SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission only (as permitted
by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c)or 240.14a-12
PHARMHOUSE CORP.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the
Registrant)
[ ] Payment of filing Fee (Check the appropriate box):
[ ] No fee required
[x ] Fee computed on table below per Exchange Act Rules 14a6(i)(1)
and 0-11.
1) Title of each class of securities to which transaction applies:
Common Shares, par value $.01
2) Aggregate number of securities to which transaction applies:
[3,453,874]
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on
which the filing fee is calculated and state how it was determined):
$3.25
4) Proposed maximum aggregate value of transaction:
$[11,225,091]
5) Total fee paid: $[2,245]
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the
Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
Preliminary Proxy Statement
dated December 23, 1998
PHARMHOUSE CORP.
Route 18, Midstate Shopping Center
East Brunswick, New Jersey 08816
January 15, 1999
TO OUR SHAREHOLDERS:
You are cordially invited to attend a special meeting of the
shareholders of Pharmhouse Corp., a New York corporation (the
"Company"), to be held on February 24, 1999, at the offices of
Herrick, Feinstein LLP, Two Park Avenue, 21st floor, New York, New
York 10016 at 10:00 a.m., New York time (the "Special
Meeting").
At the Special Meeting, you will be asked to consider and vote
upon a proposal to approve and adopt the Agreement and Plan of
Merger (the "Merger Agreement") dated as of December 17, 1998 among
the Company, Phar-Mor, Inc., a Pennsylvania corporation ("Phar-
Mor"), and Pharmacy Acquisition Corp., a New York
corporation and wholly-owned subsidiary of Phar-Mor ("Merger
Sub"), pursuant to which (a) Merger Sub will be merged with and
into the Company, with the Company being the surviving
corporation (the "Surviving Corporation"), and (b) each
outstanding share of common stock of the Company, $.01 par value
("Common Shares") will be converted into the right to receive
$3.25 per share in cash, subject to certain adjustments described in
the accompanying Proxy Statement, and the outstanding shares of
Merger Sub will be converted into new shares of Common Shares of the
Surviving Corporation.
Details of the proposed transaction and other important
information are contained in the accompanying Proxy Statement.
After careful consideration, and upon the unanimous
recommendation of the members of the Special Committee of
Independent Directors, the Board of Directors of the Company has
unanimously approved the Merger Agreement and determined that the
transactions contemplated by the Merger Agreement are in the best
interests of the Company and its shareholders. The Board of
Directors unanimously recommends a vote FOR approval and adoption of
the Merger Agreement.
In addition, in connection with its approval of the
transaction with Phar-Mor, the Board of Directors received a
written opinion, dated December 16, 1998, from Jefferies &
Company, Inc. ("Jefferies") to the effect that, as of the date of
such opinion and subject to certain considerations stated
therein, the per share price to be received by the holders of
Common Shares was fair to such holders from a financial point of
view. The full text of the written opinion dated December 16, 1998
of Jefferies, which sets forth the assumptions made, matters
considered and limitations on the review undertaken, is attached as
Annex A to the enclosed Proxy Statement and should be read in its
entirety. On __________, 1999, Jefferies advised the Board of
Directors of the Company of its confirmation of the fairness opinion
delivered December 16,1998.
WE URGE YOU TO READ THE ENCLOSED MATERIAL CAREFULLY AND
REQUEST THAT YOU SIGN, DATE AND RETURN THE ENCLOSED PROXY FORM IN THE
ENCLOSED ENVELOPE AS SOON AS POSSIBLE. YOU MAY, OF COURSE, ATTEND
THE SPECIAL MEETING AND VOTE IN PERSON, EVEN IF YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY CARD.
Sincerely,
/s/ KENNETH A. DAVIS
Kenneth A. Davis
President, Chief Executive Officer
and Chief Operating Officer
PHARMHOUSE CORP.
Route 18, Midstate Shopping Center
East Brunswick, New Jersey 08816
-----------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 24, 1999
To the Shareholders of Pharmhouse Corp.:
NOTICE IS HEREBY GIVEN that a special meeting of the
shareholders of PHARMHOUSE CORP., a New York corporation (the
"Company"), will be held on February 24, 1999, at the offices of
Herrick, Feinstein LLP, Two Park Avenue, 21st floor, New York, New
York 10016 at 10:00 a.m., New York time (the "Special
Meeting"), for the following purposes:
1. To approve and adopt the Agreement and Plan of Merger (the
"Merger Agreement") dated as of December 17, 1998 among the
Company, Phar-Mor, Inc., a Pennsylvania corporation ("Phar-Mor"),
and Pharmacy Acquisition Corp., a New York corporation and
wholly-owned subsidiary of Phar-Mor ("Merger Sub"), pursuant to
which (a) Merger Sub will be merged with and into the Company, with
the Company being the surviving corporation, and (b) each
outstanding share of common stock of the Company ("Common Shares")
will be converted into the right to receive $3.25 in cash, subject
to certain adjustments described in the accompanying Proxy
Statement, and the outstanding shares of Merger Sub will be
converted into new Common Shares of the Surviving Corporation.
2. To transact such other business as may properly come before
the Special Meeting or any postponements or adjournments thereof.
The Board of Directors has fixed the close of business on
January 13, 1999 as the record date for the determination of the
holders of Common Shares entitled to notice of, and to vote at, the
Special Meeting. Accordingly, only shareholders of record at the
close of business on such date are entitled to notice of and to
vote at the Special Meeting and any adjournment or postponement
thereof. The affirmative vote of two-thirds of the outstanding
Common Shares entitled to vote thereon is necessary for approval
and adoption of the Merger Agreement and the transactions
contemplated thereby.
Enclosed with this Notice is a Proxy Statement, and the
documents annexed thereto, which contain further information
regarding the Special Meeting, the Merger Agreement and other
related matters. To ensure that your vote will be counted,
please complete, date and sign the enclosed proxy form and return it
promptly in the enclosed postage-paid envelope, whether or not you
plan to attend the Special Meeting. Executed proxies with no
instructions indicated thereon will be voted for approval and
adoption of the Merger Agreement. You may revoke your proxy in the
manner described in the Proxy Statement at any time before it has
been voted at the Special Meeting. Any shareholder attending the
Special Meeting may vote in person even if he or she has returned
a proxy.
Sincerely,
/s/ MARCIE B. DAVIS
Marcie B. Davis
Executive Vice President,
Secretary and Treasurer
New York, New York
January 15, 1999
YOUR VOTE IS IMPORTANT
PLEASE COMPLETE AND SIGN THE ACCOMPANYING FORM OF
PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE SPECIAL
MEETING. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES. RETURNING YOUR PROXY DOES NOT AFFECT YOUR RIGHT
TO CHANGE YOUR VOTE OR VOTE IN PERSON IN THE EVENT YOU
ATTEND THE SPECIAL MEETING. PLEASE DO NOT SEND IN YOUR
COMMON STOCK CERTIFICATES AT THIS TIME.
PHARMHOUSE CORP.
Route 18, Midstate Shopping Center
East Brunswick, New Jersey 08816
---------------------------------------
PROXY STATEMENT
---------------------------------------
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SPECIAL MEETING OF SHAREHOLDERS
FEBRUARY 24, 1999
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INTRODUCTION
General
This Proxy Statement is furnished in connection with the
solicitation by Pharmhouse Corp., a New York corporation (the
"Company"), for use at a special meeting of the shareholders of the
Company (the "Shareholders") to be held on February 24, 1999 at the
offices of Herrick, Feinstein LLP, Two Park Avenue, 21st floor, New
York, New York 10016 , at 10:00 a.m., New York time (the "Special
Meeting"), and at any postponements or adjournments thereof. The
approximate date on which a definitive Proxy Statement and the
accompanying proxy will first be mailed to Shareholders is January
15, 1999.
At the Special Meeting, the Shareholders will consider and
vote upon a proposal to approve and adopt the Merger Agreement. The
Merger Agreement provides, subject to the approval of the
Shareholders at the Special Meeting and to other terms and
conditions contained therein, for the merger of Merger Sub with and
into the Company, with the Company being the Surviving
Corporation (the "Merger"). Pursuant to the Merger Agreement,
each outstanding Common Share (each, a "Share" or "Common
Share"), other than Common Shares held by the Company as treasury
stock or owned by Phar-Mor or any subsidiary of Phar-Mor, will be
converted into the right to receive $3.25 per Share in cash,
subject to certain adjustments described below (the "Merger
Consideration"). See "THE MERGER-The Merger Agreement
Adjustments to the Merger Consideration". The outstanding shares of
common stock of Merger Sub will be converted into newly issued Common
Shares.
Under the Company's By-Laws, a majority of the outstanding
Common Shares entitled to vote, represented in person or by
proxy, is required for a quorum at the Special Meeting. Section 903
of the New York Business Corporation Law ("NYBCL") requires the
<Page 2>
affirmative vote of at least two-thirds of all the outstanding
Shares as of the Record Date (as defined below), or approximately
[1,739,124] Shares, for approval of the Merger Agreement.
Pursuant to the terms of the Merger Agreement, after the
approval and adoption of the Merger Agreement by the
Shareholders, the satisfaction or waiver of all other conditions
contained in the Merger Agreement, and the filing of a
Certificate of Merger with the Department of State of the State of
New York in accordance with Sections 901 and 904 of the NYBCL (the
date and time of such filing being hereinafter referred to as the
"Effective Time"), each Common Share issued and outstanding
immediately prior to the Effective Time (other than shares held in
the treasury of the Company which will be canceled and retired
without any conversion thereof and without any payment with
respect thereto) will be canceled, retired and converted into
the right to receive in cash, without interest thereon, $3.25,
subject to the adjustments described below in "THE MERGER-The
Merger Agreement-Adjustments to the Merger Consideration".
Voting at the Special Meeting
The Board of Directors has fixed the close of business on
January 13, 1999 as the record date (the "Record Date") for the
determination of Shareholders entitled to notice of and to vote at
the Special Meeting. At the close of business on January 13, 1999,
there were [2,608,555] Shares issued and outstanding, each of which
is entitled to one vote at the Special Meeting, held by approximately
[2,312] holders of record.
Shares represented by a properly signed, dated and returned
proxy will be treated as present at the Special Meeting for
purposes of determining a quorum, without regard to whether the
proxy is marked as casting a vote or abstaining. Proxies
relating to "street name" Shares that are voted by brokers will be
counted as Shares present for purposes of determining the
presence of a quorum, but will not be treated as Shares having
voted at the Special Meeting as to the Merger proposal if
authority to vote is withheld by the broker. As indicated above,
Section 903 of NYBCL requires the affirmative vote of at least two-
thirds of all the outstanding Shares for approval of the Merger
Agreement. Accordingly, abstentions and broker non-votes will have
the same effect as votes against the approval of the Merger
Agreement. See "THE MERGER-Interests of Certain Persons in the
Merger-Voting Agreements".
In order to vote on the approval of the Merger Agreement at the
Special Meeting, Shareholders may attend the Special Meeting or
promptly sign, date and return the enclosed proxy form in the
enclosed envelope.
THE MERGER
Background of the Merger
The Company has incurred losses from its operations in four of
its last five fiscal years. It reported positive net income for
the 1997 fiscal year only because of an extraordinary gain
resulting from the cancellation of indebtedness due to the
settlement of the Company's litigation with Woolworth
<Page 3>
Corporation. In addition, the Company labored under the
limitations posed by a lack of adequate capital. Furthermore, the
Company has been subject to intense competition in many of its
store locations and has from time to time encountered
difficulties in obtaining sufficient credit to enable it to stock its
stores with adequate merchandise inventory.
Given the inability of the Company to obtain additional
capital, the lack of sufficient trade credit which, in turn,
adversely affects its ability to maintain adequate merchandise
inventory levels in its stores and the continuing losses from
operations, the Board of Directors of the Company (the "Board") had
for some time considered and attempted to pursue various
strategic alternatives which might be available to the Company and
would be in the best interests of its shareholders. Those
alternatives included attempts to seek additional capital and/or to
effect a transaction with a strategic partner. The Company engaged
investment banks and financial advisors since mid-1997 for that
purpose, the most recent and current one being Jefferies & Company,
Inc. ("Jefferies"). Although during the past three years the
Company contacted, directly and through such financial advisors, a
fair number of capital sources, its efforts to raise additional
capital were unsuccessful. In addition, in early 1998 the
Company engaged in negotiations to be a party to a rollup
transaction with several other companies in the discount drug
industry, but the Company was advised, that the roll-up
transaction could not be implemented because of the inability of the
sponsor of the transaction to raise sufficient equity capital to
consummate the transaction.
In late August, early September of this year, Kenneth A.
Davis, President and Chief Executive Officer of the Company,
initiated direct contact with David M. Schwartz, President and Chief
Operating Officer of Phar-Mor, and a brief conversation
concerning their respective companies ensued. A second meeting was
held between the parties at the end of September.
On October 29, 1998, Phar-Mor submitted a written offer to the
Company to purchase the Company for $2.00 per Share.
Management's response to Phar-Mor's initial offer was that the per
share price offered by Phar-Mor had to be significantly higher.
Representatives of the Company and Phar-Mor negotiated further,
and on November 10, 1998, Phar-Mor increased its offer for the
outstanding Shares of the Company to $3.25 per Share. On November
16, 1998, the Board held a special meeting to consider the terms of
the proposed transaction. A representative of Jefferies was
invited to join that meeting. The Board resolved to establish a
Special Committee of Independent Directors (the "Special
Committee") to review and recommend to the Board the actions to be
taken with respect to a proposed merger with PharMor as well as
to review the alternatives available to the Company in light of
the problems then confronting the Company, including limited
capital, increasingly stringent trade credit and insufficient
merchandise inventory in a highly competitive industry. During the
November 16th meeting, the Board also reviewed with Jefferies'
representatives the relationships between Jefferies and Phar-Mor
and certain of Phar-Mor's principal stockholders. At the
conclusion of the meeting, the Board authorized management to
continue negotiating the terms of a merger with Phar-Mor, subject
to keeping the Special Committee and the Board fully apprised of all
material developments in such negotiations.
On November 20, 1998, the Special Committee and its legal
counsel met with Jefferies. The first issue discussed was the
retention of Jefferies to render a fairness opinion in light of the
services rendered by it to Phar-Mor and the success fee payable
<Page 4>
to Jefferies by the Company upon the consummation of a merger
between the Company and Phar-Mor. See "THE MERGERInterests of
Certain Persons in the Merger-Jefferies' Other Relationships".
The Special Committee concluded that there was nothing out of
the ordinary that would preclude retention of Jefferies, but in
light of Jefferies' relationship with Phar-Mor, instructed Jefferies
that the personnel assigned to assist in the preparation of the
fairness opinion refrain from communicating with representatives of
Phar-Mor unless otherwise instructed by the Special Committee or
the Board. Jefferies then presented management's and its
analysis of various strategic alternatives, including attempting
to raise additional capital privately or through a public offering,
seeking to acquire other companies engaged in the discount drug
or kindred businesses, closing additional stores (in addition to
the number of stores previously returned to Woolworth pursuant
to the settlement of the litigation with Woolworth) or liquidating
its business. After reviewing these alternatives, Jefferies advised
the members of the Special Committee that certain alternatives were
not feasible because they required capital resources not available
to the Company or required considerable time to be implemented,
In reviewing Jefferies' presentation, the members of the Special
Committee concurred with Jefferies' views with respect to those
alternatives and that the continued business viability of the Company
was seriously threatened. The Special Committee determined to
convene another meeting in order to give Jefferies the opportunity
to complete its presentation with respect to the "sales value" of
the Company and to review the terms of the proposed Merger
with Phar-Mor from the standpoint of relevant financial criteria.
The Special Committee and its legal counsel met with
Jefferies again on November 23rd. Jefferies made its
presentation with respect to the valuation of the Company,
including the values which the Company and its business
represented for a buyer such as Phar-Mor, The Special Committee
concluded, after the completion of the Jefferies presentation, that
the proposed transaction with PharMor represented the most
advantageous course of action now available, or likely to be
available in the near future, to the Company and the Shareholders.
The Special Committee instructed management to seek to minimize the
contingencies to which the consummation of the Merger would be
subject as well asto assure that any merger agreement with Phar-Mor
would properly preserve the Board's right to consider other
unsolicited offers which might ensue.
Recommendation of the Special Committee and the Board
On December 14, 1998, the Special Committee unanimously
recommended and approved the Merger Agreement and the
transactions contemplated thereby, subject to execution of the
definitive Merger Agreement in a form satisfactory to the
Company's management but no less favorable, as a whole, to the
Company than the December 11th draft Merger Agreement.
On December 14, 1998, the Board unanimously approved the Merger
based upon, among other things, the unanimous
recommendation and approval of the Special Committee and the
presentation given by Jefferies of its fairness opinion, and
resolved to recommend that the Shareholders vote to approve and
adopt the Merger Agreement. The Board determined that the Merger was
<Page 5>
for, to and in the best interests of the Shareholders. As
noted below and under "THE MERGER-The Merger Agreement," the Board,
in the exercise of its fiduciary duties, reserved the right to
consider and accept unsolicited offers from other parties which
it reasonably determines are superior to the Merger Consideration
being paid to its Shareholders by Phar-Mor in the Merger. The
recommendation and approval of the Board was subject to the execution
of the definitive Merger Agreement.
In reaching its conclusions, the Special Committee and the Board
considered a number of factors, including the following:
(a) The lack of feasible financial alternatives available to the
Company.
(b) The history of the negotiations between representatives of the
Company and the representatives of Phar-Mor, including the fact that
the negotiations resulted in an increase in the price at which Phar-
Mor was prepared to acquire the Shares from $2.00 to $3.25, subject
to certain adjustments, described under "THE MERGER-The Merger
Agreement."
(c) The fact that the $3.25 per Share cash price represents a
premium of approximately 189% over the $1.125 per Share closing price
on November 17, 1998, which was 30 days prior to the day the
Merger was announced, and a premium of approximately 79% over the
$1.8125 per Share closing price on December 16, 1998, the day before
the Merger was announced.
(d) The written opinion delivered to the Board by Jefferies
stating that the cash consideration to be received by the
Shareholders pursuant to the Merger is fair to such holders from a
financial point of view. A copy of the written opinion, which sets
forth the assumptions made, procedures followed, and other matters
considered and limits of the review of Jefferies, is attached
hereto as Annex A. SHAREHOLDERS ARE URGED TO READ SUCH OPINION IN
ITS ENTIRETY.
(e) The likelihood that the Merger will be consummated after the
execution of the Merger Agreement, including the fact that PharMor's
obligation to pay the Merger Consideration to the Shareholders
is not subject to a financing contingency.
(f)The $2,000,000 subordinated convertible loan being made to
the Company by Phar-Mor upon execution of the Merger Agreement
which will enhance the Company's liquidity pending the Merger. See
"THE MERGER-Subordinated Convertible Loan Provided by PharMor".
(g)The fact that the Company can terminate the Merger Agreement if
the Company receives an unsolicited offer from, or enters into an
agreement with, another person if the Board reasonably
determines, in the exercise of its fiduciary duties, that such
offer or agreement is financially superior to the Merger, subject
<Page 6>
to payment of the applicable termination fee and expenses
specified in the Merger Agreement and compliance with the other
terms and conditions set forth in the Merger Agreement with
respect to such superior offer.
The foregoing discussions of the information and factors
considered and given weight by the Special Committee and the Board
is not intended to be exhaustive. In view of the variety of factors
considered in connection with their evaluation of the Merger, the
Special Committee and the Board did not find it practicable to, and
did not, quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination. In
addition, individual members of the Special Committee and of the
Board may have given diferent weights to different factors.
The parties continued negotiating the final terms and
conditions of the Merger Agreement until its execution by the
parties on December 17, 1998.
Upon execution of the Merger Agreement by the parties, PharMor
extended a $2 million subordinated convertible loan to the Company,
whose terms are described under "THE MERGER-Subordinated Convertible
Loan Provided by Phar-Mor".
Opinion of Jefferies
In connection with the Merger, the Company retained
Jefferies to evaluate the fairness, from a financial point of
view, to the holders of the Common Shares of the Merger
Consideration to be received by such holders. On December 14,
1998, Jefferies delivered a presentation to the Board, which
presentation included a draft of the fairness opinion which
Jefferies was prepared to deliver. On December 16, 1998,
Jefferies delivered an executed fairness opinion to the Company to
the effect that, as of the date of such opinion and based upon and
subject to certain matters stated in such opinion, the cash
consideration to be received by the Shareholders in the Merger was
fair from a financial point of view. Pursuant to an
engagement letter with Jefferies, the Company agreed to pay
Jefferies a non-refundable fee of $200,000 for Jefferies
rendering its opinion and to reimburse Jefferies for its
reasonable out-of-pocket expenses in connection with rendering
such opinion. The Company has also agreed to indemnify Jefferies and
certain related parties against certain liabilities, including
liabilities under the federal securities laws. See "THE MERGER-
Interests of Certain Persons in the Merger-Jefferies' Other
Relationships".
Jefferies was selected by the Company based on Jefferies'
experience and expertise in rendering such opinions. As part of its
investment banking business, Jefferies is regularly engaged in the
<Page 7>
evaluation of capital structures and the valuations 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.
Furthermore, Jefferies had acted on behalf of the Company as
its financial advisor in connection with the successful
refinancing of its asset based lending facility with Foothill
Capital Corp. in May, 1998.
The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to
particular circumstances and, therefore, such an opinion is not
readily susceptible to a 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 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 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 Company. 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.
In arriving at its opinion, Jefferies reviewed the Merger
Agreement and held discussions with the Company's senior
management concerning the business, operations and prospects of the
Company. In conducting its analyses and arriving at its opinion,
Jefferies reviewed a draft of the Merger Agreement dated December
16, 1998 and certain financial and other information that was
publicly available or furnished to Jefferies by the Company,
including the financial terms of the Merger, certain internal
financial analyses, projections, budgets, reports and other
information prepared by the Company's management. In its review
and analysis and in rendering its opinion, Jefferies relied
upon, but did not independently investigate or verify the accuracy,
completeness and fair presentation of, the financial and other
information that was provided to it by the Company, or that was
publicly available to it (including, without limitation, the
information described above and the financial projections prepared
by the Company regarding the future performance of the Company).
The opinion is expressly conditioned upon such information
(whether written or oral) being complete, accurate and fair in all
respects.
Jefferies also considered, to the extent publicly available, the
financial terms of certain other similar transactions recently
effected which Jefferies considered relevant in evaluating the
Merger and Merger Consideration and analyzed certain financial,
stock market and other publicly available information relating to
the businesses of other companies whose operations Jefferies
considered relevant in evaluating those of the Company. In
addition to the foregoing, Jefferies conducted such other analyses
and examinations and considered such other financial, economic and
market criteria as Jefferies deemed appropriate in arriving at its
opinion. Jefferies noted that its opinion was necessarily based
upon information available, and financial, stock market and other
conditions and circumstances existing and disclosed, to Jefferies
as of the date of its opinion.
<Page 8>
With respect to financial forecasts and other data provided to
or otherwise reviewed by or discussed with Jefferies, the
management of the Company advised Jefferies that such forecasts and
other data were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management
of the Company as to the future financial performance of the Company.
Jefferies did not make and was not provided with an independent
evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Company. No limitations were
imposed by the Company on Jefferies with respect to the
investigations made or procedures followed by Jefferies in rendering
its opinion, other than as described in "THE MERGERBackground of
the Merger".
THE FULL TEXT OF THE WRITTEN OPINION OF JEFFERIES DATED
DECEMBER 16, 1998, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED
HERETO AS ANNEX A AND IS INCORPORATED HEREIN BY REFERENCE.
HOLDERS OF SHARES ARE URGED TO READ THIS OPINION CAREFULLY IN ITS
ENTIRETY. JEFFERIES' OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE
CASH CONSIDERATION TO BE RECEIVED BY HOLDERS OF SHARES IN THE MERGER
FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF
THE OFFER, THE MERGER OR RELATED TRANSACTIONS AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH
SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE SUMMARY OF THE
OPINION OF JEFFERIES SET FORTH IN THIS PROXY STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION.
Interests of Certain Persons in the Merger
Jefferies' Other Relationships
As noted under "THE MERGER-Background of the Merger",
Jefferies has also been retained as the Company's exclusive
financial advisor with respect to the Merger. Jefferies will also
receive a fee of approximately $520,000 if the Merger is consummated.
Jefferies has also provided investment banking and financial
advisory services to Phar-Mor and received customary fees for
rendering such services. During 1996 and 1997, Phar-Mor paid
Jefferies fees and expenses of approximately $645,125 in connection
with a transaction which was not consummated. During 1998 Jefferies
was retained by Phar-Mor to provide general corporate financial
advisory services and has been paid customary fees for its
services. Jefferies did not represent Phar-Mor or provide any
services to Phar-Mor in connection with the Merger or the Merger
Agreement.
<Page 9>
Agreements with Executive Officers
In November, 1998, the Company renewed and extended the
written employments agreements of Manfred Brecker, Chairman of the
Board; Kenneth A. Davis, President, Chief Executive Officer and
Chief Operating Officer of the Company, and Richard A. Davis, Senior
Vice President-Finance and Chief Financial Officer. The previously
existing agreements with these officers were then due to expire in
the near future. The Company also executed written employment
agreements with Marcie B. Davis, Executive Vice President and
Secretary; Joseph Keller, Senior Vice PresidentAdministration and
Operations; Daniel Thigpen, Vice PresidentStore Operations; and
Eileen Abbate, Vice President-Advertising. All of these employment
agreements were authorized in principle by the Board in January,
1998. All the agreements provide for an employment term continuing
through the Company's 2002 fiscal year (January 31, 2002), other
than (i) the agreement with Richard Davis, which continues through
the Company's 2001 fiscal year and (ii) the agreements with
Messrs. Keller and Thigpen and Ms. Abbate, which provide for a
one year term expiring November 6, 1999 with automatic annual
renewals unless a termination notice is given by either party to
the other. Each of the employment agreements specifies a minimum
base salary for each of the officers respectively, and in the
case of Mr. Kenneth Davis, an incentive bonus based on the
Company's pre-tax earnings. Currently, the base salary of each of
the officers is as follows: Kenneth Davis: $315,000, subject to
annual cost of living increases; Mr. Brecker: $100,000 (except
that from November 6, 1998 through January 31, 1999, the annual
base salary for Mr. Brecker was $175,000); Marcie Davis: $140,000,
subject to annual cost of living increases; Richard Davis:
$132,300, subject to annual cost of living increases; Mr.
Keller: $125,000; Mr. Thigpen: $125,000; and Ms. Abbate: $90,000.
If (a) the Company terminates Manfred Brecker's or Kenneth
Davis's employment in breach of their respective agreements, or (b)
subsequent to a change of control of the Company, any of Messrs.
Brecker, Davis, Keller and Thigpen or Ms. Davis and Ms. Abbate
terminate their respective agreements with the Company for "Good
Reason" (as defined below), each agreement provides that the
officer will be entitled to (A) a lump sum amount equal to the
discounted present value of (i) three years of his base salary
then in effect in the case of Mr. Brecker and Kenneth Davis;
(ii) two years in the case of Marcie Davis and (iii) one year in
the case of each of Richard Davis, Messrs. Keller and Thigpen and
Ms. Abbate, or, (B) at the election of the officer, to continue to
be paid his base salary for a period of (i) three years from the
date of termination of employment in the case of Mr. Brecker and
Kenneth Davis; (ii) two years in the case of Marcie Davis and
(iii) one year in the case of each of Richard Davis, Messrs.
Keller and Thigpen and Ms. Abbate. The officer will have "Good
Reason" to terminate his or her employment with the Company if,
subsequent to a change of control of the Company, (i) the officer is
assigned duties materially inconsistent with his or her duties prior
to the change of control; (ii) there is a significant change in such
employees' responsibilities, status, titles or reporting
responsibilities; (iii) there is a reduction in the employee's
base salary; (iv) there is any change or relocation of the offices
where the officer performs his or her primary duties to a location
which is more than 50 miles from such prior location; (v) the
officer is removed or fails to be reelected as a principal executive
of the Company; and/or (vi) the Company fails to cause any surviving
entity or transferee of the Company to assume all of the
Company's obligations under the employment agreement.
<Page 10>
The employment agreements also provide that if the compensation
the officers receive upon termination results in the imposition of
the excise tax imposed by Section 4999 of the Internal Revenue Code
of 1986, as amended (the "Code"), the compensation payable is to
be reduced to the largest amount that will result in no portion
of the compensation being subject to the excise tax unless such
reduction will result in the employee receiving less net
compensation than he or she would have received if such payment
was not so reduced and all such taxes were withheld.
All employee benefit plans in which the officer was entitled to
participate prior to termination shall be maintained by the Company
(i) for the number of years remaining in the employment term of
Mr. Brecker; (ii) for three years after the termination of
employment of Kenneth Davis; (iii) for two years after the
termination of employment of Marcie Davis; and (iv) for one year
after the termination of employment of Richard Davis, Messrs.
Keller and Thigpen and Ms. Abbate. In the case of Ms. Davis, Ms.
Abbate, Richard Davis, and Messrs. Keller and Thigpen, if the
change of control occurs as a result of the Company's merger with
another entity, said officers shall only be entitled to receive
such benefits as the surviving entity makes available to its
officers having approximately the same scope or level of
responsibility and compensation as the officer who is terminated.
The employment agreements with Marcie Davis and Richard
Davis provide that if the Company terminates such officers
without cause (as defined therein), the officers will receive
their respective base salary then in effect for two years and one
year, respectively, from the date of termination. Pursuant to the
terms of the agreements with each of Messrs. Keller and Thigpen and
Ms. Abbate, if the employee is terminated without cause
subsequent to a change of control, or if the Company fails to
extend the employment term after a change of control, payment of the
base salary will continue for one year thereafter.
The Merger will constitute a change of control of the
Company, as defined in the employment agreements, and therefore it
is anticipated that most if not all of the aforementioned
officers will either be entitled to terminate their employment
agreement for "Good Reason" or be terminated by the Company, thereby
triggering the payments described above.
Stock and Option Holdings of Directors and Officers
The officers and directors of the Company hold an aggregate of
780,840 Shares, including 396,939 shares subject to the Company's
option plans (excluding for purposes hereof the Shares and options
owned by Mrs. Brecker, the wife of Manfred Brecker, and Shares held
by trusts for teh benefit of Mr. Brecker's adult children). See
"OWNERSHIP OF SHARES BY DIRECTORS, OFFICERS AND FIVE PERCENT
SHAREHOLDERS". Accordingly, the officers and directors will receive
an aggregate of $2,537,730 from the total Merger Consideration (based
on a per Share price of $3.25 per Share) paid by Phar-Mor to the
Shareholders.
<Page 11>
Voting Agreements
As an inducement to Phar-Mor entering into the Merger
Agreement, each of Kenneth Davis, Anne Brecker (the wife of
Manfred Brecker), Marcie Davis and Manfred Brecker (collectively, the
"Voting Shareholders") entered into a Voting and Payment
Agreement (collectively, the "Voting Agreements") with Phar-Mor,
pursuant to which the Voting Shareholders agreed that at every
meeting or approval by written consent at which the Merger
Agreement and the Merger are considered or voted on, they would
vote all of their Shares in accordance with the recommendation of the
Board. The statements made in this Proxy Statement summarizing
the Voting Agreement are qualified in their entirety by reference
to the text of the Voting Agreement, and are expressly made
subject to the more complete information set forth therein. The
full text of the Voting Agreement is attached as Annex C to this
Proxy Statement and should be read in its entirety.
The Voting Shareholders own, collectively, 740,715 of the
2,608,555 Shares outstanding as of the record date for the
Special Meeting. Accordingly, approval of the Merger Agreement is
assured if an additional 998,409 Shares are voted in favor of
the Merger Agreement.
The Voting Shareholders also agreed that if (i) an
Acquisition Proposal (as defined in the Merger Agreement; see
"THE MERGER-The Merger Agreement - Covenants of the Company; No
Solicitation") is made known and thereafter the Shareholders do not
approve the Merger or (ii) the Merger Agreement is terminated as a
result of either (a) the Board failing to recommend, or
withdrawing or modifying in a manner adverse to Phar-Mor, its
approval of the Merger Agreement or failing to include its
recommendation of the Merger in the proxy statement or having
recommended or approved a Superior Proposal (as defined in the
Merger Agreement; see "THE MERGER-The Merger Agreement-
Covenants of the Company; No Solicitation") or (b) the Pre
Closing Balance Sheet showing that the Net Assets of the Company
exceeds $7,000,000 (as such terms are defined in the Merger
Agreement; see "THE MERGER-The Merger Agreement-Adjustments to the
Merger Consideration), and if in either case until June 30, 2000
the Voting Shareholder sells, transfers or assigns any Shares
subject to the Voting Agreement for consideration in excess of
$3.25 per Share, such Voting Shareholder shall be required to
remit to Phar-Mor all such excess consideration.
In addition, the Voting Shareholders agreed that any shares of
capital stock of the Company they acquire prior to the vote by the
Shareholders on the Merger will be subject to the Voting
Agreement. The Voting Shareholders also have agreed: (i) not to
sell, assign, pledge or otherwise transfer their Shares until the
vote by the Shareholders on the Merger, and (ii) from such time
until June 30, 2000, not to sell, assign or transfer the Shares
other than for value in a bona fide arms' length transaction to an
unaffiliated transferee.
Indemnification and Insurance
The Merger Agreement provides that for a period of seven
years after the Effective Time, Phar-Mor will, and will cause the
Surviving Corporation to (i) indemnify and hold harmless the
<Page 12>
present and former officers, directors and employees of the
Company against all costs and expenses in respect of acts or
omissions occurring prior to the Effective Time to the fullest
extent permitted under the Company's certificate of incorporation and
by-laws, and (ii) to the fullest extent permitted under
applicable law, advance to such persons fees and expenses
incurred in defending any action with respect to which indemnity may
be available under the Company's certificate of incorporation or by-
laws upon receipt by such person of an undertaking reasonably
satisfactory to Phar-Mor to repay such advances if it is ultimately
determined that such person is not entitled to indemnification.
For seven years after the Effective Time, PharMor will use
commercially reasonable efforts to provide officers' and directors'
liability insurance and fiduciary liability insurance in respect
of acts or omissions occurring on or prior to the Effective Time
covering each such person currently covered by the Company's
officers' and directors' liability insurance policy and fiduciary
liability insurance policy on terms with respect to coverage and
amounts no less favorable in any material respect than those of such
policies in effect on the date of the Merger Agreement. Phar-Mor
may satisfy such obligation by purchasing officers' and
directors' liability and fiduciary liability run-off coverage for
such period. During such sevenyear period, Phar-Mor shall not cause
or permit any amendment or other change to the certificate of
incorporation or by-laws of the Surviving Corporation which
would adversely affect the indemnification rights of former
officers, directors and employees of the Company, except to the
extent that any such amendment may be required by applicable
law. If Phar-Mor, the Surviving Corporation or any of their
respective successors and assigns (i) consolidates or merges with
any other person and is not the surviving entity, or (ii)
transfers all or substantially all of its properties and assets to
any person, the successors and assigns of Phar-Mor or the Surviving
Corporation, as the case may be, shall assume these obligations.
Proper provision will be made so that any such successors or
assignees shall assume all of the foregoing obligations.
Payment of Merger Consideration for the Shares
Promptly following execution of the Merger Agreement, Phar-Mor
appointed Harris Bank & Trust Company to act as the
paying agent (the "Paying Agent"). On or prior to the
Effective Time, Phar-Mor shall deposit with the Paying Agent, for the
benefit of the holders of Shares, cash in an amount equal to the
aggregate Merger Consideration. Promptly after the Effective Time,
the Paying Agent will send a transmittal letter and
instructions to each person that was a record holder of the
Common Stock immediately prior to the Effective Time advising
such holder of the procedure for surrendering his or her
certificate or certificates in exchange for $3.25 in cash, or
such amount as adjusted pursuant to the terms of the Merger
Agreement, for each formerly outstanding Share. Shareholders
must carefully comply with the instructions on such transmittal
letter and return it, along with their certificates, to the
Paying Agent pursuant to the terms thereof in order to receive the
payment to which they are entitled pursuant to the terms of the
Merger Agreement. Interest will not be paid on the amounts payable
upon surrender of certificates which formerly represented the
Shares. It is therefore recommended that certificates be
surrendered promptly upon receipt of the transmittal letter and
instructions from the Paying Agent.
INSTRUCTIONS WITH REGARD TO THE SURRENDER OF SHARE
CERTIFICATES TO THE PAYING AGENT, TOGETHER WITH A LETTER OF
TRANSMITTAL TO BE USED FOR THIS PURPOSE, WILL BE FORWARDED TO THE
<Page 13>
SHAREHOLDERS AS PROMPTLY AS PRACTICABLE FOLLOWING THE EFFECTIVE
TIME. SHAREHOLDERS SHOULD SURRENDER SHARE CERTIFICATES ONLY
AFTER RECEIVING A LETTER OF TRANSMITTAL. SHAREHOLDERS SHOULD NOT
SEND ANY STOCK CERTIFICATES AT THIS TIME.
The Paying Agent or Phar-Mor, as the case may be, shall be
entitled to deduct and withhold from the Merger Consideration
such amounts as they are permitted to deduct and withhold under
applicable law. To the extent any amounts are withheld, such
amounts shall be treated as having been paid to the person with
respect to whom such deduction and withholding was made. If,with
respect to any Shares, the cash price of $3.25 per Share, or such
amount as adjusted pursuant to the terms of the Merger
Agreement, is to be paid to a person who is not the holder of
record of such Shares, the amount of any applicable stock
transfer taxes will be required to be paid by the record holders or
such other person prior to the payment of the $3.25 amount per Share,
or such amount as adjusted pursuant to the terms of the Merger
Agreement, unless satisfactory evidence of the payment of such
taxes, or exemption therefrom, is submitted to the Paying Agent.
Phar-Mor shall not be liable to a holder of Shares for any cash
delivered pursuant to the Merger Agreement to any public official
pursuant to applicable abandoned property laws.
Six months after the Effective Time, the Paying Agent will
deliver to Phar-Mor any cash funds not theretofore disbursed to
holders of certificates formerly representing Shares, and
thereafter the holders of such certificates shall look to PharMor
for any cash payments due in respect of the Shares formerly
represented by such certificates. Any amounts remaining
unclaimed two years after the Effective Time (or such earlier
date immediately prior to such time as such amounts would
otherwise escheat to or become property of any governmental
entity) shall, to the extent permitted by applicable law, become the
property of Phar-Mor.
No Shareholders' Appraisal Rights
Because the Shares were listed on The Nasdaq SmallCap Market on
the Record Date, pursuant to Section 910 of the NYBCL, holders of
Shares will not be entitled to exercise dissenters' rights if the
Merger is approved and consummated.
Purpose of the Merger; Certain Results of the Merger
The purpose of the transactions contemplated by the Merger
Agreement is for Phar-Mor to acquire the entire ownership
interest in the Company. The acquisition of the entire ownership
interest in the Company has been structured as a cash merger in
order to provide a prompt and orderly transfer of ownership of the
Company from the public shareholders of the Company to PharMor.
As a result of the Merger, the Shareholders will no longer have
any continuing interest in the Company, the Common Shares will no
longer be traded on The Nasdaq SmallCap Market and the registration
of the Common Shares under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and the Company's reporting
obligations thereunder will be terminated. After giving
effect to the Merger, Phar-Mor will be the sole shareholder
of the Company.
<Page 14>
Accounting Treatment of the Merger
Phar-Mor will account for the Merger as a "purchase" in
accordance with generally accepted accounting principles.
Therefore, the aggregate consideration paid by Phar-Mor in
connection with the Merger will be allocated to the Company's
assets and liabilities based upon their fair values, with any
excess being treated as goodwill. The assets and liabilities and
results of operations of the Company will be consolidated into the
assets and liabilities and results of operations of Phar-Mor
commencing upon the consummation of the Merger.
Certain Legal Matters; Regulatory Approvals
General
The Company is not aware of any license or regulatory permit
that appears to be material to the business of the Company and its
subsidiaries, taken as a whole, that might be adversely affected
by the transaction or, except for the filing of a certificate
of merger with the Department of State of the State of New York, of
any approval or other action by any governmental, administrative or
regulatory agency or authority, domestic or foreign, that would be
required prior to the Effective Time, except as set forth in the
following paragraph.
Antitrust
Under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), and the rules promulgated
thereunder by the Federal Trade Commission (the "FTC"), the
Merger may not be consummated until notifications have been given and
certain information has been furnished to the FTC and the
Antitrust Division of the U.S. Department of Justice (the
"Antitrust Division"). The initial waiting period under the HSR Act
expires on _________, 1999. The Antitrust Division, the FTC and
state antitrust enforcement agencies frequently scrutinize the
legality under the antitrust laws of transactions such as the Merger.
The termination of the HSR Act waiting period does not preclude the
Antitrust Division, the FTC or state antitrust enforcement
agencies from challenging the transaction on antitrust grounds.
Accordingly, at any time before or after the Effective Time, either
the Antitrust Division, the FTC or the attorney general of one
or more states could take such action under the antitrust laws as
it deems necessary or desirable in the public interest.
The Merger Agreement
The statements made in this Proxy Statement summarizing the
Merger Agreement and the terms of the Merger are qualified in
their entirety by reference to the text of the Merger Agreement, and
are expressly made subject to the more complete information set
forth therein. The full text of the Merger Agreement is attached
as Annex B and should be read in its entirety.
<Page 15>
The Merger
If the Merger Agreement is approved by the Shareholders and the
other conditions therein have been timely satisfied or waived,
Merger Sub will be merged with and into the Company at the
Effective Time, whereupon the separate existence of Merger Sub
shall cease and the Company shall be the surviving
corporation (the "Surviving Corporation"). The Merger will
become effective at such time as a certificate of merger is filed
with the Department of State of the State of New York in
accordance with the applicable provisions of the NYBCL. The
Merger Agreement provides that the Effective Time shall not occur
more than ten days after the satisfaction or, to the extent
permitted under the Merger Agreement, waiver of all conditions to the
Merger. At the Effective Time, all assets, rights and
privileges of the Company and Merger Sub will vest in the
Surviving Corporation and all debts, liabilities and obligations of
the Company and Merger Sub will become the debts, liabilities and
obligations of the Surviving Corporation.
Upon consummation of the Merger, each Share outstanding
immediately prior thereto (other than Shares held by the Company as
treasury stock or owned by Phar-Mor or any subsidiary of PharMor
immediately prior to the Effective Time, which shares will be
canceled) will be converted into the right to receive $3.25,
subject to the adjustments described below, in cash, without
interest. Holders of certificates which formerly represented
Shares will thereupon have no continuing interest in, or rights as
shareholders of, the Company. At the Effective Time, each Share
issued and outstanding prior to the Effective Time (all of which
will be converted into the right to receive the Merger
Consideration) shall be canceled and retired and cease to exist and
each outstanding share of common stock of Merger Sub will be
converted automatically into a common share of the Surviving
Corporation.
Employees holding options under the Company's three stock
option plans will be entitled to receive from the Surviving
Corporation at the Effective Time, the difference between the
exercise price of each such option and $3.25, subject to the
adjustments described below, multiplied by the number of Common
Shares subject to such options (assuming full vesting of all
options).
The Merger Agreement further provides that the directors of the
Merger Sub at the Effective Time will be the initial
directors of the Surviving Corporation and the officers of the
Merger Sub at the Effective Time will be the initial officers of the
Surviving Corporation. The certificate of incorporation and by-laws
of the Company as in effect at the Effective Time will be the
initial certificate of incorporation and by-laws of the
Surviving Corporation. See "THE MERGER - Interest of Certain
Persons in the Merger-Indemnification and Insurance".
Adjustments to the Merger Consideration
The $3.25 per Share payable in respect of each Share upon
consummation of the Merger is subject to certain adjustments (the
"Per Share Amount"). If the Company ceases to conduct normal
retail operations at any store location at which it conducted
business on December 17, 1998, and Phar-Mor waives any right it may
have to terminate the Merger Agreement as a consequence of such
closure(s), the Per Share Amount shall be reduced by an amount
equal to $.10 for each such store closing, but in no event shall such
<Page 16>
reduction in the Per Share Amount exceed $.20. See "THE MERGER-The
Merger Agreement-Termination and Amendment to the Merger Agreement".
The Company is also required to prepare and deliver to PharMor,
not less than five days prior to the scheduled Effective Time, a
consolidated balance sheet of the Company and its subsidiaries
dated as of January 31, 1999 (the "Pre-Closing Balance Sheet").
If the Effective Time occurs after March 15, 1999, the Pre-Closing
Balance Sheet must be audited by the Company's auditors. If the
Pre-Closing Balance Sheet shows that the total assets minus the
total liabilities of the Company and its subsidiaries (the "Net
Assets") as of January 31, 1999 are less than $1,000,000, then the
Per Share Amount shall be reduced $.01 for every full $30,000 by
which the Net Assets are less than $1,000,000. If the Net Assets are
greater than $5,000,000, then the Per Share Amount shall be
increased by $.01 for every full $30,000 by which the Net Assets are
greater than $5,000,000. See "THE MERGER-The Merger Agreement-
Termination and Amendment to the Merger Agreement".
If the environmental audits to be obtained by Phar-Mor with
respect to (i) all real property owned by the Company and its
subsidiaries and (ii) all real property previously or currently
leased or owned by the Company and its subsidiaries at which
automotive repair services were ever performed reveal that the
estimated cost to remediate all environmental liabilities with
respect thereto (the "Environmental Liabilities") are greater
than $100,000, then the Per Share Amount shall be reduced by $.01 for
every full $30,000 by which the Environmental Liabilities exceed
$100,000, but in no event shall such reduction in the Per Share
Amount exceed $.30. See "THE MERGER-The Merger Agreement-Termination
and Amendment to the Merger Agreement".
Representations and Warranties
The Company, Phar-Mor and Merger Sub made certain
representations and warranties to each other in the Merger
Agreement. The Company represents and warrants, among other
matters, its due authorization, corporate authority and
approvals, enforceability of the Merger Agreement, governmental
authorizations, capitalization, ownership of subsidiaries,
reports filed with the Securities and Exchange Commission (the
"Commission"), financial statements, absence of certain changes,
litigation, absence of undisclosed liabilities, compliance with
laws, taxes, employee benefits, environmental matters, material
agreements, title to properties and labor matters. Phar-Mor and
Merger Sub, jointly and severally, represent and warrant, among
other matters, their due authorization, corporate authority and
approvals, enforceability of the Merger Agreement, litigation and its
ability to pay, prior to the Effective Time, the Merger
Consideration and all related fees and expenses.
Covenants of the Company; No Solicitation
Pursuant to the Merger Agreement, from the date of the
Merger Agreement until the Effective Time, the Company and its
subsidiaries have agreed to conduct their business in the
ordinary course consistent with past practice in all
material respects. In addition, without the consent of Phar-Mor, the
Company will not (i) adopt any change in its certificate of
incorporation or by-laws, (ii) merge or consolidate with any
other person or acquire a material amount of assets of another
<Page 17>
person, (iii) sell, lease or otherwise dispose of any material
assets or property except pursuant to existing contracts and in the
ordinary course of business, or (iv) take any action that would
make any representation or warranty of the Company inaccurate
at the Effective Time.
From the date of the Merger Agreement until its termination, the
Company, its subsidiaries and its officers, directors, employees
and other agents shall not (i) solicit or initiate inquiries or
proposals that constitute, or reasonably would be expected to lead
to, an offer or proposal for a merger, consolidation or
tender or exchange offer or other business combination involving
the Company or any subsidiary of the Company or the
acquisition of any substantial debt or equity interest in, or a
substantial portion of the assets of the Company or any
subsidiary of the Company (an "Acquisition Proposal") or (ii)
engage in negotiations with, or disclose any nonpublic information
relating to the Company or any of its subsidiaries or afford
access to the books or records of the Company or any subsidiary to
any person that the Company believes may be considering making or
has made an Acquisition Proposal. However, these restrictions
under the Merger Agreement do not prevent the Company and its
subsidiaries (i) from taking actions in the ordinary course of
business consistent with past practice and not in connection with an
Acquisition Proposal or (ii) from furnishing nonpublic information
to, or entering into negotiations with any person in connection
with an unsolicited bona fide Acquisition Proposal so long as prior
to furnishing the information, or entering into negotiations with
such person, (a) the Company receives from such person an executed
confidentiality agreement and (b) the Board has reasonably concluded
that such Acquisition Proposal may constitute a "Superior Proposal",
which is defined in the Merger Agreement as a bona fide proposal
that the Board determines, in its reasonable good faith judgment, is
more favorable to the Shareholders taken as a whole than the
transactions contemplated by the Merger Agreement and with
respect to which the Board determines, in its reasonable good
faith judgment, after consultation with its financial advisors,
that the person making the Acquisition Proposal has the financial
means to consummate such proposal. The Company shall notify PharMor
within 24 hours after receiving any Acquisition Proposal or any
request for nonpublic information by any person which the Company
believes is considering making, or has made, an Acquisition
Proposal, indicating the identity of the person making the
request and the details thereof.
Conditions to the Merger
Pursuant to the Merger Agreement, the respective obligations of
each of Phar-Mor, Merger Sub and the Company to effect the Merger
shall be subject to the satisfaction of the following conditions:
(a) the Merger Agreement shall have been approved by the holders of
at least two-thirds of the outstanding Common Shares of the
Company; (b) no applicable law or regulation and no judgment,
injunction, order and decree shall prohibit the consummation of
the Merger; (c) the requisite third party consents referred to
in the Merger Agreement or the schedules thereto shall have been
obtained; and (d) no governmental entity shall have issued any
order, and there shall not have been adopted or promulgated any
statute, rule or regulation prohibiting the consummation of
the Merger or limiting or restricting Phar-Mor's conduct or
operation of the business of the Company after the Merger in a
manner that would have a material adverse effect and no
proceeding seeking to prohibit, alter, prevent or materially
delay the Merger shall have been instituted.
<Page 18>
The obligations of Phar-Mor and Merger Sub to consummate the
Merger are subject to the satisfaction of the following further
conditions: (a) no material adverse effect (as determined
pursuant to the Merger Agreement) shall have occurred as a result of
the breach by the Company of any of the representations and
warranties of the Company, or the failure of the Company to have
performed its obligations required under the Merger Agreement; (b)
the amount of the Environmental Liabilities shall not be greater
than $750,000 in the aggregate; (c) Phar-Mor shall have received the
Company's Pre-Closing Balance Sheet showing that as of January 31,
1999 the Net Assets are not less than negative $1,000,000 (and if
the Effective Time occurs on or before March 15, 1999, a
certificate from the chief financial officer of the Company
certifying that such balance sheet is correct and complete in
all material respects and was prepared in accordance with generally
accepted accounting principles; and (d) Phar-Mor shall have received
all customary documents it may reasonably request relating to the
existence of the Company and the authority of the Company with
respect to the Merger Agreement.
Phar-Mor and Merger Sub agreed that the Company may pay to: (i)
Jefferies its fees and expenses for the fairness opinion relating
to the Merger (not to exceed $250,000 in the aggregate) and (ii)
other persons in respect of the Merger (not to exceed $250,000 in
the aggregate). None of such payments shall, individually or
in the aggregate, have a material adverse effect on the Company or
provide Phar-Mor any grounds not to consummate the Merger or make an
adjustment to the Merger Consideration.
Termination and Amendment to the Merger Agreement
Notwithstanding approval by the requisite vote of the
Shareholders of the Merger Agreement, the Merger Agreement may be
terminated at any time prior to the Effective Time: (a) by
mutual consent of the Company and Phar-Mor; or (b) by either the
Company or Phar-Mor if (i) at the Special Meeting the Merger fails to
be approved and adopted by the requisite vote of the Shareholders;
(ii) the Merger has not been consummated by April 30, 1999, provided
that no party that has materially breached its obligations under the
Merger Agreement shall be entitled to terminate the agreement; or
(iii) there shall be any law or regulation that makes
consummation of the Merger illegal or if there is any final
and nonappealable judgment, injunction, order or decree enjoining
Phar-Mor or the Company from consummating the Merger.
Phar-Mor has the right to terminate the Merger if (a) a
material adverse effect occurs as a result of the Company being in
breach of any of its representations contained in the Merger
Agreement or the Company fails to have performed its obligations
under the Merger Agreement and does not cure, or proceed in good
faith to cure, such breach within ten business days after Phar-Mor
delivers notice thereof (provided that at the time the Company
would not be entitled to terminate the Merger Agreement as a
result of a material adverse effect occurring as a result of Phar-Mor
or Merger Sub being in breach of any of its representations or
failing to perform its obligations thereunder); the
determination of whether any alleged breach of a representation by
the Company or the failure of the Company to perform results in a
material adverse effect is to be determined pursuant to
arbitration; (b) (i) the Company ceases to conduct normal retail
operations at two or more store locations (other than a cessation of
such operations at the stores located at Poughkeepsie, New York
and Ledgewood, New Jersey resulting from the termination of the
<Page 19>
leases for such locations solely by action of the landlord); (ii)
the Pre-Closing Balance Sheet shows that the Net Assets are
less than negative $1,000,000; and/or (iii) the environmental audits
to be obtained by Phar-Mor reveal Environmental Liabilities in excess
of $750,000; (c) the Board shall have failed to recommend or shall
have withdrawn, or modified or changed in a manner adverse to Phar-
Mor, its approval or recommendation of the Merger or shall have
failed to include its recommendation in favor the Merger in the
proxy statement used to solicit the Shareholders' vote with respect
to the Merger or shall have recommended or approved a Superior
Proposal (the determination by the Board that a proposal constitutes
a Superior Proposal shall not be treated as recommending, approving
or endorsing a Superior Proposal) or the Company shall have entered
into a definitive agreement or a letter of intent or similar
agreement providing for a Superior Proposal; or (d) the Company
elects not to cause a proxy statement to be mailed to the
Shareholders as a result of the failure of Jefferies to confirm the
opinion it delivered to the Board as of the date that the proxy
statement is mailed to the Shareholders (provided that at the time
the Company would not be entitled to terminate the Merger
Agreement as a result of a material adverse effect occurring as
a result of Phar-Mor or Merger Sub being in breach of any
of its representations contained in the Merger Agreement or
failing to perform its obligations thereunder).
The Company has the right to terminate the Merger Agreement if
(a) a material adverse effect occurs as a result of a breach of one
or more of Phar-Mor's or Merger Sub's representations or Phar-Mor
or Merger Sub fails to have performed its obligations under the
Merger Agreement and does not cure, or proceed in good faith to
cure, such breach within ten business days after the Company
delivers notice thereof (provided that at the time PharMor would not
be entitled to terminate the Merger Agreement as a result of a
material adverse effect occurring as a result of the Company being
in breach of one or more of its representations or the failure of
the Company to have performed its obligations under the Merger
Agreement); (b) before the Special Meeting, the Board shall have
failed to recommend or shall have withdrawn or modified or changed
in a manner adverse to Phar-Mor its approval or recommendation of
the Merger Agreement or the Merger or shall have failed to include in
the proxy statement its recommendation in favor of the Merger or
shall have recommended or approved or endorsed a Superior Proposal,
or the Company shall have entered into a definitive agreement or
letter of intent or similar agreement providing for a Superior
Proposal with a person other than Phar-Mor or its subsidiaries; (c)
the Company elects not to cause the proxy statement to be forwarded
to the Shareholders as a result of the failure of Jefferies to
confirm the opinion it delivered to the Board as of the date the
proxy statement is forwarded to the Shareholders (provided that at
such time PharMor is not entitled to terminate the Merger Agreement
as a result of the conditions set forth in subsections (a) and (b)
of the immediately preceding paragraph); or (d) the Pre-Closing
Balance Sheet indicates that the Net Assets are greater than
$7,000,000.
If (i) an Acquisition Proposal is made known to the Company, or
has been made directly to the Shareholders or any person shall have
publicly announced its intention to make an Acquisition Proposal
and thereafter Shareholder approval of the Merger is not obtained or
(ii) the Merger Agreement is terminated by Phar-Mor as a result
of the Board failing to recommend or withdrawing, modifying or
changing in a manner adverse to Phar-Mor its approval or
recommendation of the Merger or recommending or endorsing a
Superior Proposal, or the Company shall have entered into a
definitive agreement or letter of intent or similar agreement
providing for a Superior Proposal, then the Company shall, no
later than two days after the day of such termination, pay Phar-Mor
<page 20>
a termination fee equal to $2,000,000, plus upon Phar-Mor's
request, all reasonable and documented out-of-pocket expenses up to
$300,000 incurred by Phar-Mor in connection with the transaction.
If (i) Phar-Mor terminates the Merger Agreement as a result of a
material adverse effect occurring due to the breach by the
Company of any of its representations and warranties or the
failure of the Company to have performed its obligations under the
Merger Agreement or (ii) the Company terminates the Merger
Agreement as a result of the Pre-Closing Balance Sheet showing
that the Net Assets are greater than $7,000,000, then the
Company shall pay Phar-Mor all reasonable and documented out-of-
pocket expenses incurred by Phar-Mor up to $300,000. If, in order
to obtain such payment, Phar-Mor commences a suit which results
in a judgment against the Company for the termination fees and
expenses, the Company shall pay PharMor its reasonable costs and
expenses in connection with such suit, together with interest on
the amount of the fee at the prime rate of Citibank, N.A. in
effect on the date such payment was required to be made.
If the Merger Agreement is terminated by the Company as a
result of a material adverse effect having occurred as a result of
a breach of one or more of the representations and warranties of
Phar-Mor or Merger Sub, or Phar-Mor or Merger Sub having failed
to have performed its obligations under the Merger Agreement,
Phar-Mor shall, no later than two days after the day of such
termination by the Company, pay the Company a termination fee equal
to $2,000,000, plus upon the Company's request, all reasonable and
documented out-of-pocket expenses up to $300,000 incurred by the
Company in connection with the transaction. The termination fee is
not payable to the Company (i) if the Company shall have
materially breached any representation, warranty or covenant in the
Merger Agreement and such breach gives Phar-Mor the right to
terminate the agreement, or (ii) for any reason other than the
specific circumstance described in the immediately preceding
sentence. If, in order to obtain such payment, the Company
commences a suit which results in a judgment against PharMor for the
termination fees and expenses, Phar-Mor shall pay the Company its
reasonable costs and expenses in connection with such suit, together
with interest on the amount of the fee at the prime rate of
Citibank, N.A. in effect on the date such payment was required to
be made. Phar-Mor's obligation to pay the termination fee to
the Company can be offset, in Phar-Mor's discretion, against the
obligations of the Company under the $2,000,000 convertible
subordinated note payable by the Company to Phar-Mor.
The Merger Agreement provides that Phar-Mor shall not
purchase Common Shares for a period of one year if the Merger is not
consummated as a result of Phar-Mor's breach of the Merger
Agreement.
The Merger Agreement may not be amended except by written
agreement of the parties thereto. After the adoption of the
Merger Agreement by the Shareholders, no amendment shall, without the
further adoption of the Shareholders, alter or change the Merger
Consideration or any of the terms or conditions of the Merger
Agreement if such alteration or change would adversely affect the
Shareholders. No Shareholder approval is necessary if the parties
desire to extend the time to consummate the Merger.
<Page 21>
Certain Federal Income Tax Consequences
General
The following summary addresses the material federal income tax
consequences to Shareholders who have their Shares exchanged for the
right to receive $3.25 per Share in cash, adjusted as provided in
the Merger Agreement (and described elsewhere in this Proxy
Statement), as a result of the Merger. The summary does not
address all aspects of federal income taxation that may be relevant
to particular holders of Shares and thus, for example, may not be
applicable to holders of Shares who are not citizens or residents
of the United States, who are employees and who acquired their
Shares pursuant to the exercise of incentive stock options or who are
entities that are otherwise subject to special tax treatment under
the Code (such as insurance companies, taxexempt entities and
regulated investment companies); nor does this summary address the
effect of any applicable foreign, state, local or other tax laws.
The discussion assumes that each holder of Shares holds such Shares
as a capital asset within the meaning of Section 1221 of the Code.
The federal income tax discussion set forth below is included for
general information purposes only and is based upon present law.
The precise tax consequences of the Merger will depend on the
particular circumstances of the holder. SHAREHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES TO THEM OF THE PROPOSED
TRANSACTION.
The receipt of cash for Shares pursuant to the Merger will be
a taxable transaction for federal income tax purposes and may also
be a taxable transaction under applicable state, local or foreign
tax laws. In general, a shareholder who receives cash for Shares
pursuant to the Merger will recognize gain or loss for federal
income tax purposes equal to the difference between the amount of
cash received in exchange for the Shares exchanged and such
shareholder's adjusted tax basis in such Shares. Such gain or loss
will be a capital gain or loss, and will be a long-term capital gain
or loss if the holder has held the Shares for more than one year at
the time of sale. Under current law, the gain or loss will be
calculated separately for each block of Shares exchanged pursuant to
the Merger.
Under the current law, an individual taxpayer who has held a
capital asset for more than 12 months generally will be taxed on
gain from the sale of that asset at a maximum rate of 20%. The
maximum federal tax rate applicable to ordinary income (including
dividends and short-term capital gains recognized by individuals) is
39.6%. The maximum federal tax rate applicable to all capital gains
and ordinary income recognized by a corporation is 35%.
Withholding
Unless a Shareholder complies with certain reporting and/or
certification procedures or is an exempt recipient under
applicable provisions of the Code (and regulations promulgated
thereunder), such shareholder may be subject to a "backup"
withholding tax of 31% with respect to any payments received in the
Merger. Shareholders should contact their brokers to ensure
compliance with such procedures. Foreign shareholders should
consult with their tax advisors regarding withholding taxes in
general.
<Page 22>
Subordinated Convertible Loan Provided By Phar-Mor
Upon the execution of the Merger Agreement, Phar-Mor loaned the
Company $2,000,000 pursuant to the terms of the Subordinated
Convertible Note Purchase Agreement (the "Note Purchase
Agreement") and Subordinated Convertible Promissory Note (the
"Note"). The statements made in this Proxy Statement summarizing the
Note Purchase Agreement and the Note are qualified in their entirety
by reference to the text of the Note Purchase Agreement and the Note,
and are expressly made subject to the more complete information set
forth therein. The full text of the Note Purchase Agreement
and the Note are attached as Annex D to this Proxy Statement and
should be read in their entirety.
Pursuant to the Note, principal and accrued interest thereon at
a rate of 11% per annum are due upon the "Maturity Date", which is
defined in the Note as the earlier of (i) June 30, 1999 and (ii) a
termination of the Merger Agreement if (a) the Board shall have
failed to recommend or shall have withdrawn, or modified or changed
in a manner adverse to Phar-Mor, its approval or recommendation of
the Merger or shall have failed to include its recommendation in
favor of the Merger in the proxy statement or shall have
recommended or approved a Superior Proposal or if the Company
shall have entered into a definitive agreement or a letter of
intent or similar agreement providing for a Superior Proposal, or (b)
if the Pre-Closing Balance Sheet shows that the Net Assets are
greater than $7,000,000.
The Note is convertible, in whole or in part, at the option of
Phar-Mor at any time on or after the Maturity Date into Common Shares
("Note Shares") at a conversion rate of $3.25, subject to customary
anti-dilution provisions for stock splits, stock dividends,
reorganizations, merger, consolidations, etc.
Pursuant to the Note Purchase Agreement, at any time
commencing on the Maturity Date and expiring five years
thereafter, the holder(s) of the Note and Note Shares
representing in excess of 50% of the Note Shares that are not held
by the Company or any affiliate thereof shall have the right, on
two occasions, to demand that the Company register the Note Shares
for sale under the Securities Act of 1933, as amended (the
"Securities Act"). The holder(s) of the Note and Note Shares also
has unlimited piggy-back registration rights commencing after the
Maturity Date until such time as the Note Shares may be sold by such
holder(s) on a basis exempt from the registration requirements of the
Securites Act.
INFORMATION CONCERNING THE COMPANY
The Company is a New York corporation with its principal
offices located at Route 18, Midstate Shopping Center, East
Brunswick, New Jersey 08816; the telephone number is (732) 6981166.
The Company operates a chain of 32 discount drug stores, 13 of
which are operated under the name Pharmhouse and 19 of which are
operated under the name The Rx Place. The Company's stores are
located primarily in the mid-Atlantic and New England states and
emphasize a pricing policy of everyday discount prices on all
merchandise. The Company maintains one distribution center in
Pottstown, Pennsylvania to support its store operations.
<Page 23>
The Company is subject to the information filing
requirements of the Exchange Act and, in accordance therewith, is
obligated to file with the Commission periodic reports, proxy
statements and other information relating to its business,
financial condition and other matters. Information as of
particular dates concerning the Company's directors and officers,
their remuneration, stock options granted to them, the principal
holders of the Company's securities and any material interest of such
persons in transactions with the Company is required to be disclosed
in reports filed with the Commission or in proxy statements
distributed to the Company's stockholders and filed with the
Commission. Such reports, proxy statements and other information,
may be inspected at the Commission's office at 450 Fifth Street,
N.W., Washington, D.C. 20549, and also should be available for
inspection at the regional offices of the Commission located at
7 World Trade Center, 13th Floor, New York, New York. Copies of
such materials should be obtainable, upon payment of the customary
charges, by writing to the Commission's principal office at 450
Fifth Street, N.W., Washington, D.C. 20549. Such material may
also be accessed through an Internet Web site maintained by the
Commission at http://www.sec.gov.
Accompanying and forming a part of this Proxy Statement is the
Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1998 and the Company's Quarterly Report on Form 10-Q
for the quarterly period ended October 31, 1998.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROXY STATEMENT AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED. THE DELIVERY OF THIS PROXY STATEMENT
SHALL NOT IMPLY THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY OR PHAR-MOR SINCE THE
DATE HEREOF.
INFORMATION CONCERNING MERGER SUB AND PHAR-MOR
Merger Sub is a newly formed New York corporation and a
wholly owned direct subsidiary of Phar-Mor. To date, Merger Sub has
not conducted any business other than in connection with its
formation and capitalization and the transactions contemplated by the
Merger Agreement. Merger Sub will have no significant assets or
liabilities other than those created pursuant to the Merger
Agreement. Because Merger Sub is a newly formed corporation, no
meaningful financial information regarding Merger Sub is
available.
Phar-Mor, a Pennsylvania corporation, 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 January 1, 1999, Phar-Mor
operated 106 stores in 22 metropolitan markets in 19 states under the
name of Phar-Mor. Approximately 52% of Phar-Mor's stores are located
in Pennsylvania, Ohio and West Virginia, and approximately
23% are located in Virginia, North Carolina and South Carolina.
<PAGE 24>
The principal executive offices of Phar-Mor and Merger Sub are
located at 20 Federal Plaza West, Youngstown, Ohio 445010400; the
telephone number is (330) 746-6641.
Phar-Mor is subject to the informational filing requirements of
the Exchange Act and, in accordance therewith, is required to file
periodic reports, proxy statements and other information with the
Commission relating to its business, financial condition and other
matters. Information as of particular dates concerning Phar-Mor's
directors and officers, their remuneration, stock options
granted to them, the principal holders of Phar-Mor's securities
and any material interest of such persons in transactions with
Phar-Mor is required to be described in proxy statements
distributed to Phar-Mor's shareholders and filed with the
Commission. Such reports, proxy statements and other
information should be available for inspection at the public
reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and should also be
available for inspection at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such materials may also be obtained by mail,
upon payment of the Commission's customary fees, by writing to its
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549.
Such material may also be accessed through an Internet Web
site maintained by the Commission at http://www.sec.gov.
ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT CONCERNING
PHAR-MOR AND MERGER SUB HAS BEEN SUPPLIED BY PHAR-MOR AND HAS NOT
BEEN INDEPENDENTLY VERIFIED BY THE COMPANY.
PRICE RANGE OF THE SHARES; DIVIDENDS
The Shares are currently listed and traded on The Nasdaq
SmallCap Market, a segment of The Nasdaq Stock Market, under the
trading symbol "PHSE." The following table sets forth the high
and low quotations per Share for each quarterly period during the
last two fiscal years as reported on The Nasdaq SmallCap Market.
FISCAL QUARTER ENDING High Low
---- ----
05/03/97 8 1/2 6 1/4
08/02/97 9 6
11/01/97 7 4 3/4
01/31/98 6 1/2 4
05/03/98 4 1/4 4 1/4
08/02/98 5 4 11/16
11/01/98 1 31/32
On December 16, 1998, the last full trading day prior to the
announcement of the execution of the Merger Agreement, the high and
low sales prices per Share on The Nasdaq SmallCap Market were $1.94
<Page 25>
and $1.25. On __________, 1999, the last full trading day for
which quotations were available at the time of printing this Proxy
Statement, the high and low sales prices per Share on The Nasdaq
SmallCap Market were $_________ and $_______.
During the past three fiscal years and through the date of this
Proxy Statement, the Company has not declared any cash or stock
dividends and was, and continues to be, subject to
restrictions against the payment of cash dividends under its
agreements with its senior and subordinated lenders.
OWNERSHIP OF SHARES BY DIRECTORS, OFFICERS
AND FIVE PERCENT SHAREHOLDERS
Security Ownership of Principal Shareholders
The following table sets forth certain information, as of
December 10, 1998, with respect to holdings of the Common Shares by
each person known by the Company to be the beneficial owner of more
than 5% of the total number of Common Shares outstanding as of that
date. Each beneficial owner has sole voting and investment
power with respect to the Common Shares set forth opposite his
or her, or its name in the following table, except as otherwise
disclosed in the footnotes to the table.
Name and Address Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
- ---------------- -------------------- ----------
Anne Brecker 490,336 (1) 16.2%
860 Broadway
New York, NY 10003
Kenneth A. Davis 404,658 (2) 13.4%
860 Broadway
New York, NY 10003
Hemisphere 260,000 (3) 8.6%
Trading Co., Inc.
5796 Shelby Oaks Drive
Memphis, TN 38134-7333
Stephen R. Mittel 158,600 (4) 5.2%
One Sansome Street
San Francisco, CA 94101
* Calculation based upon 3,022,650 Common Shares outstanding as of
December 10, 1998 and Common Shares issuable upon options which
are exercisable within 60 days (including total non-qualified
options of 212,514 and total incentive options of 201,581.
<Page 26>
(1)Includes 484,542 shares owned by Mrs. Brecker and 5,794
shares held by trusts, of which she is the trustee, for the
benefit of her children. Mrs. Brecker disclaims beneficial
ownership of the shares held by such trusts. Does not
include 1,281 shares beneficially owned by Mrs. Brecker's
husband, Manfred Brecker, the Chairman of the Board of the
Company, with respect to which Mrs. Brecker disclaims
beneficial ownership.
(2)Includes 153,663 shares subject to options granted to Mr.
Davis pursuant to Company's 1991 Non-Qualified Stock
Option Plan (the "Non-Qualified Plan") and 64,691 shares
subject to options granted pursuant to the Company's 1991
Incentive Stock Option Plan (the "Incentive Option Plan"), all
of which are exercisable within 60 days. Does not include
122,472 shares beneficially owned by Mr. Davis' wife. Mr. Davis
disclaims beneficial ownership of the shares held by his wife.
(3)As reported on Amendment #1 to Schedule 13D filed by
Hemisphere Trading Co. Inc. ("Hemisphere") on April 7, 1997.
According to such Schedule 13D, Hemisphere has shared voting
power and shared dispositive power with respect to all
260,000 of these shares.
(4)As reported on a Schedule 13G jointly filed by Mr. Stephen R.
Mittel, Nob Hill Capital Management Partners and Nob Hill
Capital Management, Inc. (the "Mittel Group"), on July 30,
1998. According to such Schedule 13G, the Mittel Group has
shared voting power and shared dispositive power with respect to
all 158,600 of these shares.
Security Ownership of Management
The following table sets forth certain information as of
December 10, 1998 with respect to holdings of the Common Shares
beneficially owned by (i) each of the Company's directors,
(ii) the chief executive officer of the Company during 1997,
(iii) the other most highly compensated executive officers whose
annual salary and bonus during 1997 exceeded $100,000 and (iv) all
officers and directors of the Company as a group.
Name of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class*
- ------------------ -------------------- ----------
Manfred Brecker 1,281 (1) *
Kenneth A. Davis 404,658 (2) 13.4%
Joseph Keller 108,153 (3) 3.6%
Marcie B. Davis 122,472 (4) 4.1%
Richard A. Davis 52,000 (5) 1.7%
Daniel Thigpen 6,597 (6) *
Melvin Katz 11,392 *
Michael A. Feder 10,932 *
Peter Gerard 10,932 *
Raymond L. Steele 12,311 *
Officers and directors as (7) 25.3%
a group (consisting
of 12 persons)
* Less than 1%
(1)Does not include 484,542 shares owned by Mr. Brecker's wife,
Anne Brecker, or 5,794 shares held by trusts for the benefit of
Mr. Brecker's adult children, of which his wife is the
trustee. Mr. Brecker disclaims beneficial ownership of the
shares held by his wife and shares held by the trusts.
(2)Includes 153,663 shares subject to options granted to Mr.
Davis pursuant to the Non-Qualified Plan and 64,691 shares subject
to options granted pursuant to the Corporation's Incentive
Option Plan, all of which are exercisable within 60 days.
Does not include 122,472 shares beneficially owned by Mr. Davis'
wife. Mr. Davis disclaims beneficial ownership of the shares held
by his wife.
(3)Includes 12,874 shares subject to options granted to Mr.
Keller under the Non-Qualified Plan and 26,000 shares subject to
options granted under the Incentive Option Plan, all of which
are exercisable within 60 days.
(4)Includes 42,299 shares subject to options granted to Ms.
Davis pursuant to the Non-Qualified Plan and 17,379 shares
subject to options granted under the Incentive Option Plan,
all of which are exercisable within 60 days. Does not include
404,658 shares beneficially owned by Ms. Davis' husband. Ms.
Davis disclaims beneficial ownership of the shares held by her
husband.
(5)Includes 50,000 shares subject to options granted to Mr.
Richard A. Davis pursuant to the Corporation's Incentive
Option Plan, all of which are exercisable within 60 days.
(6)Includes 5,402 shares subject to options granted under the
Incentive Option Plan, all of which are exercisable within 60 days.
(7)Includes an aggregate of 212,514 shares subject to options
granted under the Non-Qualified Plan and 169,702 options granted
under the Incentive Option Plan, all of which are exercisable
within 60 days.
<Page 28>
INDEPENDENT PUBLIC ACCOUNTANTS
A representative of PricewaterhouseCoopers LLP, the Company's
independent certified public accountants for the current fiscal
year, is not expected to be present at the Special Meeting.
SHAREHOLDER PROPOSALS FOR ANNUAL MEETING
Because of the matters to be acted upon at the Special
Meeting, the date for the next Annual Meeting has not been
established. If the Merger is approved, no further Shareholders'
meetings will be convened by the Company. However, if it is not
approved, the Board will make provisions of presentation of
proposals by shareholders at the next Annual Meeting, provided
that such proposals are submitted by eligible shareholders who
have complied with the relevant regulations of the Commission.
Shareholder proposals intended to be submitted for presentation at
the next Annual Meeting of shareholders of the Company must be in
writing and must be received by the Company at its executive offices
within the time periods prescribed by Rule 14a-8(a)(3) promulgated
by the Commission pursuant to the Exchange Act.
PROXY SOLICITATION; REVOCATION OF PROXIES
Proxies are being solicited by and on behalf of the Board. All
expenses of this solicitation, including the cost of preparing
and mailing this Proxy Statement, will be borne by the Company. In
addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of the Company in
person or by telephone, telegram or other means of communication.
Such directors, officers and employees will not be additionally
compensated, but may be reimbursed for out-ofpocket expenses in
connection with such solicitation. Arrangements will also be
made with custodians, nominees and fiduciaries for forwarding of
proxy solicitation material to beneficial owners of Shares held
of record by such persons, and the Company may reimburse such
custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
IT IS URGED THAT PROXIES BE RETURNED PROMPTLY. THEREFORE,
SHAREHOLDERS ARE URGED TO FILL IN, SIGN AND RETURN THE
ACCOMPANYING FORM OF PROXY IN THE ENCLOSED ENVELOPE.
ANY SHAREHOLDER WHO HAS GIVEN A PROXY MAY REVOKE IT BY
WRITTEN NOTICE ADDRESSED TO AND RECEIVED BY THE SECRETARY OF THE
COMPANY PRIOR TO ITS EXERCISE, OR BY SUBMITTING A DULY EXECUTED
PROXY BEARING A LATER DATE OR BY ELECTING TO VOTE IN PERSON AT THE
SPECIAL MEETING. THE MERE PRESENCE AT THE SPECIAL MEETING OF THE
PERSON APPOINTING A PROXY DOES NOT REVOKE THE PRIOR GRANT OF A
PROXY.
<Page 29>
OTHER MATTERS
The Board is not aware of any matters to be presented for action
at the Special Meeting other than the matters referred to above and
does not intend to bring any other matters before the Special
Meeting. However, if other matters should properly come before the
Special Meeting, it is intended that the holders of Proxies will
vote thereon in their discretion.
All documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of
this Proxy Statement and prior to the date of the Special Meeting
shall be deemed to be incorporated by reference in this Proxy
Statement and to be a part hereof from the date of filing of such
documents. Any statement contained herein, or in a document all or a
portion of which is incorporated or deemed to be incorporated by
reference herein, shall be deemed to be modified or superseded for
purposes of this Proxy Statement to the extent that a statement
contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement.
BY ORDER OF THE BOARD OF DIRECTORS
Kenneth A. Davis
President, Chief Executive Officer
and Chief Operating Officer
REVOCABLE PROXY
PHARMHOUSE CORP.
X PLEASE MARK VOTES
AS IN THIS EXAMPLE
SPECIAL MEETING OF SHAREHOLDERS Authorization, For Against Abstain
FEBRUARY 24, 1999 Approval and adoption of an
THIS PROXY IS SOLICITED BY Agreement and Plan of Merger dated
THE BOARD OF DIRECTORS December 17, 1998 among the Company,
a New York corporation, Phar-Mor, Inc.
a Pennsylvania corporation ("Phar-Mor"),
and Pharmacy Acquisition Corp., a New
The undersigned hereby York corporation and wholly owned
appoints Kenneth A. Davis and subsidiary of Phar-Mor ("Merger Sub"),
Joseph Keller as proxies, each pursuant to which (1) Merger Sub would
with power to appoint his be merged with and into the Company
substitute, and hereby with the Company surviving the merger,
authorizes each of them to and (2) each outstanding Share will
represent and vote all the be converted into the right to receive
Common Shares, $.01 par value $3.25 in cash, subject to certain
(the "Shares"), of Pharmhouse adjustments described in the Proxy
Corp. (the "Company") held of Statement.
record by the undersigned on
January 13, 1999, (that the
undersigned would be
entitled to vote if personally THE BOARD OF DIRECTORS UNANIMOUSLY
present at the Special Meeting RECOMMENDS A VOTE "FOR" THE ABOVE
to be held on February 24, PROPOSAL.
1999, or at any adjournment or
postponement thereof, (1) as The shares represented by this proxy
specified herein the matter will be voted as directed by the
listed herein and more fully shareholder. If NO DIRECTION IS GIVEN,
described in the Notice of SHARES WILL BE VOTED FOR THE PROPOSAL.
Special Meeting and Proxy
Statement of said meeting, THIS PROXY WILL BE VOTED FOR THE
receipt of which is PROPOSAL UNLESS INSTRUCTIONS TO THE
acknowledged, and (2) in their CONTRARY ARE INDICATED. Please note
discretion on such other matters that abstaining from the vote on the
as may properly come before the proposal will have the same effect as a
Meeting or any adjournment or vote AGAINST the proposal.
postponement thereof.
Please sign exactly as your name
appears on this Proxy. When shares are
held by joint tenants, both should sign.
When signing as attorney, executor,
Please be sure to --------- administrator, trustee or guardian,
sign and date this Date please give full title as such. If a
Proxy in the bos below corporation, please sign in full
- ------------------------ corporate name by an authorized officer.
If a partnership, please sign in
Shareholdler Co-holder partnership name by an authorized
sign above (if any) sign person.
above
Detach above card, sign, date and mail in postage paid envelope provided.
PHARMHOUSE CORP.
Route 18, Midstate Shopping Center
East Brunswick, NJ 08816
PLEASE ACT PROMPTLY
SIGN, DATE AND MAIL YOUR PROXY TODAY.
TABLE OF CONTENTS
Page
INTRODUCTION 1
General 1
Voting at the Special Meeting 2
THE MERGER 2
Background of the Merger 2
Recommendation of the Special Committee and the Board 4
Opinion of Jefferies 6
Interests of Certain Persons in the Merger 8
Jefferies' Other Relationships 8
Agreements with Executive Officers 8
Stock and Option Holdings of Directors
and Officers 10 Voting Agreements 10
Indemnification and Insurance 11
Payment of Merger Consideration for the Shares 12
No Shareholders' Appraisal Rights 13
Purpose of the Merger; Certain Results of
the Merger 13
Accounting Treatment of the Merger 13
Certain Legal Matters; Regulatory Approvals 13
General 13
Antitrust 14
The Merger Agreement 14
The Merger 14
Adjustments to the Merger Consideration 15
Representations and Warranties 16
Covenants of the Company; No Solicitation 16
Conditions to the Merger 17
Termination and Amendment to the Merger
Agreement 17
Certain Federal Income Tax Consequences 20
General 20
Withholding 21
Subordinated Convertible Loan Provided By
Phar-Mor 21
INFORMATION CONCERNING THE COMPANY 22
INFORMATION CONCERNING MERGER SUB AND PHAR-MOR 23
PRICE RANGE OF THE SHARES; DIVIDENDS 23
OWNERSHIP OF SHARES BY DIRECTORS, OFFICERS
AND FIVE PERCENT SHAREHOLDERS 24
Security Ownership of Principal Shareholders 24
Security Ownership of Management 26
INDEPENDENT PUBLIC ACCOUNTANTS 27
SHAREHOLDER PROPOSALS FOR ANNUAL MEETING 27
PROXY SOLICITATION; REVOCATION OF PROXIES 27
OTHER MATTERS 28
ANNEXES
ANNEX A - OPINION OF JEFFERIES & COMPANY, INC.
ANNEX B - AGREEMENT AND PLAN OF MERGER
ANNEX C - VOTING AND PAYMENT AGREEMENT
ANNEX D - NOTE PURCHASE AGREEMENT AND PROMISSORY NOTE
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
FORM 10-Q FOR THE FISCAL QUARTER ENDED OCTOBER 31, 1998
Jefferies & Company, Inc.
650 Fifth Avenue
Fourth Floor
New York, New York 10019
December 16, 1998
PHARMHOUSE CORP.
860 Broadway
New York, NY 10003
To the Members of the Board of Directors:
We understand that Phar-Mor, Inc., a Pennsylvania
corporation (the "Purchaser"), and Pharmacy Acquisition Corp.
(the "Merger Subsidiary"), a wholly owned subsidiary of the
Purchaser, has offered to enter into an Agreement and Plan of
Merger (the "Merger Agreement") with Pharmhouse Corp., a New York
corporation (the "Company"), pursuant to which, subject to the
terms and conditions set forth therein, the Purchaser will
acquire any and all of the issued and outstanding common stock,
$0.01 par value, of the Company (the "Common Stock") for $3.25
per share in cash (the "Offer Price") through a transaction in
which the Merger Subsidiary will be merged with and into the
Company and the issued and outstanding Common Stock will be
canceled and extinguished and converted into the right to receive
the Offer Price (the "Transaction").
You asked us to render our opinion as to whether the Offer
Price is fair, from a financial point of view, to the holders of
the Common Stock.
Jefferies & Company, Inc. ("Jefferies"), as part of its
investment banking business, is regularly engaged in the
evaluation of capital structures and the valuations 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, Jefferies may
trade the securities of the Company and the Purchaser 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.
In connection with its engagement, Jefferies will receive a
fee for providing this opinion to the Company and will also
receive a success fee upon consummation of the Transaction. In
addition, Jefferies has received customary investment banking
fees from the Company for providing financial advisory services
related to the refinancing of the Company's senior credit
facility which occurred in May, 1998.
Jefferies also has provided investment banking services to
the Purchaser and received customary fees for rendering such
services. During 1998 Jefferies was retained by the Purchaser to
provide general corporate finance advisory services and has been
paid customary fees for such services. Jefferies will not
receive any compensation from the Purchaser in connection with
the delivery of this opinion.
PHARMHOUSE CORP.
December 16, 1998
Page 2
In conducting our analysis and arriving at the opinion
expressed herein, we have reviewed a draft of the Merger
Agreement, dated December 16, 1998 (including any schedules and
exhibits thereto which were provided by the Company) and certain
financial and other information that was publicly available or
furnished to us by the Company, including the financial terms of
the Transaction, certain internal financial analyses,
projections, budgets, reports and other information prepared by
the Company's management. We have also held discussions with
various members of senior management of the Company concerning
historical and current operations, financial condition and
prospects, as well as the strategic and operating benefits
anticipated from the business combination. In addition, we have
reviewed the reported price and trading activities of the Common
Stock, compared certain financial and stock market information
for the Company with similar information for other publicly-
traded companies that we considered relevant, reviewed the
financial terms of certain other business combinations that we
considered relevant and conducted such other reviews, analyses
and inquiries relating to the Company as we considered
appropriate in rendering this opinion. In accordance with our
engagement by the Company, Jefferies has not performed any due
diligence on the Purchaser or any of its affiliates.
In the course of 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 the financial and other information that was
provided to us by the Company, or that was publicly available to
us (including, without limitation, the information described
above and the financial projections and projected operating
assumptions provided by the Company regarding its estimated
future performance). 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 or
obtained 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 the Company's projections and underlying
projected operating assumptions were reasonably prepared on bases
reflecting the best currently available estimates and good faith
judgments of the Company management as to the future performance
of the Company. In addition, in rendering this opinion we have
assumed, with your permission, that the Company will perform in
accordance with such projections for all periods specified
therein. Although such projections constituted one of many items
that we employed in the formation of our opinion, changes to the
Company's financial projections could affect the opinion rendered
herein.
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 conduct a comprehensive physical
inspection of any of the assets of the Company, nor have we been
furnished with any such appraisals. Our opinion is based on
economic, monetary, political, regulatory, 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); however, such
conditions are subject to rapid and unpredictable change and such
changes could affect the conclusions expressed herein. We have
PHARMHOUSE CORP.
December 16, 1998
Page 3
made no independent investigation of any legal matters affecting
the Company, 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 the
Company and its stockholders.
In rendering this opinion we have also assumed, with your
permission, that: (i) the terms and provisions contained in the
Merger Agreement (including any schedules and exhibits thereto)
will not differ from those contained in the drafts of those
documents we have heretofore reviewed with respect to any matter
material to our opinion expressed herein; (ii) the conditions to
the consummation of the Transaction set forth in the Merger
Agreement will be satisfied without material expense; and (iii)
there is not now, and there will not as a result of the
consummation of the transactions contemplated by the Merger
Agreement be, any default, or event of default, under any
indenture, credit agreement or other material agreement or
instrument to which the Company is a party.
Moreover, in rendering the opinion set forth below we note
that the consummation of the Transaction is conditioned upon the
approval of the holders of the Common Stock, and we are not
recommending that the Company, 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 the Company,
and does not address the Company's underlying business decision
to effect 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 Offer Price to be
received by the holders of the Common Stock is fair from a
financial point of view.
It is understood and agreed that this opinion is provided
for the use of the Board of Directors of the Company as one
element in the Board's consideration of the Transaction, and may
not be used for any other purpose, or otherwise referred to,
relied upon or circulated, without our prior written consent. We
expressly disclaim any undertaking or obligation to advise any
person of any change in any fact or matter affecting this 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
the Common Stock in connection with the Transaction but may not
otherwise be disclosed publicly in any manner without our prior
written approval.
Sincerely,
/s/ Jefferies & Company, Inc.
JEFFERIES & COMPANY, INC.
AGREEMENT AND PLAN OF MERGER
dated as of
December 17, 1998 among
PHARMHOUSE CORP., PHAR MOR, INC.
and
PHARMACY ACQUISITION CORP.
TABLE OF CONTENTS/1
Page
ARTICLE 1
THE MERGER
Section 1.01. The Merger 1
Section 1.02. Conversion of Shares 2
Section 1.03. Surrender and Payment 3
Section 1.04. Employee Stock Options and Restricted Shares 5
Section 1.05 No Set-Off 5
ARTICLE 2
THE SURVIVING CORPORATION
Section 2.01. Certificate of Incorporation 6
Section 2.02. Bylaws 6
Section 2.03. Directors and Officers 6
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 3.01. Corporate Existence and Power 6
Section 3.02. Corporate Authorization; Approval of the Board 7
Section 3.03. Governmental Authorization 7
Section 3.04. Noncontravention 7
Section 3.05. Capitalization 8
Section 3.06. Subsidiaries 8
Section 3.07. SEC Filings 9
Section 3.08. Financial Statements. 9
Section 3.09. Proxy Statements; Schedule 13E-3 10
Section 3.10. Absence of Certain Changes 10
Section 3.11. Litigation 12
Section 3.12. No Undisclosed Material Liabilities 12
Section 3.13. Compliance with Laws 12
Section 3.14. Finders' Fees 12
Section 3.15. Taxes 13
Section 3.16. Employee Benefits 13
Section 3.17. Environmental Matters 14
Section 3.18. Material Agreements 15
Section 3.19. Title to Properties; Encumbrances 16
Section 3.20. Labor Matters 16
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Section 4.01. Corporate Existence and Power 17
Section 4.02. Corporate Authorization 17
Section 4.03. Governmental Authorization 17
Section 4.04. Noncontravention 18
Section 4.05. Proxy Statement; Schedule 13E-3 18
Section 4.06 Litigation 18
Section 4.07. Finders' Fees 18
Section 4.08. Financing 19
ARTICLE 5
COVENANTS OF THE COMPANY
Section 5.01. Conduct of the Company 19
Section 5.02. Stockholder Meeting; Proxy Material 20
Section 5.03. Access to Information 21
Section 5.04. Other Offers 21
Section 5.05. Estoppel Certificates. 22
Section 5.06. Confidentiality Agreement 22
Section 5.07. Pre-Closing Balance Sheet 22
ARTICLE 6
COVENANTS OF BUYER
Section 6.01. Obligations of Merger Subsidiary 23
Section 6.02. Director and Officer Liability 23
Section 6.03. Employment Agreements 24
Section 6.04. Standstill 24
Section 6.05 Transitory Nature of Merger Subsidiary. 24
Section 6.06. Buyer's Environmental Report 24
ARTICLE 7
COVENANTS OF BUYER AND THE COMPANY
Section 7.01. Commercially Reasonable Efforts; SEC Filings 24
Section 7.02. Public Announcements 25
Section 7.03. Further Assurances 25
Section 7.04. Notices of Certain Events 25
ARTICLE 8
CLOSING; CONDITIONS TO THE MERGER
Section 8.01. Closing 25
Section 8.02. Conditions to the Obligations of Each Party 26
Section 8.03. Conditions to the Obligations of Buyer and
Merger Subsidiary 26
Section 8.04. Conditions to the Obligations of the Company 27
ARTICLE 9
TERMINATION
Section 9.01. Termination 27
Section 9.02. Effect of Termination 29
ARTICLE 10
MISCELLANEOUS
Section 10.01. Notices 31
Section 10.02. Survival 32
Section 10.03. Amendments; No Waivers 32
Section 10.04. Expense 33
Section 10.05. Successors and Assigns 33
Section 10.06. Counterparts; Effectiveness 33
Section 10.07. Parties in Interest 33
Section 10.08. No Personal Liability 33
Section 10.09. Governing Law 33
Section 10.10. Jurisdiction 33
Section 10.11. Specific Performance 35
Section 10.12. Interpretation 35
Section 10.13. Entire Agreement; Schedules 35
Section 10.14. Severability 36
1/The Table of Contents is not a part of this Agreement
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of
December 17, 1998 among PHARMHOUSE CORP., a New York corporation
(the "Company"), PHAR MOR, INC., a Pennsylvania corporation
("Buyer") and PHARMACY ACQUISITION CORP., a New York corporation and
a wholly owned subsidiary of Buyer ("Merger Subsidiary").
WITNESSETH:
WHEREAS, Buyer and the Company desire that Merger Subsidiary be
merged with and into the Company with the Company being the
surviving corporation and a wholly owned subsidiary of Buyer as
contemplated hereby; and
WHEREAS, the Board of Directors of the Company has approved
this Agreement and the transactions contemplated hereby;
NOW, THEREFORE, in consideration of the mutual promises
contained herein, the parties hereto agree as follows:
ARTICLE 1
THE MERGER
Section 1.01. The Merger. (a) Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time
(as defined below), Merger Subsidiary shall be merged (the "Merger")
with and into the Company in accordance with the Business
Corporation Law of the State of New York (the "New York Law"),
whereupon the separate existence of Merger Subsidiary shall
cease and the Company shall be the surviving corporation (the
"Surviving Corporation"). Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all assets,
properties, rights, privileges, powers and franchises of a public
or private nature of the Company and the Merger Subsidiary
shall vest in the Surviving Corporation and all debts, liabilities,
obligations and duties of the Company and the Merger Subsidiary
shall become the debts, liabilities, obligations and duties of the
Surviving Corporation. The Surviving Corporation shall assume and
be liable for all the liabilities, obligations and penalties of
the Company and the Merger Subsidiary. No
liability or obligation due or to become due, claim or demand for any
cause existing against either the Company or the Merger
Subsidiary, or any stockholder, officer or director thereof,
shall be released or impaired by the Merger. No action or
proceeding, whether criminal or civil, then pending by or against
either the Company or the Merger Subsidiary, or any stockholder,
officer or director thereof, shall abate or be discontinued by the
Merger, but may be enforced, prosecuted, settled or
compromised as if the Merger had not occurred, or the Surviving
Corporation may be substituted in such action or special
proceeding in place of either the Company or the Merger
Subsidiary.
(b) As soon as practicable, but in no event later than ten
days after the satisfaction or, to the extent permitted
hereunder, waiver of all conditions to the Merger, the Company and
Merger Subsidiary will file a certificate of merger (together with
any other documents, certificates and instruments required by law
to effectuate and consummate the Merger, all in a form reasonably
acceptable to the Company and Buyer) with the Department of
State of the State of New York and make all other filings or
recordings required by New York Law in connection with the Merger.
The Merger shall become effective at such time as the certificate
of merger is duly filed with the Department of State of the State
of New York (the "Effective Time").
Section 1.02. Conversion of Shares.
(a) At the Effective Time by virtue of the Merger:
(i) each share (each a "Share") of common stock, par
value $.01 per share, of the Company (the "Common Stock")
held by the Company as treasury stock or owned by Buyer or any
subsidiary of Buyer immediately prior to the Effective Time
shall be canceled, and no payment shall be made with respect
thereto;
(ii) each share of common stock of Merger Subsidiary
outstanding immediately prior to the Effective Time shall be
converted into and become one share of common stock of the
Surviving Corporation with the same rights, powers and
privileges as the shares so converted and shall constitute
the only outstanding shares of capital stock of the
Surviving Corporation; and
(iii) each Share outstanding immediately prior to the
Effective Time shall, except as otherwise provided in Section
1.02(a)(i) above or as provided in Sections 1.02(b),
be converted into the right to receive $3.25 in cash,
without interest, but subject to adjustment as provided in
Section 1.02(b) (such amount, as so adjusted, the "Per Share
Amount"), payable in full by wire transfer or check of
immediately available funds within five business days after the
date when such holder has satisfied the procedures
contemplated by Section 1.03, in accordance with the
provisions of this Agreement. Following the Effective Time, all
certificates or other instruments representing shares of Common
Stock outstanding immediately prior to the Merger shall
thereafter only represent the right to receive, upon surrender
thereof, the Merger Consideration (as defined below). At
the Effective time, each share of Common Stock issued and
outstanding prior to the Effective time (all of which shares
will be converted into the right to receive the Merger
Consideration) shall be cancelled and retired and shall
cease to exist. The Per Share Amount payable to all issued
and outstanding Shares pursuant to this Section
1.02(a)(iii) is herein referred to as the "Merger
Consideration."
(b) The Per Share Amount shall be subject to adjustment as follows:
(i) if the Company ceases to conduct normal retail operations at
any store location at which it conducts such operations on the date
hereof, and Buyer waives any right it may have to terminate this
Agreement as a consequence of such closure(s), the Per Share Amount
shall be reduced by an amount equal to $.10 for each such store
closing (including without limitation the cessation of normal retail
operations at either of the Company's store locations no. 167 and
168 for any reason); provided, however, that in no event shall the
Per Share Amount be reduced by an amount in excess of $.20
pursuant to this Section 1.02(b); provided further, that if the
Company ceases to conduct normal retail operations at two or
more of its currently existing store locations (other than a
cessation of such operations at the Company's store locations no.
167 and/or 168 resulting from the termination of the leases for
such locations solely by action of the landlord therefor), then
Buyer has the right to terminate this Agreement pursuant to Section
9.01(g)(i);
(ii) if the Pre-Closing Balance Sheet (as defined below)
shows that the total assets minus the total liabilities of the
Company and the Company Subsidiaries on a consolidated basis (the
"Net Assets") as of the date thereof is less than $1,000,000 then
the Per Share Amount shall be reduced by $.01 for every full
$30,000 by which the Net Assets are less than $1,000,000;
provided, however, that if Net Assets are less than negative
$1,000,000 then Buyer has the right to terminate this Agreement
pursuant to Section 9.01(g)(ii); provided further, that in
determining Net Assets for purposes of this Section
1.02(b)(ii), no adjustment to the Pre-Closing Balance Sheet
shall be made with respect to Section 1.02(b)(iv) below;
(iii) if the Pre-Closing Balance Sheet shows that the Net
Assets are greater than $5,000,000, then the Per Share Amount
shall be increased by $.01 for every full $30,000 by which the
Net Assets are greater than $5,000,000; provided, however, that if
Net Assets are greater than $7,000,000 then the Company has the
right to terminate this Agreement pursuant to Section 9.01(l); and
(iv) if the Closing Environmental Liabilities (as defined
below) are greater than $100,000, then the Per Share Amount shall be
reduced by $.01 for every full $30,000 by which the
Environmental Liabilities exceed $100,000; provided, however,
that in no event shall the Per Share Amount be reduced by an
amount in excess of $.30 pursuant to this Section 1.02(b)(iv); and
provided further, that if the Closing Environmental Liabilities are
greater than $750,000, then Buyer has the right to terminate
this Agreement pursuant to Section 9.01(g)(ii).
Section 1.03. Surrender and Payment. (a) Promptly
following execution of this Agreement, Buyer shall appoint Harris
Bank & Trust Company (or such other qualified party reasonably
acceptable to the Company) (the "Exchange Agent") for the purpose of
exchanging certificates representing Shares for the Per Share Amount,
and the Company shall provide Buyer and the Exchange Agent with
a complete and accurate list of names and addresses for the
stockholders of record of the Company. On or prior to the
Effective time, Buyer shall deposit, or shall cause to be
deposited, with or for the account of the Exchange Agent, for the
benefit of the holders of Shares of Common Stock, cash in an
amount equal to the Merger Consideration. Buyer shall direct the
Exchange Agent to invest such funds, pending their disbursement in
accordance herewith, in a money market mutual fund registered under
the Investment Company Act of 1940, as amended, selected by Buyer.
Buyer shall pay all fees and expenses of the Exchange
Agent. For purposes of determining the Merger Consideration to
be made available, Buyer shall assume that no holder of Shares
will perfect his right to appraisal of his Shares. Promptly
after the Effective Time, Buyer will send, or will cause the
Exchange Agent to send, to each holder of Shares at the Effective
Time a letter of transmittal for use in such exchange (which
shall specify that the delivery shall be effected, and risk of
loss and title shall pass, only upon proper delivery of the
certificates representing Shares to the Exchange Agent).
(b) Each holder of Shares that have been converted into a
right to receive the Per Share Amount, upon surrender to the
Exchange Agent of a certificate or certificates representing such
Shares, together with a properly completed letter of transmittal
covering such Shares, will be entitled to receive the Merger
Consideration payable in respect of such Shares, provided that
Buyer shall direct the Exchange Agent to accept an indemnity in the
form reasonably satisfactory to Buyer and the Exchange Agent, for
any such certificate which is lost, stolen or destroyed. Until
so surrendered, each such certificate shall, after the Effective
Time, represent for all purposes, only the right to receive such
Merger Consideration. The Exchange Agent or Buyer,
as the case may be, shall be entitled to deduct and withhold from the
consideration otherwise payable pursuant to this Agreement such
amounts as the Exchange Agent or Buyer are required to deduct
and withhold under the Internal Revenue Code of 1986, as amended
(the "Code"), or any applicable provision of state, local or foreign
tax law, with respect to the making of any payment in respect of
the Merger Consideration hereunder. To the extent such amounts
are so withheld, such amounts shall be treated for all purposes of
this Agreement as having been paid to the Person with respect to
whom such deduction and withholding was made by the Exchange Agent
or Buyer. No such deduction or withholding shall be made if the
relevant Person shall provide documentation reasonably
satisfactory to the Exchange Agent and Buyer
establishing an exemption from withholding, and Buyer shall take
customary actions to obtain such documentation prior to such
deduction or withholding.
(c) If any portion of the Merger Consideration is to be paid to
a Person other than the registered holder of the Shares represented
by the certificate or certificates surrendered in exchange
therefore, it shall be a condition to such payment that the
certificate or certificates so surrendered shall be properly endorsed
or otherwise be in proper form for transfer and that the Person
requesting such payment shall pay to the Exchange Agent any
transfer or other taxes required by law as a result of such payment
to a Person other than the registered holder of such Shares or
establish to the satisfaction of the Exchange Agent that such tax
has been paid or is not payable. For purposes of this Agreement,
"Person" means an individual, a corporation, a limited liability
company, a partnership, an association, a trust or any other entity
or organization, including a government or political subdivision or
any agency or instrumentality thereof.
(d) If, after the Effective Time, certificates representing Shares
are presented to the Surviving Corporation, they shall be canceled
and exchanged for the consideration provided for, and in accordance
with the procedures set forth, in this Article 1.
(e) Any portion of the Merger Consideration made available to the
Exchange Agent pursuant to Section 1.03(a) that remains unclaimed by
the holders of Shares six months after the Effective Time shall be
returned to Buyer, upon demand, and any such holder who has not
exchanged his Shares for the Merger Consideration in accordance
with this Section prior to that time shall thereafter look only to
Buyer for payment of the Merger Consideration in respect of his
Shares. Notwithstanding the foregoing, Buyer shall not be liable
to any holder of Shares for any amount paid to a public official
pursuant to applicable abandoned property laws. Any amounts
remaining unclaimed by holders of Shares two years after the
Effective Time (or such earlier date immediately prior to such time
as such amounts would otherwise escheat to or become property of
any governmental entity) shall, to the extent permitted by
applicable law, become the property of Buyer free and clear of
any claims or interest of any Person previously entitled thereto.
Section 1.04. Employee Stock Options and Restricted Shares.
(a) At or immediately prior to the Effective Time, (i) each
outstanding option to purchase Common Stock granted under any
employee or nonemployee director stock option or compensation
plan or arrangement of the Company shall be canceled, and each
holder of any such option, whether or not then vested or
exercisable, shall be paid by the Surviving Corporation at the
Effective Time for each such option an amount determined by
multiplying (A) the excess, if any, of the Per Share Amount over the
applicable exercise price of such option by (B) the number of shares
of Common Stock such holder could have purchased (assuming
full vesting of all options) had such holder exercised such
option in full immediately prior to the Effective Time, and (ii)
each restricted Share granted under any employee or nonemployee
director stock option or other compensation plan or arrangement of
the Company shall be vested and converted into the right to receive
the Per Share Amount in accordance with Section 1.02(c).
Schedule 3.16 hereto (A) identifies each employee stock option or
compensation plan or arrangement of the Company and (B)
identifies each employee or nonemployee director of the Company or
any Company subsidiary who holds options pursuant top any such plan,
and sets forth with respect to each such holder (1) the number of
options held thereby and (2) the exercise price per share
applicable to each such option.
(b) Prior to the Effective Time, the Company shall (i) use its
commercially reasonable efforts to obtain any consents from holders
of options to purchase shares of Common Stock and restricted
Shares granted under the Company's stock option or compensation
plans or arrangements and (ii) make any permitted amendments to
the terms of such stock option or compensation plans or
arrangements, and take any other permitted actions thereunder,
that, in the case of either clauses 1.04(b)(i) or 1.04(b)(ii),
are necessary to give effect to the transactions contemplated by
Section 1.04(a). Notwithstanding any other provision of this
Section, payment may be withheld in respect of any option or
restricted Shares until any necessary consent from the holder thereof
is obtained.
Section 1.05 No Set-Off. Except as expressly set forth
in Section 9.02(d), Buyer's obligations to make the payments
provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any setoff,
counterclaim, recoupment, defense or other claim, right or action
which Buyer may have against the Company or any holder of Common
Stock or options to purchase Common Stock.
ARTICLE 2
THE SURVIVING CORPORATION
Section 2.01. Certificate of Incorporation. The
certificate of incorporation of the Company in effect at the
Effective Time shall be the certificate of incorporation of the
Surviving Corporation until amended in accordance herewith and
with applicable law.
Section 2.02. Bylaws. The bylaws of the Company in effect
at the Effective Time shall be the bylaws of the Surviving
Corporation until amended in accordance herewith and with
applicable law.
Section 2.03. Directors and Officers. From and after the
Effective Time, until successors are duly elected or appointed and
qualified in accordance with applicable law, the directors and
officers of Merger Subsidiary at the Effective Time shall be the
directors and officers of the Surviving Corporation.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Buyer that:
Section 3.01. Corporate Existence and Power. The Company is
a corporation duly incorporated, validly existing and in good
standing under the laws of the State of New York, and has all
corporate powers and all material governmental licenses,
authorizations, consents and approvals required to carry on its
business as now conducted. The Company is duly qualified to do
business as a foreign corporation and is in good standing in each
jurisdiction where the character of the property owned or leased by
it or the nature of its activities makes such qualification
necessary, except for those jurisdictions where the failure to be so
qualified would not, individually or in the aggregate, have a
Material Adverse Effect. The Company has heretofore delivered to
Buyer true and complete copies of the Company's certificate of
incorporation and bylaws as currently in effect. As used in this
Agreement, the term "Material Adverse Effect" means a material
adverse effect on the business, assets, operations, condition or
prospects (financial or otherwise), results of operations or the
conduct of the business of the Company and the Company
Subsidiaries taken as a whole; provided, however, that the
cessation of normal retail operations at any two or more store
locations at which either the Company or any Company Subsidiary
conducts business on the date hereof (other than a cessation of
such operations at either of the Company's store locations no. 167
or 168 resulting from the termination of the leases for such
locations solely by action of the landlords therefor) shall
constitute a Material Adverse Effect; and provided further that the
incurrence by the Company on a consolidated basis of net losses
not exceeding $600,000 for February 1999 and not exceeding $825,000
for March 1999, in and of itself shall not constitute a Material
Adverse Effect for purposes hereof. For purposes of this
Agreement, a "Subsidiary," as to any Person, means any
corporation or other entity of which securities or other
ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing
similar functions are directly or indirectly owned by such
Person, and "Company Subsidiary" means any Subsidiary of the
Company.
Section 3.02. Corporate Authorization; Approval of the
Board. The execution, delivery and performance by the Company of
this Agreement and the consummation by the Company of the
transactions contemplated hereby are within the Company's
corporate powers and, except for any required approval by the
Company's stockholders in connection with the consummation of the
Merger, have been duly authorized by all necessary corporate
action of the Company. This Agreement constitutes a valid and
binding agreement of the Company enforceable against the Company in
accordance with its terms, except (x) as the same may be limited
by applicable bankruptcy, insolvency, moratorium or similar
laws of general application relating to or affecting creditors'
rights, and (y) for the limitations imposed by general principles of
equity. The foregoing exceptions (x) and (y) are hereinafter
referred to as the "Enforceability Exceptions." The
Board of Directors of the Company has, by resolutions duly
adopted at a meeting duly called and held, [unanimously] approved
this Agreement, the Merger and the other transactions
contemplated hereby on the material terms and conditions set
forth herein. The Board of Directors of the Company has received the
opinion as of the date of this Agreement of Jefferies & Co., Inc.,
as financial advisor to the Board of Directors of the Company,
that the consideration to be received by the Company's stockholders
(other than Buyer and its Subsidiaries) in the Merger is fair
to such stockholders from a financial point of view, and such
opinion has been made available to Buyer.
Section 3.03. Governmental Authorization. The execution,
delivery and performance by the Company of this Agreement and the
consummation of the Merger by the Company require no material
action by or in respect of, or filing with, any governmental
body, agency, official or authority other than (a) the filing of a
certificate of merger in accordance with New York Law, (b)
compliance with any applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "Exchange Act"), (c) for notification
pursuant to, and expiration or termination of the waiting period
under, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations thereunder (the "HSR Act"),
and (d) where the failure to take such action or make such filing
would not have, and would not reasonably be expected to
have, a Material Adverse Effect or materially interfere with or
delay the transactions contemplated hereby.
Section 3.04. Noncontravention. The execution, delivery and
performance by the Company of this Agreement and the
consummation by the Company of the transactions contemplated
hereby do not and will not (a) contravene or conflict with the
certificate of incorporation or bylaws of the Company, (b)
assuming compliance with the matters referred to in Section 3.03,
to the best of the Company's knowledge, contravene or conflict in any
material respect with any provision of any law, regulation,
judgment, injunction, order or decree binding upon or applicable to
the Company or any Company Subsidiary, (c) except as set forth on
Schedule 3.04 or as disclosed on the SEC Reports (as defined below)
and with such other exceptions as would not individually or in the
aggregate have a Material Adverse Effect, to the best of the
Company's knowledge, constitute a default under or give rise to a
right of termination, cancellation or acceleration of
any right or obligation of the Company or any Company Subsidiary or
to a loss of any benefit to which the Company or any Company
Subsidiary is entitled under any provision of any agreement,
contract, real estate lease or other instrument binding upon the
Company or any Company Subsidiary or any license, franchise,
permit or other similar authorization held by the Company or any
Company Subsidiary or (d) with such exceptions as would not
individually or in the aggregate have a Material Adverse Effect, to
the best of the Company's knowledge, result in the creation or
imposition of any Lien on any asset of the Company or any Company
Subsidiary. For purposes of this Agreement, "Lien" means, with
respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect to such
asset.
Section 3.05. Capitalization. The authorized capital stock of
the Company consists of 25,000,000 shares of common stock, par value
$.01 per share (defined above as "Common Stock"), and 2,500,000
shares of preferred stock, par value $.10 per share. As of
December 10, 1998, there were outstanding (i) 2,594,827 shares of
Common Stock and no shares of preferred stock, (ii)
stock options held by employees and nonemployee directors of the
Company to purchase a total of 845,319 shares of Common Stock at
such exercise prices as set forth in Schedule 3.05, and (iii)
stock awards to nonemployee directors in aggregate amount equal to
13,728 shares of Common Stock. All outstanding Shares have been
duly authorized and validly issued and are fully paid and
nonassessable. Except as set forth in this Section and in
Schedule 3.05 or as disclosed in the SEC Reports, and except for
changes since December 10, 1998 resulting from the exercise of
stock options granted to employees and nonemployee directors of
the Company and referred to in the preceding clause (ii), there are
outstanding (a) no shares of capital stock or other voting
securities of the Company, (b) no securities of the Company
convertible into or exchangeable for shares of capital stock or
voting securities of the Company, (c) no options or other rights to
acquire from the Company, and no obligation of the Company to issue,
any capital stock, voting securities or securities convertible
into or exchangeable for capital stock or voting securities of
the Company and (d) no stock appreciation rights or similar rights
with respect to any securities of the Company (the
items in clauses 3.05(a), 3.05(b), 3.05(c) and 3.05(d) being
referred to collectively as the "Company Securities"). There are no
outstanding obligations of the Company or any Company
Subsidiary to repurchase, redeem or otherwise acquire any Company
Securities.
Section 3.06. Subsidiaries. (a) Schedule 3.06 lists each
of the Company's subsidiaries and the jurisdiction of
incorporation and organization of each Subsidiary. Each Company
Subsidiary is a corporation duly incorporated, validly existing and
in good standing under the laws of its jurisdiction of
incorporation, has all corporate powers and all material
governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted and is duly
qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of the property
owned or leased by it or the nature of its activities makes such
qualification necessary, except for those jurisdictions where
failure to be so qualified would not, individually or in the
aggregate, have a Material Adverse Effect. All Company
Subsidiaries and their respective jurisdictions of incorporation are
identified on Schedule 3.06(a).
(b) Except as set forth in Schedule 3.06(b) or as disclosed in
the SEC Reports, all of the outstanding capital stock of, or other
ownership interests in, each Company Subsidiary, is owned by the
Company, directly or indirectly, free and clear of any
Lien and free of any other limitation or restriction (including any
restriction on the right to vote, sell or otherwise dispose of such
capital stock or other ownership interests). There are
no outstanding (i) securities of the Company or any Company
Subsidiary convertible into or exchangeable for shares of capital
stock or other voting securities or ownership interests in any
Company Subsidiary, (ii) options or other rights to acquire from the
Company or any Company Subsidiary, and no other obligation of the
Company or any Company Subsidiary to issue, any capital stock,
voting securities or other ownership interests in, or any
securities convertible into or exchangeable for any capital
stock, voting securities or ownership interests in, any Company
Subsidiary or (iii) stock appreciation rights or similar rights
with respect to any securities of any Company Subsidiary (the
items in clauses 3.06(b)(i), 3.06(b)(ii) and 3.06(b)(iii) being
referred to collectively as the ("Company Subsidiary
Securities"). There are no outstanding obligations of the
Company or any Company Subsidiary to repurchase, redeem or
otherwise acquire any outstanding Company Subsidiary Securities.
Section 3.07. SEC Filings. (a) The Company has made
available to Buyer (i) the annual reports on Form 10-K for its
fiscal years ended January 31, 1998, February 1, 1997 and
February 3, 1996, (ii) its quarterly reports on Form 10-Q for its
fiscal quarters ended May 2, August 1 and October 31, 1998, (iii) its
proxy or information statements relating to meetings of, or actions
taken without a meeting by, the stockholders of the
Company held since January 31, 1996, and (iv) all of its other
reports, statements, schedules and registration statements filed
with the Securities and Exchange Commission (the "SEC") since
January 31, 1996. As used herein, the term "Form 10-K" means the
Company's annual report on Form 10-K for the fiscal year ended
January 31, 1998, the term "Form 10-Q" means the Company's
quarterly report on Form 10-Q for the fiscal quarter ended
October 31, 1998, and the term "SEC Reports" means all of the
reports and other filings referred to in the preceding clauses (i)
through (iv).
(b) As of its filing date, each such report or statement
filed pursuant to the Exchange Act did not contain any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not
misleading.
(c) Each such registration statement, as amended or
supplemented, if applicable, filed pursuant to the Securities Act of
1933, as amended (the "Securities Act"), as of the date such
statement or amendment became effective did not contain any
untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading.
Section 3.08. Financial Statements. The audited
consolidated financial statements and unaudited consolidated
interim financial statements of the Company included in its
annual reports on Form 10-K and the quarterly reports on Form 10Q
referred to in Section 3.07 fairly present, in all material
respects and in conformity with generally accepted accounting
principles ("GAAP") applied on a consistent basis (except as may be
indicated in the notes thereto), the consolidated financial
position of the Company and its consolidated subsidiaries as of the
dates thereof and their consolidated results of the
operations and changes in financial position for the periods then
ended (subject to normal year-end adjustments in the case of any
unaudited interim financial statements).
Section 3.09. Proxy Statements; Schedule 13E-3. The proxy
statement of the Company (the "Company Proxy Statement") to be
mailed to the stockholders of the Company in connection with the
meeting of such stockholders to vote on the approval and adoption of
this Agreement and the Merger (the "Company Stockholder
Meeting"), and any amendments or supplements to such proxy
statement will, when filed with the SEC, to the best of the
Company's knowledge, comply as to form in all material respects
with the applicable requirements of the Exchange Act. At the
time the Company Proxy Statement or any amendment or supplement
thereto is first mailed to stockholders of the Company and at the
time such stockholders vote on adoption of this Agreement, the
information supplied by the Company for inclusion or
incorporation by reference in the Company Proxy Statement or in the
Rule 13e-3 Transaction Statement on Schedule 13E-3 to be filed
with the SEC in connection with the Merger (the "Schedule 13E-3"),
as either such document may be supplemented or amended, if
applicable, to the best of the Company's knowledge, will not contain
any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein,
in light of the circumstances under which they were made, not
misleading.
Section 3.10. Absence of Certain Changes. Except as set
forth on Schedule 3.10 or as otherwise permitted by this
Agreement, since October 31, 1998, the Company and Subsidiaries
have in all material respects conducted their business in the
ordinary course consistent with past practice and there has not
been:
(a) any event, occurrence or development of a state of
circumstances or facts which has had or reasonably would be
expected to have a Material Adverse Effect (other than those arising
from general economic or industry-wide events or occurrences);
(b) any declaration, setting aside or payment of any dividend or
other distribution with respect to any shares of capital stock of
the Company, or any repurchase, redemption or other acquisition
by the Company or any Company Subsidiary of any outstanding
shares of capital stock or other securities of, or other
ownership interests in, the Company or any Company Subsidiary;
(c) any amendment of any material term of any outstanding
security of the Company or any Company Subsidiary;
(d) any amendment of any material term of any real estate lease
to which the Company or any Company Subsidiary is a party;
(e)any incurrence, assumption or guarantee by the Company or
any Company Subsidiary of any indebtedness for borrowed money in
excess of $50,000 in the aggregate other than in the ordinary
course of business and in amounts and on terms consistent with
past practices (but excluding indebtedness owed to Buyer or any
Subsidiary of Buyer);
(f) any creation or assumption by the Company or any Company
Subsidiary of any Lien (other than Permitted Liens (as defined
below)) on any material asset other than in the ordinary course
of business consistent with past practices;
(g) any transaction or commitment made, or any contract or
agreement entered into, by the Company or any Company Subsidiary
relating to its assets or business (including the acquisition or
disposition of any assets) or any relinquishment by the Company or
any Company Subsidiary of any contract or other right, in either
case, material to the Company and the Subsidiaries taken as a
whole, other than transactions and commitments in the ordinary
course of business consistent with past practice, those
contemplated by this Agreement and additions of subscribers to
existing programming agreements;
(h) any making of any loan, advance or capital contributions to or
investment in any Person other than advances to employees in the
ordinary course of business consistent with past practice and
loans, advances or capital contributions to or investments in wholly
owned Company Subsidiaries made in the ordinary course of business
consistent with past practices;
(i) any change in any method of accounting or accounting
practice by the Company or any Company Subsidiary, except for
any such change required by reason of a concurrent change in GAAP;
or
(j) any (i) grant of any severance or termination pay to any
director, officer or employee of the Company or any of the Company
Subsidiaries, except as set forth in the Company's employment
agreements listed in Schedule 3.20, (ii) entering into of any
employment, deferred compensation or other similar agreement (or
any amendment to any such existing agreement) with any director,
officer or employee of the Company or any of the Company
Subsidiaries, (iii) increase in benefits payable under any existing
severance or termination pay policies or (iv) increase in
compensation, bonus or other benefits payable to directors or
officers (who are not employees) of the Company or any of the
Company Subsidiaries, or, other than in the ordinary course of
business consistent with past practice, to employees (including
officers who are employees) of the Company or any of the Company
Subsidiaries.
For purposes of this Agreement, "Permitted Liens" means (i)
materialmen's, mechanics', carriers', workmen's, warehousemen's,
repairmen's, and other like Liens arising in the ordinary course of
business for payments which are not material in amount, and pledges
or deposits to obtain the release of such Liens; (ii) Liens for
current taxes or assessments not yet due and payable or which are
being contested in good faith by appropriate
proceedings and for which appropriate reserves have been
established; (iii) Liens securing indebtedness owed to Buyer or any
Subsidiary of Buyer; and (iv) other Liens or minor
imperfections of title that, taken in the aggregate, do not
materially impair the conduct of the Company's and the Company
Subsidiaries' business or the use of any material assets.
Section 3.11. Litigation. Except as set forth in Schedule
3.11 or as disclosed in the SEC Reports, there is no action,
suit, investigation or proceeding pending against, or to the
knowledge of the Company threatened against, the Company or any
Company Subsidiary or any of their respective properties before any
court or arbitrator or any governmental body, agency or official
(i) which would reasonably be expected to have a Material
Adverse Effect, or (ii) which seek to prevent, hinder, modify or
challenge the transactions contemplated by this Agreement.
Section 3.12. No Undisclosed Material Liabilities. Neither
the Company nor any of the Company Subsidiaries has any
indebtedness, liability or obligation of any type, whether or not
required by GAAP to be reflected on a balance sheet and whether or
not due, except (a) liabilities reflected or reserved against in the
balance sheet set forth in the Form 10-Q, or otherwise disclosed
in the other SEC Reports, (b) liabilities incurred in the ordinary
course of business since October 31, 1998, (c) other liabilities,
individually or in the aggregate, which would not reasonably be
expected to have a Material Adverse Effect and (d) as set forth on
any Schedule hereto or any contract or agreement set forth thereon
(other than for breach thereof).
Section 3.13. Compliance with Laws. Except as set forth on
Schedule 3.13, the Company and the Company Subsidiaries hold all
licenses, franchises, certificates, consents, permits,
qualifications and authorizations from all governmental
authorities necessary for the lawful conduct of their businesses,
except where the failure to hold any of the foregoing would not
have, and would not reasonably be expected to have, a Material
Adverse Effect. Neither the Company nor any Company Subsidiary has
violated, or is in violation of, any such licenses,
franchises, certificates, consents, permits, qualifications or
authorizations or any applicable statutes, laws, ordinances,
rules and regulations (including, without limitation, any of the
foregoing related to occupational safety, storage, disposal,
discharge into the environment of hazardous wastes, environmental
protection, conservation, unfair competition, labor practices or
corrupt practices) of any governmental authorities, except where
such violations do not have, and would not reasonably be expected
to have, a Material Adverse Effect.
Section 3.14. Finders' Fees. Except for Jefferies & Co.,
Inc., the terms of whose engagement are set forth in the
engagement letter provided to Buyer, there is no investment
banker, broker, finder or other intermediary which has been
retained by or is authorized to act on behalf, of the Company or
any Company Subsidiary who might be entitled to any fee or
commission from Buyer or any of its affiliates upon consummation
of the transaction contemplated by this Agreement.
Section 3.15. Taxes. Except as to any items that would
not, individually, or in the aggregate, have a Material Adverse
Effect and except as set forth on Schedule 3.15 or as disclosed in
the SEC Reports: (a) the Company and each of the Company
Subsidiaries has (i) paid all United States federal, state, local and
foreign income, FICA/FUTA, sales, excise, franchise and similar
taxes of any nature whatsoever (together with any related penalties
and interest) (any of the foregoing, a "Tax"), required to be paid
by it or collected from employees or customers in the form of
payroll withholding on or before the date hereof (and will duly
pay all such amounts required to be paid between the date hereof
and the Effective Time) and (ii) properly completed in correct
form and timely filed all United States federal, state, local
and foreign income (including any estimated Taxes) and other Tax
returns or reports (including declarations of estimated Tax),
required to be filed by it; (b) there are no claims or
assessments pending against the Company or any of the Company
Subsidiaries for any alleged deficiency in or failure to pay any
Tax, and the Company does not know of any threatened Tax claims or
assessments against the Company or any of the Company Subsidiaries;
(c) the Company and each of the Company Subsidiaries has
established adequate accruals for Taxes, interest, penalties
and other additions thereto and for any liability for deferred
Taxes in accordance with GAAP; (d) there are no Liens for Taxes
(other than for current Taxes not yet due and payable) on the assets
of the Company or any of the Company's Subsidiaries; (e) there are
no agreements, waivers, or other arrangements providing for
extensions of time in respect of the assessment or collection of
any unpaid Tax; (f) except as set forth on Schedule 3.15(f), the
Company has not made any payment which will be or may be
characterized as an "excess parachute payment" within the meaning of
Section 280G(b)(1) of the Internal Revenue Code of 1986, as amended;
(g) the Company has not taken any action that could have the effect
of deferring any liability for Taxes from any period ending on or
before the Effective Time to any taxable period ending thereafter;
(h) the Federal income tax returns of the Company have either
been audited by the Internal Revenue Service or the period
during which any assessments may be made has expired without
waiver or extension, for all periods prior to and including the
taxable year ended 1994; and (i) from January 31, 1998, there have
not been any Tax elections, any settlements or compromises of any
income or other Tax liabilities or any changes in Tax attributes.
Section 3.16. Employee Benefits. (a) Except as set forth on
Schedule 3.16, the Company does not maintain, contribute to or have
any material liability (whether direct or indirect, including,
without limitation, as a result of an indemnification obligation)
under, or with respect to, and no ERISA Affiliate has any liability
which has or will create any material obligation by, or result in
any material liability to, Buyer with respect to or under, any
Employee Benefit Plan. No material liability (whether direct or
indirect, including, without limitation, as a result of an
indemnification obligation) with respect to any Employee Benefit
Plan has been or is reasonably expected to be incurred by the
Company or any ERISA Affiliate under or pursuant to Title I or
Title IV of ERISA or the penalty, excise tax or joint and several
liability provisions of the Code relating to employees, employee
compensation or employee benefit plans that could, following the
Effective Time, become or remain a material
liability of Buyer or of any Employee Benefit Plan established or
contributed to by Buyer, and no event, transaction or condition has
occurred or exists that could result in any such liability to their
operations or, following the Effective Time, Buyer's.
(b) Except as set forth on Schedule 3.16(b), neither the
execution and delivery by the Company of this Agreement nor the
consummation of the transactions contemplated by this Agreement
will result in the acceleration or creation of any rights of any
person to benefits under any Employee Benefit Plan (including,
without limitation, the acceleration of vesting or exercisability of
any stock options or restricted stock, the acceleration of the
accrual or vesting under any Employee Benefit Plan or the
acceleration or creation under any severance, parachute or change of
control agreement) which could result in a material liability to
Buyer.
(c) Except as set forth on Schedule 3.16(c), there is no
material action, order, writ, injunction, judgment or decree
outstanding or claim, suit, litigation, proceeding arbitration,
governmental audit or investigation relating to or seeking
benefits under any Employee Benefit Plan that is pending or, to the
knowledge of the Company, threatened or anticipated against the
Company, any ERISA Affiliate or any Employee Benefit Plan, other
than claims for benefits in the ordinary course.
(d) Except as set forth on Schedule 3.20, neither any
provision of any employee Benefit Plan or any contract (whether or
not written), nor any transaction, condition or other event exists
or has occurred that would require Buyer to provide any material
compensation, payments or benefits, including, without limitation,
severance payments) to or on behalf of any former or current
employee of the Company or any ERISA Affiliate.
(e) As used herein, the term "Employee Benefit Plan" means
any pension, retirement, profit-sharing, deferred compensation,
bonus, incentive, performance, stock option, phantom stock, stock
purchase, restricted stock, premium conversion, medical,
hospitalization, vision, dental or other health, life,
disability, severance, termination or other employee benefit
plan, program, arrangement, agreement or policy, whether written or
unwritten, to which the Company or any Company Subsidiary
contributes, is obligated to contribute to, is a party to or is
otherwise bound, or with respect to which the Company or any
Company Subsidiary may have any liabilities. As used herein, the
term "ERISA Affiliate" means (i) a member of any "controlled
group" (as defined in Section 414(b) of the Code) of which the
Company is a member, (ii) a trade or business, whether or not
incorporated, under common control (within the meaning of Section
414(c) of the Code) with the Company, or (iii) a member of any
affiliated service group (within the meaning of Section 414(m) of
the Code) of which the Company is a member.
Section 3.17. Environmental Matters.
(a) To the best of the Company's knowledge, except as set
forth on Schedule 3.17 or as disclosed in the SEC Reports, there are
no material Environmental Liabilities (as defined below) of the
Company or any of the Company Subsidiaries. To the best of the
Company's knowledge, the Company and the Company Subsidiaries are in
compliance and have been in compliance, in all material respects,
with all Environmental Laws. There has been no report regarding
any material environmental assessment, investigation, study, audit,
test, review or other analysis conducted of which the Company has
knowledge in relation to the current or prior business of the
Company or the Company Subsidiaries or any property or facility
now or previously owned by the Company or the Company
Subsidiaries which has not been delivered to Buyer. Schedule
3.17 identifies all environmental reports and studies in
the possession or control of the Company relating to any real
property that previously has been or currently is owned or leased
by the Company, any Company Subsidiary or any predecessor
thereof, copies of which previously been furnished to Buyer.
Schedule 3.17 identifies all real property owned by the Company or
any Company Subsidiary, and all real property previously or
currently leased or owned by the Company or any Company
Subsidiary at which automotive repair services ever have been
performed.
(b) For purposes of this Agreement, "Environmental
Liabilities" means any and all liabilities of the named entity,
which (i) arise under or relate to matters covered by
Environmental Laws and (ii) relate to actions occurring or
conditions existing on or prior to the Effective Time, and
includes but is not limited to fines, penalties, and costs of
correcting any compliance deficiencies, and obligations for site
cleanup or investigation or cleanup resulting from the disposal,
release or threatened release of hazardous substances,
pollutants, contaminants, or wastes.
(c) For purposes of this Agreement, "Closing Environmental
Liabilities" means the estimated cost to remediate all
Environmental Liabilities of the Company with respect to the real
property locations identified on Schedule 3.17 as determined by
reference to the environmental report to be obtained by Buyer
pursuant to Section 6.06; provided, however, that if the Company
disputes the amount of such remediation costs as so determined, the
Company shall notify the Buyer to such effect within ten business
days of its receipt of Buyer's environmental report pursuant to
Section 6.06, and the amount of the Closing Environmental
Liabilities shall then be determined in accordance with the
dispute resolution procedure set forth in Section 10.10(d).
(d) For purposes of this Agreement, "Environmental Laws"
means any federal, state, and local laws, judicial decisions,
regulations, rules, judgments, orders, decrees, permits,
licenses, agreements and governmental restrictions, relating to
human health, the environment or to emissions, discharges or
releases of pollutants, contaminants or other hazardous
substances or wastes into the environment, including without
limitation ambient air, surface water, ground water or land, or
otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of
pollutants, contaminants or other hazardous substances or wastes or
the clean-up or other remediation thereof.
Section 3.18. Material Agreements. Except for those
contracts listed on Schedule 3.18 (the "Material Agreements"), or as
disclosed in SEC Reports, neither the Company nor any of the Company
Subsidiaries is a party to or is bound by any written or oral
contract, commitment or agreement which is material to the Company
and the Company Subsidiaries taken as a whole or which involves
payments of more than $150,000 in the aggregate over the remaining
term thereof or which restricts the Company and its affiliates
from engaging in any business in a manner that would be consistent
with its current practices and activities. Each Material Agreement
is in all material respects the validly existing, legally
enforceable obligation of the Company or one of the Company
Subsidiaries, as the case may be, and, to the best of the Company's
knowledge, of the other parties thereto, subject to the
Enforceability Exceptions. To the best of the Company's
knowledge, the Company and the Company Subsidiaries are validly and
lawfully operating in all material respects under the Material
Agreements to which they are a party. To the best of the Company's
knowledge, the Company and the Company Subsidiaries have duly
complied in all material respects with all of the terms and
conditions of each of the Material Agreement to which they are a
party.
Section 3.19. Title to Properties; Encumbrances. Except as
set forth on Schedule 3.19 or as disclosed in the SEC Reports, the
Company and each of the Company Subsidiaries has good and
marketable title to (or in the case of leased assets, valid and
existing leasehold interests in) the material assets set forth on the
balance sheet included in the Form 10-Q (other than those disposed
of in the ordinary course of business since October 31, 1998), free
and clear of all Liens other than Permitted Liens. Schedule 3.19
sets forth a list of all real property which is owned or leased
by the Company or any of the Company Subsidiaries, and sets
forth with respect to each lease: (i) the term thereof; (ii) the
renewal options, if any, applicable thereto; (iii) the number of
square feet of leased space; and (iv) the rents and other
financial terms applicable thereto. Except as set forth in
Schedule 3.19 or disclosed in the SEC Reports and with such
other exceptions as would not have a Material Adverse Effect, to
the best of the Company's knowledge, all buildings, improvements,
furniture, fixtures, equipment and other operating assets of
the Company and the Company Subsidiaries are in good working
order and condition, normal wear and tear excepted.
Section 3.20. Labor Matters. (a) Except as set forth on
Schedule 3.20, neither the Company nor any Company Subsidiary is a
party to any employment, labor or collective bargaining
agreement, and there are no employment, labor or collective
bargaining agreements which pertain to employees of the Company or
of any Company Subsidiary. The Company has heretofore made
available to Buyer true, complete and correct copies of the (i)
employment agreements listed on Schedule 3.20 and (ii) labor or
collective bargaining agreements listed on such Schedule,
together with all amendments, modifications, supplements or side
letters affecting the duties, rights and obligations of any party
thereunder.
(b) No employees of the Company or of any Company
Subsidiary are represented by any labor organization. To the
knowledge of the Company, no labor organization or group of
employees of the Company or of any Company Subsidiary has made a
pending demand for recognition or certification, and there are no
representation or certification proceedings or petitions seeking
a representation proceeding presently pending or threatened in
writing to be brought or filed with the National Labor Relations
Board or any other labor relations tribunal or authority. To the
knowledge of Company, there are no organizing activities
involving either the Company or any Company Subsidiary pending
with any labor organization or group of employees of the Company
or any Company Subsidiary.
(c) Except as set forth on Schedule 3.20, there are no (i)
unfair labor practice charges, grievances or complaints pending or,
to the Company's knowledge, threatened in writing by or on behalf
of any employee or group of employees of the Company or of any
Company Subsidiary which, if resolved against the Company or any
Company Subsidiary, as the case may be, would cause a Material
Adverse Effect on the Company, or (ii) complaints, charges or
claims against the Company or any Company Subsidiary pending or, to
the Company's knowledge, threatened in writing to
be brought or filed, with any governmental entity or arbitrator
based on, arising out of, in connection with, or otherwise
relating to the employment or termination of employment of any
individual by the Company or any Company Subsidiary which, if
resolved against the Company or any Company Subsidiary, as the
case may be, would cause a Material Adverse Effect.
(d) The Company is in full compliance with the Worker
Readjustment and Notification Act, 29 U.S.C. 2101 (the "WARN
Act"), including the prompt and correct furnishing of all notices
required to be given thereunder in connection with any "plant
closing" or "mass layoff" to "affected employees,"
"representatives" and any state dislocated worker unit and local
government officials. No reduction in the notification period
under the WARN Act is being relied upon by the Company.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer and the Merger Subsidiary, jointly and severally,
represent and warrant to the Company that:
Section 4.01. Corporate Existence and Power. Each of Buyer
and Merger Subsidiary is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has all corporate powers required to carry on its
business as now conducted. Since the date of its
incorporation, Merger Subsidiary has not engaged, and will not
engage, in any activities other than in connection with or as
contemplated by this Agreement or in connection with arranging any
financing required to consummate the transactions
contemplated hereby. Buyer has heretofore delivered to the
Company true and complete copies of Buyer's and Merger
Subsidiary's certificate or articles of incorporation and bylaws as
in effect on the date hereof.
Section 4.02. Corporate Authorization. The execution,
delivery and performance by Buyer and Merger Subsidiary of this
Agreement and the consummation by Buyer and Merger Subsidiary of the
transactions contemplated hereby are within the corporate powers
of Buyer and Merger Subsidiary and have been duly authorized
by all necessary corporate action of Buyer and Merger Subsidiary.
This Agreement constitutes a valid and binding agreement of
each of Buyer and Merger Subsidiary enforceable against it in
accordance with its terms, subject to the
Enforceability Exceptions. The approval of Buyer's shareholders is
not required to execute this Agreement or consummate the Merger.
Buyer's and Merger Subsidiary's Boards of Directors have duly
authorized the Merger and the other transactions
contemplated hereby (including the Subordinated Note Purchase
Agreement and the Subordinated Note) by resolutions adopted at
meetings duly held and called.
Section 4.03. Governmental Authorization. The execution,
delivery and performance by Buyer and Merger Subsidiary of this
Agreement and the consummation by Buyer and Merger Subsidiary of the
transactions contemplated by this Agreement require no material
action by or in respect of, or filing with, any governmental
body, agency, official or authority other than (a) the filing of a
certificate of merger in accordance with New York Law, (b)
compliance with any applicable requirements of the Exchange Act,
(c) for notification pursuant to, and expiration or termination of
the waiting period under, the HSR Act, and (d) where the
failure to obtain such consents, approvals, authorizations
or permits, or to make such filings or notifications,
would not have, and would not reasonably be
expected to have, a Buyer MAE or materially interfere with or
delay the transactions contemplated hereby. As used herein, the
term "Buyer MAE" means a material adverse effect on the ability of
Buyer and Merger Subsidiary to consummate the Merger in
accordance with the terms and conditions set forth in this
Agreement.
Section 4.04. Noncontravention. The execution, delivery and
performance by Buyer and Merger Subsidiary of this Agreement and the
consummation by Buyer and Merger Subsidiary of the transactions
contemplated hereby do not and will not (a) contravene or
conflict with the certificate or articles of incorporation
or bylaws of Buyer or Merger Subsidiary, (b) assuming
compliance with the matters referred to in Section 4.03,
contravene or conflict in any material respect with any provision of
law, regulation, judgment, order or decree binding upon Buyer or any
Subsidiary of Buyer or (c) except as set forth in Schedule 4.04, and
with such exceptions as would not individually or in
the aggregate have a Buyer MAE, constitute a default under or
give rise to any right of termination, cancellation or
acceleration of any right or obligation of Buyer or any
Subsidiary of Buyer or to a loss of any benefit to which Buyer or any
Subsidiary of Buyer is entitled under any agreement, contract or
other instrument binding upon Buyer or any Subsidiary of
Buyer.
Section 4.05. Proxy Statement; Schedule 13E-3. The
Schedule 13E-3, and any amendments or supplements thereto, will,
when filed with the SEC, comply as to form in all material
respects with the applicable requirements of the Exchange Act. At
the time the Company Proxy Statement or any amendment or
supplement thereto is first mailed to stockholders of the Company and
at the time such stockholders vote on adoption of this
Agreement, the information supplied by Buyer for inclusion or
incorporation by reference in the Company Proxy Statement or the
Schedule 13E-3, as either such document may be amended or
supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not
misleading.
Section 4.06 Litigation. There is no action, suit,
investigation or proceeding pending against, or to the knowledge of
the Company threatened against, Buyer or any Subsidiary of
Buyer or any of their respective properties before any court or
arbitrator or any governmental body, agency or official which
seeks to prevent, hinder, modify or challenge the transactions
contemplated by this Agreement.
Section 4.07. Finders' Fees. There is no investment
banker, broker, finder or other intermediary which has been
retained by or is authorized to act on behalf of, Buyer or any
Buyer Subsidiary (other than the Company or any Company
Subsidiary) who might be entitled to any fee or commission from the
Company or any of its affiliates upon consummation of the
transactions contemplated by this Agreement.
Section 4.08. Financing. Buyer has, and will have prior to
the Effective Time, sufficient funds available to pay the Merger
Consideration in respect of all of the Shares (other than Shares
owned by Buyer or any Subsidiary of Buyer) and to pay all related
fees and expenses pursuant to the Merger and this Agreement.
ARTICLE 5
COVENANTS OF THE COMPANY
The Company agrees that:
Section 5.01. Conduct of the Company.
(a) Except as set forth in Schedule 5.01 or as otherwise
contemplated herein, from the date hereof until the Effective
Time, the Company and the Company Subsidiaries shall conduct
their business in the ordinary course consistent with past
practice in all material respects and shall use their
commercially reasonable efforts to preserve intact their business
organizations and relationships with third parties and to keep
available the services of their present officers and employees in
all material respects. Without limiting the generality of the
foregoing, from the date hereof until the Effective Time and
except as set forth in Schedule 5.01:
(i) the Company will not adopt or propose any change
in its certificate of incorporation or bylaws;
(ii) the Company will not, and will not permit any
Company Subsidiary to, merge or consolidate with any other
Person or acquire a material amount of assets of any other
Person;
(iii) the Company will not, and will not permit any
Company Subsidiary to, sell, lease, license or otherwise
dispose of any material assets or property except (A)
pursuant to existing contracts or commitments and (B) in the
ordinary course consistent with past practice;
(iv) the Company will not, and will not permit any
Company Subsidiary to, agree or commit to do any of the
foregoing; and
(v) the Company will not, and will not permit any
Company Subsidiary to take or agree to commit to, take any
action that would make any representation or warranty of the
Company hereunder inaccurate in any respect at the Effective
Time.
(b) Notwithstanding anything to the contrary in this
Agreement, Buyer and Merger Subsidiary agree that (i) the Company may
pay to: (A) Jefferies & Company, Inc. its fees and expenses in
accordance with the existing agreements in respect of its
fairness opinion relating to the Merger, not to exceed $250,000 in
the aggregate; and (B) to other persons fees and expenses
relating to the Merger in an amount not to exceed $250,000 in the
aggregate, and (ii) to the extent that the Company makes any of
these payments, none of the payments, individually or in the
aggregate, shall be deemed to (i) have a Material Adverse Effect on
the Company or (ii) provide to Buyer any reason not to
consummate the Merger or make an adjustment to the Per Share
Amount.
Section 5.02. Stockholder Meeting; Proxy Material. Subject
to the provisions of Section 5.04, the Company shall cause the
Company Stockholder Meeting to be duly called and held as soon as
reasonably practicable for the purpose of voting on the approval and
adoption of this Agreement and the Merger unless a vote of
stockholders of the Company is not required by New York Law.
Subject to the provisions of Section 5.04, the Directors of the
Company shall recommend approval and adoption of this Agreement and
the Merger by the Company's stockholders at the Company
Stockholder Meeting, and will include such recommendation in the
Company Proxy Statement; provided, however, that, consistent with
its fiduciary duties set forth in Section 5.04, the Board of
Directors of the Company shall be permitted to (i) not recommend to
the Company's stockholders that they give the Company
Stockholder Approval or (ii) withdraw or modify in a manner
adverse to Buyer and Merger Subsidiary its recommendation to the
Company's stockholders that they give the Company Stockholder
Approval, but in each of cases (i) and (ii) only if and to the
extent that the Company has complied with Section 5.04 and this
Section 5.02 and a Superior Proposal (as defined below) is
pending at the time the Company's Board of Directors determines to
take any such action or inaction. The Company will (i) in
connection with the Company Stockholder Meeting, promptly prepare and
file with the SEC, use commercially reasonable efforts to have
cleared by the SEC as promptly as practicable and thereafter mail to
its stockholders as promptly as practicable the Company Proxy
Statement and all other proxy materials for such Company
Stockholder Meeting and (ii) unless, to the extent permitted by the
second sentence of this Section 5.02, and subject to Section 5.04,
the Board of Directors shall not recommend to the Company's
stockholders that they give the Company Stockholder Approval or
shall have withdrawn or modified in a manner adverse to Buyer its
recommendation, use commercially reasonable efforts to solicit
proxies in favor of the approval of this Agreement and the
Merger, provided that the obligation of the Company to cause the
Company Proxy Statement and the proxy to be mailed to the
Company's stockholders is subject to the Board of Directors of the
Company having received from Jefferies & Co., Inc.
confirmation of its opinion referred to in Section 3.02 as of the
date scheduled for mailing of the Company Proxy Statement if the
Board of Directors requests such a confirmation. For purposes of
this Agreement, "Superior Proposal" means any bona fide
Acquisition Proposal, on terms that the Board of Directors of the
Company determines in its reasonable good faith judgment are more
favorable to the Company's stockholders taken as a whole than the
transactions contemplated by this Agreement and with respect to
which the Company's Board of Directors determines, in its
reasonable good faith judgment, after consultation with its
financial advisors, the Person making such Acquisition Proposal has
the financial means to consummate such Acquisition Proposal. For
purposes of this Agreement, "Acquisition Proposal" means any offer
or proposal for a merger, consolidation or tender or exchange
offer or other business combination involving the Company or
any Subsidiary of the Company or the acquisition of any substantial
debt or equity interest in, or a substantial portion of the
assets of, the Company or of any Company Subsidiary, other
than the transactions contemplated by this Agreement.
Section 5.03. Access to Information. Subject to the
provisions of Section 5.06, from the date hereof until the
Effective Time, the Company will give Buyer, its counsel,
financial advisors, auditors and other authorized representatives
full access to the offices, properties, books and records of the
Company and the Company Subsidiaries, will furnish to Buyer, its
counsel, financial advisors, auditors and other authorized
representatives such financial and operating data and other
information as such Persons may reasonably request and will
instruct the Company's employees, counsel and financial advisors to
cooperate with Buyer in its investigation of the business of the
Company and the Company Subsidiaries; provided that such access
shall be upon reasonable advance notice to the Company and during
normal business hours and shall not unreasonably interfere with the
Company's operation of its business; and provided further that
no investigation pursuant to this Section shall affect any
representation or warranty given by the Company to Buyer hereunder.
Section 5.04. Other Offers From the date hereof until the
termination hereof, the Company and the Company Subsidiaries and the
officers, directors, employees or other agents of the Company and the
Company Subsidiaries will not (i) solicit or initiate any inquiries
or proposals that constitute, or reasonably would be expected to
lead to, any Acquisition Proposal or (ii) engage in negotiations
with, or disclose any nonpublic information relating to the Company
or any Company Subsidiary or afford access to the properties, books
or records of the Company or any Company Subsidiary, to any
Person (or any of its agents or representatives) that the Company
believes may be considering making, or has made, an Acquisition
Proposal, provided that nothing contained in this Section 5.04 shall
(A) prevent the Company from furnishing nonpublic information to,
or entering into negotiations with, any Person in connection with an
unsolicited Acquisition Proposal received from such Person so
long as prior to furnishing nonpublic information to, or entering
into negotiations with, such Person, (1) the Company receives
from such Person an executed confidentiality agreement with terms no
less favorable to the Company than those contained in the
Confidentiality Agreement (as defined below), (2) the Board of
Directors has reasonably concluded that such Acquisition Proposal may
constitute a Superior Proposal and (3) the Company has
otherwise complied with this Section 5.04 or (B) prevent the
Company and the Company Subsidiaries from taking actions in the
ordinary course of business consistent with past practice and not in
connection with any Acquisition Proposal. The Company will notify
Buyer as soon as possible, but in any event within 24 hours,
after receipt of any Acquisition Proposal or any request for
nonpublic information relating to the Company or any Company
Subsidiary or for access to the properties, books or records of the
Company or any Company Subsidiary by any Person that the Company
believes may be considering making, or has made, an Acquisition
Proposal. Such notice to Buyer shall indicate the identity of the
Person making the Acquisition Proposal or request and in reasonable
detail the terms thereof. If the financial or other material terms
of such Acquisition Proposal are modified in any material respect,
then the Company shall notify Buyer as soon as possible, and in any
event within 24 hours. The Company will immediately cease and cause
its advisors and agents to cease any and all existing activities,
discussions or negotiations regarding an Acquisition Proposal with
any parties previously contacted; provided that the Company may inform
such parties that this Agreement has been entered into and that the
previously disclosed exploration of strategic alternatives process has
been terminated. Nothing contained in this Agreement shall prohibit
the Board of Directors of the Company from (i) taking and
disclosing to the Company's shareholders a position with respect to
a tender offer for the Shares by a third party pursuant to Rules
14d-9 and 14e-2 promulgated under the Exchange Act, (ii) making
such disclosure to the Company's shareholders as, in the judgment of
the Board of Directors of the Company, based on the advice of
outside counsel, is required under applicable law or under the
rules of the NASDAQ Stock Market or (iii) responding to any
unsolicited proposal or inquiry solely by advising the person making
such proposal or inquiry of the terms of this Section 5.04.
From the date hereof until the termination hereof, the Company
(i) shall not terminate, amend, modify or waive any provision
of any confidentiality or standstill agreement (other than any
entered into in the ordinary course of business not in connection
with any Acquisition Proposal and other than as permitted under
the proviso to the first sentence of this Section 5.04) to which it
or any of its Subsidiaries is a party and (ii) shall enforce, to
the fullest extent permitted under applicable law, the provisions
of any such agreement, including, without
limitation, by seeking to obtain injunctions to prevent breaches
thereof that are known to it and specific performance thereof.
Section 5.05. Estoppel Certificates. The Company will
undertake commercially reasonable efforts to obtain from the
lessor under each lease listed in Schedule 3.19 an estoppel
certificate certifying (i) that to the knowledge of such lessor
there exists no event or circumstance that constitutes, or which
with the giving of notice or the passage of time would
constitute, an event of default under the lease; (ii) that the
lessee under the lease is current in its rent obligations
thereunder; and (iii) that the material terms of the lease are as
described in Schedule 3.19.
Section 5.06. Confidentiality Agreement. The terms and
conditions of the Confidentiality Agreement by and between Buyer and
the Company dated November 5, 1998 (the "Confidentiality
Agreement") are incorporated herein by reference and shall apply to
all information relating to the Company and the Company
Subsidiaries provided to Buyer before the execution of this
Agreement and to all information relating to the Company and the
Company Subsidiaries provided to Buyer after the execution of
this Agreement, including, without limitation, pursuant to
Section 5.03 hereof.
Section 5.07. Pre-Closing Balance Sheet. The Company shall
prepare and deliver to Buyer, as soon as reasonably practicable and
in any event not less than five days prior to the scheduled
Effective Time, a consolidated balance sheet of the Company and the
Company Subsidiaries dated as of January 31, 1999 and
satisfying the requirement of this Section 5.07(the "Pre-Closing
Balance Sheet"). If the Effective Time occurs on or before
March 15, 1999, then the Pre-Closing Balance Sheet may be
unaudited, and (unless audited by PricewaterhouseCoopers LLP)
shall be accompanied by a certificate executed by the Chief
Financial Officer and by the Executive Vice President and
Secretary of the Company certifying that such Pre-Closing Balance
Sheet is correct and complete in all materials respects and
prepared in accordance with generally accepted accounting
principles consistently applied, except as set forth on Schedule
5.07. If the Effective Time occurs after March 15, 1999, then the
Pre-Closing Balance Sheet shall be audited by
PricewaterhouseCoopers LLP and shall be prepared in accordance
with generally accepted accounting principles consistently
applied, except as set forth on Schedule 5.07, and provided that
notwithstanding Schedule 5.07, inventory shrink shall be actual.
ARTICLE 6
COVENANTS OF BUYER
Buyer agrees that:
Section 6.01. Obligations of Merger Subsidiary. Buyer will
take any and all action necessary to cause Merger Subsidiary to
perform its obligations under this Agreement.
Section 6.02. Director and Officer Liability. For seven
years after the Effective Time, Buyer will, and will cause the
Surviving Corporation to, (i) indemnify and hold harmless the
present and former officers, directors and employees of the Company
against all costs and expenses (including attorneys' fees and
expenses), losses, claims, damages or liabilities of any kind or
nature in respect of acts or omissions occurring prior to the
Effective Time (including, without limitation, in respect of acts or
omissions in connection with this Agreement and the
transactions contemplated hereby) to the fullest extent permitted
under the Company's certificate of incorporation and bylaws and
(ii) to the fullest extent permitted under applicable law,
advance to such Persons fees and expenses incurred in defending any
action or suit with respect to which indemnity may be
available under the Company's certificate of incorporation or
bylaws upon receipt from each such Person to whom fees and
expenses are advanced of an undertaking reasonably satisfactory to
Buyer to repay such advances if it is ultimately determined that
such Person is not entitled to indemnification. In the event any
claim or claims are asserted or made within such sevenyear period,
all rights to indemnification in respect of any such claim or claims
shall continue until disposition of any and all such claims. Any
determination required to be made with respect to whether any of the
foregoing Persons is entitled to indemnification as set forth
above shall be made by independent legal counsel selected mutually by
such Person and Buyer. For seven years after the Effective Time, Buyer
will use commercially reasonable efforts to provide officers' and
directors' liability insurance and fiduciary liability insurance in
respect of acts or omissions occurring on or prior to the Effective
Time covering each such Person currently covered by the Company's
officers' and directors' liability insurance policy and fiduciary liability
insurance policy on terms with respect to coverage and amount no
less favorable in any material respect than those of such
policies in effect on the date hereof. Buyer may satisfy such
obligation by purchasing officer's and directors' liability and
fiduciary liability run-off coverage for such seven-year period.
During such seven-year period, Buyer shall not cause or permit any
amendment or other change to the articles of incorporation or bylaws
of the Surviving Corporation which would adversely affect the
indemnification rights of former officers, directors and
employees of the Company, except to the extent any such amendment may
be required by applicable law. In the event that Buyer or the
Surviving Corporation or any of their respective successors or
assigns (i) consolidates with or merges into any other Person and
shall not be the continuing or surviving corporation or entity
of such consolidation or merger or (ii) transfers all or
substantially all of its properties and assets to any person,
then, and in each such case, proper provision shall be made so
that the successors and assigns of Buyer or the Surviving
Corporation, as the case may be, shall assume all of the
obligations set forth in this Section 6.02.
Section 6.03. Employment Agreements. From and after the
Effective Time, Buyer shall, and shall cause the Surviving
Corporation and its Subsidiaries to, honor in accordance with
their terms, the employment contracts (including without
limitation the severance provisions therein) listed in Schedule
3.20 between the Company or one of the Company Subsidiaries and
certain current or former directors, officers or employees
thereof (true and correct copies of which have been delivered by
the Company to Buyer).
Section 6.04. Standstill. If this Agreement is terminated
by the Company pursuant to and in accordance with Section
9.01(e), Buyer shall not purchase any Shares for a period of one
year following such termination without the prior written consent
of the Company.
Section 6.05. Transitory Nature of Merger Subsidiary.
Buyer acknowledges that the Company has agreed to the structure of
the merger on the basis that the transaction will be treated for
federal income tax purposes as an acquisition by Buyer of the stock
of the Company from the Company's shareholders.
Section 6.06. Buyer's Environmental Report. Buyer shall
use commercially reasonable efforts to cause Geologic Services
Corporation to prepare and deliver to Buyer as soon as reasonably
possible a Phase II environmental report covering all of the real
property identified in Schedule 3.17, which report shall include
an estimate as to the cost of remediating all Environmental
Liabilities with respect to such properties. Buyer shall deliver a
copy of such report to the Company not later than two business days
following Buyer's receipt thereof.
ARTICLE 7
COVENANTS OF BUYER AND THE COMPANY
The parties hereto agree that:
Section 7.01. Commercially Reasonable Efforts; SEC Filings.
Each of the parties hereto agrees to use its commercially
reasonable efforts to take, or cause to be taken, all appropriate
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 in the most expeditious manner practicable,
including but not limited to the satisfaction of all conditions to
0the Merger and seeking to remove promptly any injunction or other
legal barrier that may prevent or delay such consummation. Each of
the parties shall promptly notify the other whenever a consent is
obtained and shall keep the other informed as to the progress in
obtaining such consents. The Company and Buyer will promptly
prepare and file with the SEC, and thereafter mail to the
stockholders of the Company as promptly as practicable the Company
Proxy Statement and all other proxy materials for the Company
Stockholder Meeting. The Company Proxy Statement will include
therein the information required to be provided to the Company's
stockholders by Rule 13e-3(e) under the Exchange Act.
Section 7.02. Public Announcements. Buyer and the
Company agree that the press release set forth in Exhibit 7.02
hereto shall be released to the public immediately upon execution
hereof. Buyer and the Company will consult with each other
before issuing any other press release or making any other public
statement with respect to this Agreement and the transactions
contemplated hereby and, except as may be required by applicable law
or any listing agreement with any national quotation system, will
not issue any such press release or make any such public statement
prior to such consultation.
Section 7.03. Further Assurances. At and after the
Effective Time, the officers and directors of the Surviving
Corporation will be authorized to execute and deliver, in the
name and on behalf of the Company or Merger Subsidiary, any
deeds, bills of sale, assignments or assurances and to take and do,
in the name and on behalf of the Company or Merger
Subsidiary, any other actions and things to vest, perfect or
confirm of record or otherwise in the Surviving Corporation any and
all right, title and interest in, to and under any of the rights,
properties or assets of the Company acquired or to be acquired by
the Surviving Corporation as a result of, or in connection with,
the Merger.
Section 7.04. Notices of Certain Events. The parties shall
promptly notify each other of:
(a) any notice or other communication from any Person alleging
that the consent of such Person is or may be required in connection with
the transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental
or regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and
(c) the occurrence, or threatened occurrence, of any fact or
circumstance that would cause or constitute, or would be reasonably likely
to cause or constitute, a material breach of any of its representations
and warranties set forth herein.
ARTICLE 8
CLOSING; CONDITIONS TO THE MERGER
Section 8.01. Closing. The closing of the transactions
contemplated hereby shall take place at the offices of Swidler
Berlin Shereff Friedman, LLP, 919 Third Avenue, 20th Floor, New
York, New York 10022, or at such other location as the parties may
agree in writing.
Section 8.02. Conditions to the Obligations of Each Party. The
obligations of the Company, Buyer and Merger Subsidiary to
consummate the Merger are subject to the satisfaction of the
following conditions:
(a) if required by New York Law, this Agreement shall have
been adopted by the stockholders of the Company in accordance with
such Law;
(b) no provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the consummation
of the Merger;
(c) the governmental and third party notices, authorizations,
consents, orders or approvals set forth on Schedule 8.02 shall have been
obtained and be in effect; and
(d) (i) no federal, state or foreign court, arbitrator
or governmental body, agency, or official shall have issued any order,
and there shall not have been adopted or promulgated any statute, rule
or regulation, prohibiting the consummation of the Merger or,
except for orders, statutes, rules and regulations of general effect,
limiting or restricting Buyer's conduct or operation of the business
of the Company after the Merger in a manner that would have a Material
Adverse Effect, and (ii) no proceeding seeking to prohibit, alter,
prevent or materially delay the Merger shall have been instituted by any
governmental agency or authority before any court, arbitrator or
governmental body, agency or official and be pending.
Section 8.03. Conditions to the Obligations of Buyer and
Merger Subsidiary. The obligations of Buyer and Merger
Subsidiary to consummate the Merger are subject to the
satisfaction of the following further conditions:
(a) No Material Adverse Effect shall have
occurred and be continuing as a result of either (i) the breach by
the Company of any of the representations and warranties of the Company
contained in this Agreement (disregarding all exceptions therein for
materiality and Material Adverse Effect), or (ii) the failure of the
Company to have performed its obligations required hereunder, and Buyer
shall have received a certificate signed by an executive officer on
behalf of the Company to the foregoing effect;
(b) The amount of the Closing Environmental Liabilities
shall have been definitively resolved in accordance herewith, and shall
not be greater than $750,000;
(c) Buyer shall have received from the Company the Pre-Closing
Balance Sheet and all accompanying certifications and/or reports
required pursuant to Section 5.07 showing that as of the date of such
Pre-Closing Balance Sheet the Net Assets of the Company are not less
than negative $1,000,000; and
(d) Buyer shall have received all customary documents it may
reasonably request relating to the existence of the Company and the
authority of the Company for this Agreement, all in form and substance
reasonably satisfactory to Buyer.
Section 8.04. Conditions to the Obligations of the Company. The
obligations of the Company to consummate the Merger are subject
to the satisfaction of the following further conditions:
(a) no Buyer MAE shall have occurred and be
continuing as a result of either (i) the breach by
Buyer or Merger Subsidiary of any of the
representations and warranties of Buyer contained in
this Agreement (disregarding the exceptions therein for
materiality and Buyer MAE) or (ii) the failure of Buyer or
Buyer Subsidiary to have performed its obligations
required hereunder, and the Company shall have received a
certificate signed by an executive officer on behalf of
Buyer to the foregoing effect; and
(b) the Company shall have received all customary
documents it may reasonably request relating to the
existence of Buyer or Merger Subsidiary and the
authority of Buyer or Merger Subsidiary for this
Agreement, all in form and substance reasonably
satisfactory to the Company.
ARTICLE 9
TERMINATION
Section 9.01. Termination. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the
Effective Time (notwithstanding any approval of this Agreement
by the stockholders of the company):
(a) by mutual written consent of the Company and Buyer;
(b) by either the Company or Buyer if, at the
Company Stockholder Meeting (including any postponement or
adjournment thereof), the Merger and the other
transactions contemplated hereby that require such
approval shall fail to be approved and adopted by the
affirmative vote specified herein;
(c) by either the Company or Buyer, if the Merger has
not been consummated by April 30, 1999; provided, however,
that no party that has materially breached its obligations
hereunder shall be entitled to terminate this Agreement
under this subsection;
(d) by either the Company or Buyer (so long as
such party has complied in all material respects with
its obligations under Section 7.01), if there shall be
any law or regulation that makes consummation of the
Merger illegal, or if any judgment, injunction, order or
decree enjoining Buyer or the Company from
consummating the Merger is entered and such judgment,
injunction, order or decree shall become final and
nonappealable;
(e) by the Company (provided that at the time
Buyer would not be entitled to terminate this Agreement
under Section 9.01(f) or 9.01(g) disregarding the
notice provisions therein) if a Buyer MAE has occurred as
a result of either (i) the breach by Buyer of any of the
representations and warranties of Buyer contained in
this Agreement (disregarding the exceptions therein for
materiality and Buyer MAE) or (ii) the failure of Buyer
or Merger Subsidiary to have performed its
obligations required hereunder (including without
limitation a failure to consummate the Merger when and as
required pursuant to and in accordance with this
Agreement), and Buyer does not cure, or proceed in good
faith to cure, such breach within ten business days
after the Company delivers written notice thereof;
(f) by Buyer (provided that at the time the Company would not
be entitled to terminate this Agreement under Section 9.01(e)
disregarding the notice provisions therein) if a Material Adverse
Effect has occurred as a result of either (i) the breach by the
Company of any of the representations and warranties of the Company
contained in this Agreement (disregarding the exceptions therein
for materiality and Material Adverse Effect) or (ii) the failure
of the Company to have performed its obligations required hereunder,
and the Company does not cure, or proceed in good faith to cure,
such breach within ten business days after Buyer delivers written
notice thereof;
(g) by Buyer if either (i) the Company ceases to conduct normal
retail operations at two or more of its currently existing store
locations (other than a cessation of such retail operations at the
Company's store locations no. 167 and/or 168 resulting from the
termination of the leases for such locations solely be action of the
landlord therefor), (ii) the Pre-Closing Balance Sheet to be
delivered by the Company to Buyer as provided in Section 8.03(c)
shows that the Net Assets of the Company are less than
negative $1,000,000, or (iii) the Closing Environmental Liabilities
are greater than $750,000;
(h) by the Company, if prior to the Company Stockholder
Meeting, the Board of Directors of the Company shall have failed
to recommend or shall have withdrawn or modified or changed in a
manner adverse to Buyer its approval or recommendation of this
Agreement or the Merger or shall have failed to include its
recommendation in favor of the Merger in the Company Proxy
Statement or shall have recommended or approved or endorsed a
Superior Proposal (provided that the determination by the Board
of Directors that an Acquisition Proposal constitutes a Superior
Proposal for purposes of Section 5.04 shall not be treated as
recommending, approving or endorsing a Superior Proposal), or
the Company shall have entered into a definitive agreement or a
letter of intent or similar agreement (which shall not include a
confidentiality/standstill agreement permitted by Section 5.04)
providing for a Superior Proposal with a Person other than
Buyer or its Subsidiaries, in each case in accordance with and to
the extent permitted by Section 5.02; provided that the Company
shall have made the payment referred to in Section 9.02(b) hereof;
(i) by Buyer if the Board of Directors of the Company shall
have failed to recommend or shall have withdrawn, or modified or
changed in a manner adverse to Buyer its approval or recommendation
of this Agreement or the Merger or shall have failed to include its
recommendation in favor of the Merger in the Company Proxy
Statement or shall have recommended or approved or endorsed a
Superior Proposal (provided that the determination by the Board of
Directors that an Acquisition Proposal constitutes a Superior
Proposal for purposes of Section 5.04 shall not be treated as
recommending, approving or endorsing a Superior
Proposal), or the Company shall have entered into a
definitive agreement or a letter of intent or similar
agreement (which shall not include a
confidentiality/standstill agreement permitted by Section
5.04) providing for a Superior Proposal with a Person
other than Buyer or its Subsidiaries;
(j) by Buyer (provided that at the time
the Company would not be entitled to terminate this
Agreement under Section 9.01(e) disregarding the notice
provisions thereof) if the Company elects not to cause the
Company Proxy Statement and Proxy to be mailed to the
Company's stockholders pursuant to the proviso to the
third sentence of Section 5.02;
(k) by the Company (provided that at the
time Buyer would not be entitled to terminate this
Agreement under Sections 9.02(f) or 9.02(g)
disregarding the notice provisions therein) if the Company
elects not to cause the Company Proxy Statement and
Proxy to be mailed to the Company's stockholders
pursuant to the proviso to the third sentence of Section
5.02; or
(l) by the Company, if the Pre-Closing
Balance Sheet to be delivered by the Company to Buyer
as provided in Section 8.03(c) shows that the Net Assets
of the Company are greater than $7,000,000.
The party desiring to terminate this Agreement pursuant to this
Section 9.01 shall give written notice of such termination to the
other party in accordance with Section 10.01.
Section 9.02. Effect of Termination.
(a) If this Agreement is terminated pursuant to Section
9.01, this Agreement shall become void and of no effect with no
liability on the part of any party hereto, except that the
agreements contained in this Section 9.02 and in Section 10.04
shall survive the termination hereof.
(b) In the event that (i) an Acquisition Proposal shall
have been made known to the Company or any Company Subsidiary, or has
been made directly to its stockholders generally or any person
shall have publicly announced an intention (whether or not
conditional) to make an Acquisition Proposal and thereafter
Company Stockholder Approval is not obtained or (ii) this
Agreement is terminated by Buyer pursuant to Section 9.01(i) or
by the Company pursuant to Section 9.01(l), then the Company will
promptly, but in no event later than two days after the date of
such termination, pay Buyer a fee equal to $2,000,000 (the
"Termination Fee"), payable by wire transfer of same day funds,
plus upon Buyer's request all reasonable and documented out-of
pocket expenses incurred by Buyer in connection with this
Agreement and the transactions contemplated hereby in an amount (as
to such expenses) not to exceed $300,000, which payments will be in
addition to any Termination Fee that may be payable. In
the event that this Agreement is terminated by Buyer pursuant to
Section 9.01(f), then the Company will promptly, but in no event
later than two days after the date of such termination, pay
Buyer, upon Buyer's request, all reasonable and documented out-of
pocket expenses incurred by Buyer in connection with this
Agreement and the transactions contemplated hereby in an amount not
to exceed $300,000. Notwithstanding any other provision herein,
no Termination Fee or any out-of-pocket expenses will be
payable under this Section 9.02(b) (i) if Buyer shall have
materially breached any representation, warranty or covenant
applicable to it hereunder and such breach shall have given rise to
a right of termination on the part of the Company pursuant to Section
9.01(e) (disregarding the notice provision therein), or
(ii) for any reason other than the specific circumstances set
forth in this Section 9.02(b). The Company acknowledges that the
agreements contained in this Section 9.02(b) are an integral part of
the transactions contemplated by this Agreement, and that, without
these agreements, Buyer would not enter into this Agreement;
accordingly, if the Company fails promptly to pay the amount due
pursuant to this Section 9.02(b), and, in order to
obtain such payment, Buyer commences a suit which results in a
judgment against the Company for the fee set forth in this
Section 9.02(b), the Company will pay to Buyer its reasonable
costs and expenses (including attorneys' fees and expenses) in
connection with such suit, together with interest on the amount of
the fee at the prime rate of Citibank, N.A. in effect on the date
such payment was required to be made.
(c) In the event that this Agreement is terminated by the
Company pursuant to Section 9.01(e), then Buyer will promptly, but
in no event later than two days after the date of such event, pay
the Company a fee equal to $2,000,000 (the "Company
Termination Fee"), plus upon the Company's request all reasonable and
documented out-of-pocket expenses incurred by the Company in
connection with this Agreement and the transactions contemplated
hereby and thereby in an amount (as to such expenses) not to
exceed $300,000, which payments shall be made in addition to any
Company Termination Fee that may be payable. Notwithstanding any
other provision herein, no Company Termination Fee or any out-of
pocket expenses will be payable under this Section 9.02(c) to the
Company (i) if the Company shall have materially breached any
representation, warranty or covenant applicable to it hereunder and
such breach shall have given rise to a right of termination on the
part of Buyer pursuant to Section 9.01(f) (disregarding the notice
provisions therein) or if Buyer shall be entitled to
terminate this Agreement pursuant to Section 9.01(g) or (ii) for any
reason other than the specific circumstances set forth in
this Section 9.02(c). Buyer acknowledges that the agreements
contained in this Section 9.02(c) are an integral part of the
transactions contemplated by this Agreement, and that, without
these agreements, the Company would not enter into this
Agreement; accordingly, if Buyer fails promptly to pay the amount due
pursuant to this Section 9.02(c), and, in order to obtain such
payment, the Company commences a suit which results in a judgment
against Buyer for the fee set forth in this Section
9.02(c), Buyer will pay to the Company its reasonable costs and
expenses (including attorneys' fees and expenses) in connection
with such suit, together with interest on the amount of the fee at
the prime rate of Citibank N.A. in effect on the date such payment
was required to be made.
(d) If any Company Termination Fee is payable pursuant to
Section 9.02(c), Buyer in its discretion may satisfy its
obligation to pay such Company Termination Fee (and any Company
expenses) by offsetting, in whole or in part, the obligations of the
Company to Buyer under that certain Subordinated Convertible Note
Purchase Agreement between Buyer, as lender, and the Company,
as borrower, dated as of even date herewith (the "Note Agreement").
ARTICLE 10
MISCELLANEOUS
Section 10.01. Notices. All notices, requests and other
communications given or made pursuant hereto to any party
hereunder shall be in writing (including facsimile or similar
writing) and shall be given:
if to Buyer or Merger Subsidiary, to:
Phar Mor, Inc.
20 Federal Plaza West
Youngstown, OH 44503
Attention: General Counsel
Facsimile: 330 -740-2985
with a copy to:
Swidler Berlin Shereff Friedman, LLP
3000 K Street, N.W.,
Suite 300 Washington, D.C. 20007
Attention: Morris F. DeFeo, Jr.
Facsimile: 202-424-7643
if to the Company, to:
Pharmhouse Corp.
860 Broadway
New York, NY 10003
Attention: President
Facsimile: 212-358-9169
with a copy to:
Herrick, Feinstein LLP
2 Park Avenue
New York, NY 10016
Attention: Stephen M. Rathkopf
Facsimile: (212) 889-7577
and to:
Maloney, Mehlman & Katz
405 Lexington Avenue
New York, NY 10174
Attention: Melvin Katz
Facsimile: (212) 972-0111
or such other address or facsimile numbers as such party may
hereafter specify for the purpose by notice to the other parties
hereto. Each such notice, request or other communication shall
be effective (a) if given by facsimile, when such facsimile is
transmitted to the facsimile number specified in this Section and the
appropriate facsimile confirmation is received, or (b) if given by
any other means, when delivered at the address specified in this
Section.
Section 10.02. Survival. The representations and
warranties contained herein and in any certificate or other
writing delivered pursuant hereto shall not survive the Effective
Time or the termination of this Agreement. All covenants and
agreements contained herein which by their terms are to be
performed in whole or in part after the Effective Time shall
survive the Effective Time and be enforceable in accordance with
their terms.
Section 10.03. Amendments; No Waivers. (a) Any provision of
this Agreement may be amended or waived prior to the Effective Time
if, and only if, such amendment or waiver is in writing and signed,
in the case of an amendment, by the Company, Buyer and Merger
Subsidiary or in the case of a waiver, by the party against
whom the waiver is to be effective, provided that after the
adoption of this Agreement by the stockholders of the Company,
no such amendment or waiver shall, without the further approval of
such stockholders, alter or change (i) the amount or kind of
consideration to be received in exchange for any shares of capital
stock of the Company or (ii) any of the terms or conditions of
this Agreement if such alteration or change would adversely affect
the holders of any shares of capital stock of the Company.
(b) No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power
or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by
law.
Section 10.04. Expenses. Except as expressly provided in
Sections 9.02 and 10.10(c), all costs and expenses incurred in
connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such cost or expense.
Section 10.05. Successors and Assigns. The provisions of
this Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, provided
that no party may assign, delegate or otherwise transfer any of its
rights or obligations under this Agreement without the prior written
consent of each of the other parties hereto.
Section 10.06. Counterparts; Effectiveness. This
Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto
shall have received counterparts hereof signed by all of the
other parties hereto.
Section 10.07. Parties in Interest. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto,
and nothing in this Agreement, express or implied, is intended to
confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement, except for Sections
6.02, 6.03 and 10.08 (which are also intended to be for the benefit
of the persons provided for therein and may also be enforced by such
persons).
Section 10.08. No Personal Liability. Neither this
Agreement nor any certificate delivered hereunder shall create or be
deemed to create or permit any personal liability or
obligation on the part of any direct or indirect stockholder of any
party hereto except the Buyer.
Section 10.09. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the
State of New York without reference to conflicts of laws
principles applied in such State.
Section 10.10. Jurisdiction; Jury Trial Waiver. (a) Except as
expressly set forth in Section 10.10(c) or Section 10.10(d),
any suit, action or proceeding seeking to enforce any provision of,
or based on any matter arising out of or in connection with this
Agreement or the transactions contemplated hereby shall be brought
in any federal court located in the Southern District of the State
of New York or any New York state court sitting in New York City, and
each of the parties hereto hereby consents to the exclusive
jurisdiction of such courts (and of the appropriate appellate
courts therefrom) in any such suit, action or
proceeding and waives any objection to venue laid therein.
Process in any such suit, action or proceeding may be served on any
party anywhere in the world, whether within or without the State
of New York. Without limiting the generality of the foregoing,
each party hereto agrees that service of process upon such party
may be made at the address referred to in Section 10.01, and if
made in accordance with the provision of Section 10.01, shall be
deemed effective service of process upon such party.
(b) Each party hereto hereby waives all rights to trial by
jury in any action or proceeding instituted by either of them
against the other which pertains directly or indirectly to this
Agreement, the Merger, any alleged tortious conduct by any party, or
in any way, directly or indirectly, arises out of or relates to the
relationship among the parties hereto. The prevailing party in any
such suit, action or proceeding shall be entitled to recover all
reasonable costs incurred in connection therewith including,
without limitation, attorneys' fees.
(c) In the event that Buyer terminates this Agreement
pursuant to Section 9.01(f) and the Company disputes such
termination, the Company, by written notice delivered to Buyer
within five days of such termination, may require that such
dispute be submitted to binding arbitration in accordance with
this Section 10.10(c). Such arbitration shall be held in
Youngstown, Ohio in accordance with the CPR Rules for
Nonadministered Arbitration of Business Disputes (the "CPR
Rules"), except as expressly modified by the provisions hereof. The
arbitration shall be governed by the United States
Arbitration Act, 9 U.S.C. 1-16, notwithstanding the choice of law
provision of Section 10.09. There shall be one arbitrator, who
shall be jointly selected by Buyer and Company; provided, however,
that if the arbitrator has not been selected within 15 days after
a matter is submitted to arbitration, then the arbitrator
shall be selected in accordance with the CPR Rules. The arbitrator
shall be disinterested in the subject matter of the dispute, shall
not have been employed or engaged by either party within the
past five years and shall have appropriate qualifications and
experience with respect to arbitrations of business disputes. The
prevailing party in the arbitration shall be entitled to recover all
reasonable costs incurred thereby in connection with such
arbitration proceeding, including without limitation reasonable
attorneys' fees. Notwithstanding any other provision hereof,
the sole question that may be submitted to arbitration pursuant
to this Agreement is whether Buyer's termination of this Agreement
pursuant to Section 9.01(f) was or was not justified.
(d) In the event that the Company disputes the amount of
the Closing Environmental Liabilities as provided in Section
3.17(c), such dispute shall be resolved as provided in this
Section 10.10(d). The Company shall have 20 days following
delivery of its dispute notice pursuant to Section 3.17(c) to
engage (at the Company's sole cost and expense) an environmental
consultant to prepare a Phase II report as to the properties
identified on Schedule 3.17 (which report shall include an
estimate as to the cost of remediating all Environmental
Liabilities with respect to such properties) and to deliver a
copy of such report to Buyer. If the Company shall fail to
deliver a copy of such report to Buyer within such 20-day period,
then the Closing Environmental Liabilities shall be as determined by
reference to Buyer's environmental report. If the Company
delivers such environmental report to Buyer within such 20-day
period and it indicates that the estimated cost to remediate all
Environmental Liabilities of the Company with respect to the real
property locations identified on Scheduled 3.17 is not more than
$100,000 less than the remediation cost estimate submitted by
Buyer's environmental consultant with respect to such properties,
then the Closing Environmental Liabilities shall equal the
average of the respective remediation cost estimates submitted by
Buyer's environmental consultant and the Company's environmental
consultant. If the Company delivers such environmental report to
Buyer within such 20-day period and it indicates that the
estimated cost to remediate all Environmental Liabilities of the
Company with respect to the real property locations identified on
Scheduled 3.17 is at least $100,000 less than the remediation
cost estimate submitted by Buyer's environmental consultant with
respect to such properties, then Buyer and the Company shall
direct their respective environmental consultants to select a
third environmental consultant (at the joint cost and expense of
Buyer and the Company) to prepare a Phase II report as to the
properties identified in Schedule 3.17 (which report shall
include an estimate as to the cost of remediating all
Environmental Liabilities with respect to such properties) and to
deliver a copy of such report to Buyer and the Company as soon as
reasonably practicable. In such event, the Closing Environmental
Liabilities shall equal the remediation cost estimate submitted by
the third environmental consultant, whose decision shall be final
and binding for all purposes hereof.
Section 10.11. Specific Performance. The parties hereto
agree that irreparable damage would occur in the event any
provision of this Agreement was not performed in accordance with
the terms hereof and that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions of this
Agreement in any federal court located in the Southern District of
the State of New York or any New York state court sitting in New
York City, in addition to any remedy to which they are entitled
at law or in equity.
Section 10.12. Interpretation. When a reference is made in
this Agreement to a Section or Schedule, such reference shall be to
a Section of or a Schedule to this Agreement unless otherwise
indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Whenever
the words "include," "includes" or "including" are used in this
Agreement they shall be deemed to be followed by the
words "without limitation." The phrases "the date of this
Agreement," "the date hereof," and terms of similar import,
unless the context otherwise requires, shall be deemed to refer to
December 17, 1998.
Section 10.13. Entire Agreement; Schedules. This
Agreement, the Confidentiality Agreement and the Note Agreement
constitute the entire agreement among the parties with respect to the
subject matter hereof and supersedes all prior written and oral
and all contemporaneous oral agreements and understandings with
respect to the subject matter hereof. Each party
acknowledges and agrees that no other party hereto makes any
representations or warranties, whether express or implied, other
than the express representations and warranties contained herein or
in the certificates to be delivered at the Effective Time. The
fact that any item of information is disclosed in any Schedule
to this Agreement shall not be construed to mean that such
information is required to be disclosed by this Agreement. Such
information and the dollar thresholds set forth herein shall not be
used as a basis for interpreting the terms "material" or "Material
Adverse Effect" or other similar terms in this Agreement. A
matter set forth in one section of the Schedules need not be set
forth in any other Section or Schedule so long as its relevance to
the latter Section or Schedule is reasonably clear.
Section 10.14. Severability. If any term or other
provision of this Agreement is determined to be invalid, illegal or
incapable of being enforced by any rule of law, or public policy,
all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic
or legal substance of the transactions contemplated herein is
not affected in any manner materially adverse to any party hereto.
Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in
a mutually acceptable manner.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized
officers as of the day and year first above written.
PHARMHOUSE CORP.
By:/s/ Kenneth A. Davis
Name: Kenneth A. Davis
Title: President
PHAR MOR, INC.
By:/s/ John R. Ficarro
Name: John R. Ficarro
Title: Chief Admin. Officer
PHARMACY ACQUISITION CORP.
By:/s/ John R. Ficarro
Name: John R. Ficarro
Title: Sr. V.P.
VOTING AGREEMENT, dated as of December 17, 1998 (this
"Agreement"), among PHAR MOR, INC., a Pennsylvania corporation
("Buyer"), and KENNETH DAVIS (the "Holder").
WITNESSETH:
WHEREAS, Buyer, PHARMACY ACQUISITION CORP., a New York
corporation and wholly-owned subsidiary of Buyer ("Merger
Subsidiary") and PHARMHOUSE CORP., a New York corporation (the
"Company"), propose to enter into an Agreement and Plan of Merger
to be dated as of the date hereof (the "Merger Agreement";
capitalized terms used herein and not otherwise defined are used
herein as defined in the Merger Agreement), pursuant to which
Merger Subsidiary will be merged with and into the Company (the
"Merger"), and each outstanding share of the common stock, par
value $.01, of the Company (the "Company Common Stock") will be
converted into the right to receive cash on the basis described
in the Merger Agreement;
WHEREAS, the Holder, individually or as trustee or
custodian, is the owner of the number of shares of Company Common
Stock set forth opposite the Holder's name on Schedule I to this
Agreement (the "Subject Shares"); and
WHEREAS, as a condition of its entering into the Merger
Agreement, Buyer has requested that the Holder agree, and the
Holder has agreed, (i) to vote the Subject Shares with respect to
the Merger Agreement and the Merger and (ii) to make certain
payments to Buyer, upon the terms and subject to the conditions
set forth herein.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements and covenants hereinafter set forth, and
intending to be legally bound hereby, the parties hereto hereby
agree as follows:
Section 1. Agreement to Vote Shares. (a) At every
annual or special meeting of the shareholders of the Company and
at every continuation or adjournment thereof, and on every action
or approval by written consent of the shareholders of the Company
in lieu of any such meeting, in which in either case the Merger
Agreement and the Merger are being considered or voted on, the
Holder shall vote the Subject Shares in accordance with the
recommendations of the Board of Directors of the Company. The
Holder may vote the Subject Shares on all other matters.
(b) No person executing this Agreement who is or becomes
during the term hereof a director of the Company makes any
agreement or understanding herein in his or her capacity as such
director. The Holder signs solely in his or her capacity as the
owner of the Subject Shares.
Section 2. Agreement to Make Payments. In the event
that (i) an Acquisition Proposal shall have been made known to
the Company or any Company Subsidiary, or has been made directly
to the Company's stockholders generally or any person shall have
publicly announced an intention (whether or not conditional) to
make an Acquisition Proposal and thereafter Company Stockholder
Approval is not obtained, or (ii) the Merger Agreement is
terminated by Buyer pursuant to Section 9.01(h) or Section
9.01(l) thereof, and if in either case during the period ending
June 30, 2000 the Holder sells, assigns or transfers all or any
of the Subject Shares (whether by operation of law or otherwise)
for consideration in excess of $3.25 per share, then Holder shall
pay to Buyer all consideration received by the Holder in
connection with such transfer in excess of $3.25 per share. The
Holder shall make such payment to Buyer promptly, and in any
event no later than three business days, after receipt by the
Holder of the consideration from the holder's transferee as
aforesaid.
Section 3. Representations and Warranties of the Holder.
The Holder hereby represents and warrants to Buyer that:
(a) this Agreement has been duly executed and
delivered by the Holder, and is the legal, valid and binding
obligation of the Holder;
(b) no consent of any court, governmental authority,
beneficiary, co-trustee or other person is necessary for the
execution, delivery and performance of this Agreement by the
Holder;
(c) the Holder owns the Subject Shares free and clear
of any pledge, lien, security interest, charge, claim,
equity or encumbrance of any kind, other than this
Agreement;
(d) the Holder has the present power and right to vote
all of the Subject Shares; and
(e) except as provided herein, the Holder has not (i)
granted any power-of-attorney or other authorization or
interest with respect to any of the Subject Shares, (ii)
deposited any of the Subject Shares into a voting trust or
(iii) entered into any voting agreement of other arrangement
with respect to the voting of any of the Subject Shares.
Section 4. Representations and Warranties of Buyer.
Buyer hereby represents and warrants to the Holder that:
(a) this Agreement has been duly executed and
delivered by Buyer, and is the legal, valid and binding
obligation of Buyer; and
(b) no consent of any court, governmental authority,
beneficiary, co-trustee or other person is necessary for the
execution, delivery and performance of this Agreement by
Buyer.
Section 5. Covenants of the Holder. The Holder hereby
agrees and covenants that:
(a) any shares of capital stock of the Company
(including the Company Common Stock) that the Holder
purchases or with respect to which the Holder otherwise
acquires beneficial ownership (including by reason of stock
dividends, split-ups, recapitalizations, combinations,
exchanges of shares or the like) after the date of this
Agreement and prior to the termination of the covenants of
the Holder set forth in Section 1 shall be considered
Subject Shares and subject to the covenants of Section 1 and
Section 2 of this Agreement;
(b) the Holder will not sell, assign, pledge or
otherwise transfer any of the Subject Shares at any time
prior to the termination of the covenants of the Holder set
forth in Section 1; provided, however, that the foregoing
limitation shall not apply to any transfer effected pursuant
to the laws of descent and distribution or intestate
succession following the death of the Holdler during the
subject period, but shall apply to any further transfer by
any permitted seccessor or assign of the Holder pursuant to
such laws; and
(c) during the period beginning on the date of the
termination of the covenants of the Holder set forth in
Section 1 and ending on June 30, 2000, the Holder will not
sell, assign or transfer all or any of the Subject Shares
other than for value in a bona fide arms' length transaction
to an unaffiliated transferee; provided, however, that the
foregoing limitation shall not apply to any transfer
effected pursuant to the laws of descent and distribution
following the death of the Holder during the subject period,
but shall apply to any further transfer by any permitted
successor or assign of the Holder pursuant to such laws.
Section 6. Termination. This covenants of the Holder
set forth in Section 1 hereof shall terminate on the earlier of
(a) the Effective Time and (b) the date 30 calendar days after
the date on which the Merger Agreement is terminated. The
covenants of the Holder set forth in Section 2 hereof shall
terminate on June 30, 2000.
Section 7. Notices. All notices, requests and other
communications given or made pursuant hereto to any party
hereunder shall be in writing (including facsimile or similar
writing) and shall be given:
if to Buyer:
Phar Mor, Inc.
20 Federal Plaza West
Youngstown, OH 44503
Attention: General Counsel
Facsimile: 330-740-2985
with a copy to:
Swidler Berlin Shereff Friedman, LLP
3000 K Street, N.W., Suite 300
Washington, D.C. 20007
Attention: Morris F. DeFeo, Jr.
Facsimile: 202-424-7643
if to the Holder:
Kenneth Davis
22 Clover Drive
Great Neck, NY 11021
Facsimile: 516-829-9897
with a copy to:
Herrick, Feinstein LLP
2 Park Avenue
New York, NY 10016
Attention: Stephen M. Rathkopf
Facsimile: 212-889-7577
and to:
Maloney, Mehlman & Katz
405 Lexington Avenue
New York, NY 10174
Attention: Melvin Katz
Facsimile: (212) 972-0111
or such other address or facsimile numbers as such party may
hereafter specify for the purpose by notice to the other parties
hereto. Each such notice, request or other communication shall
be effective (a) if given by facsimile, when such facsimile is
transmitted to the facsimile number specified in this Section and
the appropriate facsimile confirmation is received, or (b) if
given by any other means, when delivered at the address specified
in this Section.
Section 8. Amendments; No Waivers. (a) Any provision of
this Agreement may be amended or waived prior to the Effective
Time if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by Buyer and the Holder or
in the case of a waiver, by the party against whom the waiver is
to be effective.
(b) No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
Section 9. Expenses. All costs and expenses incurred in
connection with this Agreement shall be paid by the party
incurring such cost or expense.
Section 10. Successors and Assigns. The provisions of
this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns,
provided that no party may assign, delegate or otherwise transfer
any of its rights or obligations under this Agreement without the
prior written consent of each of the other parties hereto.
Section 11. Counterparts; Effectiveness. This Agreement
may be signed in any number of counterparts, each of which shall
be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement shall
become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
Section 12. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the
State of New York without reference to conflict of laws
principles applied in such State.
Section 13. Jurisdiction; Jury Trial Waiver. (a) Any
suit, action or proceeding seeking to enforce any provision of,
or based on any matter arising out of or in connection with this
Agreement or the transactions contemplated by this Agreement
shall be brought in any federal court located in the Southern
District of the State of New York or any New York state court
sitting in New York City, and each of the parties hereto hereby
consents to the exclusive jurisdiction of such courts (and of the
appropriate appellate courts therefrom) in any such suit, action
or proceeding and waives any objection to venue laid therein.
Process in any such suit, action or proceeding may be served on
any party anywhere in the world, whether within or without the
State of New York. Without limiting the generality of the
foregoing, each party hereto agrees that service of process upon
such party at the address referred to in Section 8, together with
written notice of such service to such party, shall be deemed
effective service of process upon such party.
(b) EACH PARTY HERETO HEREBY WAIVES ALL RIGHTS TO TRIAL BY
JURY IN ANY ACTION OR PROCEEDING INSTITUTED BY EITHER OF THEM
AGAINST THE OTHER WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS
AGREEMENT, ANY ALLEGED TORTIOUS CONDUCT BY ANY PARTY, OR IN ANY
WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE
RELATIONSHIP AMONG THE PARTIES HERETO.
Section 14. Specific Performance. The parties hereto
agree that irreparable damage would occur in the event any
provision of this Agreement was not performed in accordance with
the terms hereof and that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions of this
Agreement in any federal court located in the Southern District
of the State of New York or any New York state court sitting in
New York City, in addition to any remedy to which they are
entitled at law or in equity.
Section 15. Interpretation. When a reference is made in
this Agreement to a Section, such reference shall be to a Section
of this Agreement unless otherwise indicated. Whenever the words
"include," "includes" or "including" are used in this Agreement
they shall be deemed to be followed by the words "without
limitation." The phrases "the date of this Agreement," "the date
hereof," and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to December 17,
1998.
Section 16. Entire Agreement. This Agreement constitutes
the entire agreement among the parties with respect to the
subject matter hereof and supersedes all prior written and oral
and all contemporaneous oral agreements and understandings with
respect to the subject matter hereof. Each party acknowledges
and agrees that no other party hereto makes any representations
or warranties, whether express or implied, other than the express
representations and warranties contained herein.
Section 17. Severability. If any term or other provision
of this Agreement is determined to be invalid, illegal or
incapable of being enforced by any rule of law, or public policy,
all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated
herein is not affected in any manner materially adverse to any
party hereto. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, or caused this Agreement to be duly executed by their
respective authorized officers, as of the day and year first
above written.
PHAR MOR, INC.
By:
Name:
Title:
THE HOLDER
By:
Name: Kenneth Davis
SCHEDULE I
HOLDER NUMBER OF SHARES
Kenneth Davis 179,304
VOTING AND PAYMENT AGREEMENT
VOTING AGREEMENT, dated as of December 17, 1998 (this
"Agreement"), among PHAR MOR, INC., a Pennsylvania corporation
("Buyer"), and MARCIE DAVIS (the "Holder").
WITNESSETH:
WHEREAS, Buyer, PHARMACY ACQUISITION CORP., a New York
corporation and wholly-owned subsidiary of Buyer ("Merger
Subsidiary") and PHARMHOUSE CORP., a New York corporation (the
"Company"), propose to enter into an Agreement and Plan of Merger to
be dated as of the date hereof (the "Merger Agreement"; capitalized
terms used herein and not otherwise defined are used herein as
defined in the Merger Agreement), pursuant to which Merger
Subsidiary will be merged with and into the Company (the "Merger"),
and each outstanding share of the common stock, par value $.01, of
the Company (the "Company Common Stock") will be converted into the
right to receive cash on the basis described in the Merger Agreement;
WHEREAS, the Holder, ndividually or as trustee or custodian, is
the owner of the number of shares of Company Common Stock set forth
opposite the Holder's name on Schedule I to this Agreement (the
"Subject Shares"); and
WHEREAS, as a condition of its entering into the Merger
Agreement, Buyer has requested that the Holder agree, and the Holder
has agreed, (i) to vote the Subject Shares with respect to the
Merger Agreement and the Merger and (ii) to make certain payments to
Buyer, upon the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements and covenants hereinafter set forth, and
intending to be legally bound hereby, the parties hereto hereby
agree as follows:
Section 1. Agreement to Vote Shares. (a) At every
annual or special meeting of the shareholders of the Company and at
every continuation or adjournment thereof, and on every action or
approval by written consent of the shareholders of the Company in
lieu of any such meeting, in which in either case the Merger
Agreement and the Merger are being considered or voted on, the Holder
shall vote the Subject Shares in accordance with the recommendations
of the Board of Directors of the Company. The Holder may vote the
Subject Shares on all other matters.
(b) No person executing this Agreement who is or becomes during
the term hereof a director of the Company makes any agreement or
understanding herein in his or her capacity as such director. The
Holder signs solely in his or her capacity as the owner of the
Subject Shares.
Section 2. Agreement to Make Payments. In the event
that (i) an Acquisition Proposal shall have been made known to the
Company or any Company Subsidiary, or has been made directly to the
Company's stockholders generally or any person shall have publicly
announced an intention (whether or not conditional) to make an
Acquisition Proposal and thereafter Company Stockholder Approval is
not obtained, or (ii) the Merger Agreement is terminated by Buyer
pursuant to Section 9.01(h) or Section 9.01(l) thereof, and if in
either case during the period ending June 30, 2000 the Holder sells,
assigns or transfers all or any of the Subject Shares (whether by
operation of law or otherwise) for consideration in excess of $3.25
per share, then Holder shall pay to Buyer all consideration received
by the Holder in connection with such transfer in excess of $3.25
per share. The Holder shall make such payment to Buyer promptly, and
in any event no later than three business days, after receipt by the
Holder of the consideration from the holder's transferee as
aforesaid.
Section 3. Representations and Warranties of the Holder. The
Holder hereby represents and warrants to Buyer that:
(a) this Agreement has been duly executed and delivered by the
Holder, and is the legal, valid and binding obligation of the Holder;
(b) no consent of any court, governmental authority, beneficiary, co-
trustee or other person is necessary for the execution, delivery and
performance of this Agreement by the Holder;
(c) the Holder owns the Subject Shares free and clear of any pledge,
lien, security interest, charge, claim, equity or encumbrance of any
kind, other than this Agreement;
(d) the Holder has the present power and right to vote all of the
Subject Shares; and
(e) except as provided herein, the Holder has not (i) granted any
power-of-attorney or other authorization or interest with respect to
any of the Subject Shares, (ii) deposited any of the Subject Shares
into a voting trust or (iii) entered into any voting agreement of
other arrangement with respect to the voting of any of the Subject
Shares.
Section 4. Representations and Warranties of Buyer. Buyer
hereby represents and warrants to the Holder that:
(a) this Agreement has been duly executed and
delivered by Buyer, and is the legal, valid and binding
obligation of Buyer; and
(b) no consent of any court, governmental authority, beneficiary, co-
trustee or other person is necessary for the execution, delivery and
performance of this Agreement by Buyer.
Section 5. Covenants of the Holder. The Holder hereby agrees
and covenants that:
(a) any shares of capital stock of the Company (including the
Company Common Stock) that the Holder purchases or with respect to
which the Holder otherwise acquires beneficial ownership (including
by reason of stock dividends, split-ups, recapitalizations,
combinations, exchanges of shares or the like) after the date of this
Agreement and prior to the termination of the covenants of Holder set
forth in Section 1 shall be considered Subject Shares and subject to
the covenants of Section 1 and Section 2 of this Agreement;
(b) the Holder will not sell, assign, pledge or otherwise transfer
any of the Subject Shares at any time prior to the termination of
the covenants of the Holder set forth in Section 1; provided,
however, that the foregoing limitation shall not apply to any
transfer effected pursuant to the laws of descent and distribution or
intestate succession following the death of the Holder during the
subject period, but shall apply to any further transfer by any
permitted successor or assign of the Holder pursuant to such laws;
and
(c) during the period beginning on the date of the termination of
the covenants of the Holder set forth in Section 1 and ending on June
30, 2000, the Holder will not sell, assign or transfer all or any of
the Subject Shares other than for value in a bona fide arms' length
transaction to an unaffiliated transferee; provided, however, that
the foregoing limitation shall not apply to any transfer effected
pursuant to the laws of descent and distribution following the death
of the Holder during the subject period, but shall apply to any
further transfer by any permitted successor or assign of the Holder
pursuant to such laws.
Section 6. Termination. This covenants of the Holder set
forth in Section 1 hereof shall terminate on the earlier of (a) the
Effective Time and (b) the date 30 calendar days after the date on
which the Merger Agreement is terminated. The covenants of the
Holder set forth in Section 2 hereof shall terminate on June 30,
2000.
Section 7. Notices. All notices, requests and other
communications given or made pursuant hereto to any party hereunder
shall be in writing (including facsimile or similar writing) and
shall be given:
if to Buyer:
Phar Mor, Inc.
20 Federal Plaza
WestYoungstown, OH 44503
Attention: General Counsel
Facsimile: 330-740-2985
with a copy to:
Swidler Berlin Shereff Friedman, LLP
3000 K Street, N.W., Suite 300
Washington, D.C. 20007
Attention: Morris F. DeFeo, Jr.
Facsimile: 202-424-7643
if to the Holder:
Marcie Davis
22 Clover Drive
Great Neck, NY 11021
Facsimile: 516-829-9897
with a copy to:
Herrick, Feinstein LLP
2 Park Avenue
New York, NY 10016
Attention: Stephen M. Rathkopf
Facsimile: 212-889-7577
and to:
Maloney, Mehlman & Katz
405 Lexington Avenue
New York, NY 10174
Attention: Melvin Katz
Facsimile: (212) 972-0111
or such other address or facsimile numbers as such party may
hereafter specify for the purpose by notice to the other parties
hereto. Each such notice, request or other communication shall be
effective (a) if given by facsimile, when such facsimile is
transmitted to the facsimile number specified in this Section and the
appropriate facsimile confirmation is received, or (b) if given by
any other means, when delivered at the address specified in this
Section.
Section 8. Amendments; No Waivers. (a) Any provision of this
Agreement may be amended or waived prior to the Effective Time if,
and only if, such amendment or waiver is in writing and signed, in
the case of an amendment, by Buyer and the Holder or in the case of a
waiver, by the party against whom the waiver is to be effective.
(b) No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by
law.
Section 9. Expenses. All costs and expenses incurred in
connection with this Agreement shall be paid by the party incurring
such cost or expense.
Section 10. Successors and Assigns. The provisions of this
Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, provided
that no party may assign, delegate or otherwise transfer any of its
rights or obligations under this Agreement without the prior written
consent of each of the other parties hereto.
Section 11. Counterparts; Effectiveness. This Agreement
may be signed in any number of counterparts, each of which shall be
an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument. This Agreement shall become
effective when each party hereto shall have received counterparts
hereof signed by all of the other partie hereto.
Section 12. Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York
without reference to conflict of laws principles applied in such
State.
Section 13. Jurisdiction; Jury Trial Waiver. (a) Any suit,
action or proceeding seeking to enforce any provision of, or based on
any matter arising out of or in connection with this Agreement or the
transactions contemplated by this Agreement shall be brought in any
federal court located in the Southern District of the State of New
York or any New York state court sitting in New York City, and each
of the parties hereto hereby consents to the exclusive jurisdiction
of such courts (and of the appropriate appellate courts therefrom) in
any such suit, action or proceeding and waives any objection to venue
laid therein. Process in any such suit, action or proceeding may be
served on any party anywhere in the world, whether within or
without the State of New York. Without limiting the generality of
the foregoing, each party hereto agrees that service of process upon
such party at the address referred to in Section 8, together with
written notice of such service to such party, shall be deemed
effective service of process upon such party.
(b) EACH PARTY HERETO HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY
IN ANY ACTION OR PROCEEDING INSTITUTED BY EITHER OF THEM AGAINST THE
OTHER WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, ANY
ALLEGED TORTIOUS CONDUCT BY ANY PARTY, OR IN ANY WAY, DIRECTLY OR
INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP AMONG THE
PARTIES HERETO.
Section 14. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of
this Agreement was not performed in accordance with the terms hereof
and that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in any
federal court located in the Southern District of the State of New
York or any New York state court sitting in New York City, in
addition to any remedy to which they are entitled at law or in
equity.
Section 15. Interpretation. When a reference is made in this
Agreement to a Section, such reference shall be to a Section of this
Agreement unless otherwise indicated. Whenever the words "include,"
"includes" or "including" are used in this Agreement they shall be
deemed to be followed by the words "without limitation." The phrases
"the date of this Agreement," "the date hereof," and terms of similar
import, unless the context otherwise requires, shall be deemed to
refer to December 17, 1998.
Section 16. Entire Agreement. This Agreement constitutes the
entire agreement among the parties with respect to the subject matter
hereof and supersedes all prior written and oral and all
contemporaneous oral agreements and understandings with respect to
the subject matter hereof. Each party acknowledges and agrees that
no other party hereto makes any representations or warranties,
whether express or implied, other than the express representations
and warranties contained herein.
Section 17. Severability. If any term or other provision of
this Agreement is determined to be invalid, illegal or incapable of
being enforced by any rule of law, or public policy, all other
conditions nd provisions of this Agreement shall nevertheless remain
in full force and effect so long as the economic or legal substance
of the transactions contemplated herein is not affected in any manner
materially adverse to any party hereto. Upon such determination
that any term or other provision is invalid, illegal or incapable of
being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, or caused this Agreement to be duly executed by their
respective authorized officers, as of the day and year first above
written.
PHAR MOR, INC.
By:
-----------------------
Name:
Title:
THE HOLDER
By:
-----------------------
Name: Marcie Davis
SCHEDULE I
HOLDER NUMBER OF SHARES
Marcie Davis 62,794
VOTING AND PAYMENT AGREEMENT
VOTING AGREEMENT, dated as of December 17, 1998 (this
"Agreement"), among PHAR MOR, INC., a Pennsylvania corporation
("Buyer"), and ANNE BRECKER (the "Holder").
WITNESSETH:
WHEREAS, Buyer, PHARMACY ACQUISITION CORP., a New York
corporation and wholly-owned subsidiary of Buyer ("Merger
Subsidiary") and PHARMHOUSE CORP., a New York corporation (the
"Company"), propose to enter into an Agreement and Plan of Merger
to be dated as of the date hereof (the "Merger Agreement";
capitalized terms used herein and not otherwise defined are used
herein as defined in the Merger Agreement), pursuant to which
Merger Subsidiary will be merged with and into the Company (the
"Merger"), and each outstanding share of the common stock, par
value $.01, of the Company (the "Company Common Stock") will be
converted into the right to receive cash on the basis described
in the Merger Agreement;
WHEREAS, the Holder, individually or as trustee or
custodian, is the owner of the number of shares of Company Common
Stock set forth opposite the Holder's name on Schedule I to this
Agreement (the "Subject Shares"); and
WHEREAS, as a condition of its entering into the Merger
Agreement, Buyer has requested that the Holder agree, and the
Holder has agreed, (i) to vote the Subject Shares with respect to
the Merger Agreement and the Merger and (ii) to make certain
payments to Buyer, upon the terms and subject to the conditions
set forth herein.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements and covenants hereinafter set forth, and
intending to be legally bound hereby, the parties hereto hereby
agree as follows:
Section 1. Agreement to Vote Shares. (a) At every
annual or special meeting of the shareholders of the Company and
at every continuation or adjournment thereof, and on every action
or approval by written consent of the shareholders of the Company
in lieu of any such meeting, in which in either case the Merger
Agreement and the Merger are being considered or voted on, the
Holder shall vote the Subject Shares in accordance with the
recommendations of the Board of Directors of the Company. The
Holder may vote the Subject Shares on all other matters.
(b) No person executing this Agreement who is or becomes
during the term hereof a director of the Company makes any
agreement or understanding herein in his or her capacity as such
director. The Holder signs solely in his or her capacity as the
owner of the Subject Shares.
Section 2. Agreement to Make Payments. In the event
that (i) an Acquisition Proposal shall have been made known to
the Company or any Company Subsidiary, or has been made directly
to the Company's stockholders generally or any person shall have
publicly announced an intention (whether or not conditional) to
make an Acquisition Proposal and thereafter Company Stockholder
Approval is not obtained, or (ii) the Merger Agreement is
terminated by Buyer pursuant to Section 9.01(h) or Section
9.01(l) thereof, and if in either case during the period ending
June 30, 2000 the Holder sells, assigns or transfers all or any
of the Subject Shares (whether by operation of law or otherwise)
for consideration in excess of $3.25 per share, then Holder shall
pay to Buyer all consideration received by the Holder in
connection with such transfer in excess of $3.25 per share. The
Holder shall make such payment to Buyer promptly, and in any
event no later than three business days, after receipt by the
Holder of the consideration from the holder's transferee as
aforesaid.
Section 3. Representations and Warranties of the Holder.
The Holder hereby represents and warrants to Buyer that:
(a) this Agreement has been duly executed and
delivered by the Holder, and is the legal, valid and binding
obligation of the Holder;
(b) no consent of any court, governmental authority,
beneficiary, co-trustee or other person is necessary for the
execution, delivery and performance of this Agreement by the
Holder;
(c) the Holder owns the Subject Shares free and clear
of any pledge, lien, security interest, charge, claim,
equity or encumbrance of any kind, other than this
Agreement;
(d) the Holder has the present power and right to vote
all of the Subject Shares; and
(e) except as provided herein, the Holder has not (i)
granted any power-of-attorney or other authorization or
interest with respect to any of the Subject Shares, (ii)
deposited any of the Subject Shares into a voting trust or
(iii) entered into any voting agreement of other arrangement
with respect to the voting of any of the Subject Shares.
Section 4. Representations and Warranties of Buyer.
Buyer hereby represents and warrants to the Holder that:
(a) this Agreement has been duly executed and
delivered by Buyer, and is the legal, valid and binding
obligation of Buyer; and
(b) no consent of any court, governmental authority,
beneficiary, co-trustee or other person is necessary for the
execution, delivery and performance of this Agreement by
Buyer.
Section 5. Covenants of the Holder. The Holder hereby
agrees and covenants that:
(a) any shares of capital stock of the Company
(including the Company Common Stock) that the Holder
purchases or with respect to which the Holder otherwise
acquires beneficial ownership (including by reason of stock
dividends, split-ups, recapitalizations, combinations,
exchanges of shares or the like) after the date of this
Agreement and prior to the termination of the covenants of
the Holder set forth in Section 1 shall be considered
Subject Shares and subject to the covenants of Section 1 and
Section 2 of this Agreement;
(b) the Holder will not sell, assign, pledge or otherwise
transfer any of the Subject Shares at any time prior to
the termination of the covenants of the Holder set forth in
Section 1; provided, however, that the foregoing limitation
shall not apply to any transfer effected pursuant to the laws
of descent and distribution or intestate succession following
the death of the Holder during the subject period, but shall
apply to any further transfer by any permitted successor or
assign of the Holder pursuant to such laws; and
(c) during the period beginning on the date of the
termination of the covenants of the Holder set forth in
Section 1 and ending on June 30, 2000, the Holder will not
sell, assign or transfer all or any of the Subject Shares
other than for value in a bona fide arms' length transaction
to an unaffiliated transferee; provided, however, that the
foregoing limitation shall not apply to any transfer
effected pursuant to the laws of descent and distribution
following the death of the Holder during the subject period,
but shall apply to any further transfer by any permitted
successor or assign of the Holder pursuant to such laws.
Section 6. Termination. This covenants of the Holder
set forth in Section 1 hereof shall terminate on the earlier of
(a) the Effective Time and (b) the date 30 calendar days after
the date on which the Merger Agreement is terminated. The
covenants of the Holder set forth in Section 2 hereof shall
terminate on June 30, 2000.
Section 7. Notices. All notices, requests and other
communications given or made pursuant hereto to any party
hereunder shall be in writing (including facsimile or similar
writing) and shall be given:
if to Buyer:
Phar Mor, Inc.
20 Federal Plaza West
Youngstown, OH 44503
Attention: General Counsel
Facsimile: 330-740-2985
with a copy to:
Swidler Berlin Shereff Friedman, LLP
3000 K Street, N.W., Suite 300
Washington, D.C. 20007
Attention: Morris F. DeFeo, Jr.
Facsimile: 202-424-7643
if to the Holder:
Anne Brecker
17099 Whitehaven Drive
Boca Raton, FL 33496
Facsimile: 561-470-1349
with a copy to:
Herrick, Feinstein LLP
2 Park Avenue
New York, NY 10016
Attention: Stephen M. Rathkopf
Facsimile: 212-889-7577
and to:
Maloney, Mehlman & Katz
405 Lexington Avenue
New York, NY 10174
Attention: Melvin Katz
Facsimile: (212) 972-0111
or such other address or facsimile numbers as such party may
hereafter specify for the purpose by notice to the other parties
hereto. Each such notice, request or other communication shall
be effective (a) if given by facsimile, when such facsimile is
transmitted to the facsimile number specified in this Section and
the appropriate facsimile confirmation is received, or (b) if
given by any other means, when delivered at the address specified
in this Section.
Section 8. Amendments; No Waivers. (a) Any provision of
this Agreement may be amended or waived prior to the Effective
Time if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by Buyer and the Holder or
in the case of a waiver, by the party against whom the waiver is
to be effective.
(b) No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
Section 9. Expenses. All costs and expenses incurred in
connection with this Agreement shall be paid by the party
incurring such cost or expense.
Section 10. Successors and Assigns. The provisions of
this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns,
provided that no party may assign, delegate or otherwise transfer
any of its rights or obligations under this Agreement without the
prior written consent of each of the other parties hereto.
Section 11. Counterparts; Effectiveness. This Agreement
may be signed in any number of counterparts, each of which shall
be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement shall
become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
Section 12. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the
State of New York without reference to conflict of laws
principles applied in such State.
Section 13. Jurisdiction; Jury Trial Waiver. (a) Any
suit, action or proceeding seeking to enforce any provision of,
or based on any matter arising out of or in connection with this
Agreement or the transactions contemplated by this Agreement
shall be brought in any federal court located in the Southern
District of the State of New York or any New York state court
sitting in New York City, and each of the parties hereto hereby
consents to the exclusive jurisdiction of such courts (and of the
appropriate appellate courts therefrom) in any such suit, action
or proceeding and waives any objection to venue laid therein.
Process in any such suit, action or proceeding may be served on
any party anywhere in the world, whether within or without the
State of New York. Without limiting the generality of the
foregoing, each party hereto agrees that service of process upon
such party at the address referred to in Section 8, together with
written notice of such service to such party, shall be deemed
effective service of process upon such party.
(b) EACH PARTY HERETO HEREBY WAIVES ALL RIGHTS TO TRIAL BY
JURY IN ANY ACTION OR PROCEEDING INSTITUTED BY EITHER OF THEM
AGAINST THE OTHER WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS
AGREEMENT, ANY ALLEGED TORTIOUS CONDUCT BY ANY PARTY, OR IN ANY
WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE
RELATIONSHIP AMONG THE PARTIES HERETO.
Section 14. Specific Performance. The parties hereto
agree that irreparable damage would occur in the event any
provision of this Agreement was not performed in accordance with
the terms hereof and that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions of this
Agreement in any federal court located in the Southern District
of the State of New York or any New York state court sitting in
New York City, in addition to any remedy to which they are
entitled at law or in equity.
Section 15. Interpretation. When a reference is made in
this Agreement to a Section, such reference shall be to a Section
of this Agreement unless otherwise indicated. Whenever the words
"include," "includes" or "including" are used in this Agreement
they shall be deemed to be followed by the words "without
limitation." The phrases "the date of this Agreement," "the date
hereof," and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to December 17,
1998.
Section 16. Entire Agreement. This Agreement constitutes
the entire agreement among the parties with respect to the
subject matter hereof and supersedes all prior written and oral
and all contemporaneous oral agreements and understandings with
respect to the subject matter hereof. Each party acknowledges
and agrees that no other party hereto makes any representations
or warranties, whether express or implied, other than the express
representations and warranties contained herein.
Section 17. Severability. If any term or other provision
of this Agreement is determined to be invalid, illegal or
incapable of being enforced by any rule of law, or public policy,
all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated
herein is not affected in any manner materially adverse to any
party hereto. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, or caused this Agreement to be duly executed by their
respective authorized officers, as of the day and year first
above written.
PHAR MOR, INC.
By:
Name:
Title:
THE HOLDER
By:
Name: Anne Brecker
SCHEDULE I
HOLDER NUMBER OF SHARES
Anne Brecker 484,542
VOTING AND PAYMENT AGREEMENT
VOTING AGREEMENT, dated as of December 17, 1998 (this
"Agreement"), among PHAR MOR, INC., a Pennsylvania corporation
("Buyer"), and MANFRED BRECKER (the "Holder").
WITNESSETH:
WHEREAS, Buyer, PHARMACY ACQUISITION CORP., a New York
corporation and wholly-owned subsidiary of Buyer ("Merger
Subsidiary") and PHARMHOUSE CORP., a New York corporation (the
"Company"), propose to enter into an Agreement and Plan of Merger
to be dated as of the date hereof (the "Merger Agreement";
capitalized terms used herein and not otherwise defined are used
herein as defined in the Merger Agreement), pursuant to which
Merger Subsidiary will be merged with and into the Company (the
"Merger"), and each outstanding share of the common stock, par
value $.01, of the Company (the "Company Common Stock") will be
converted into the right to receive cash on the basis described
in the Merger Agreement;
WHEREAS, the Holder, individually or as trustee or
custodian, is the owner of the number of shares of Company Common
Stock set forth opposite the Holder's name on Schedule I to this
Agreement (the "Subject Shares"); and
WHEREAS, as a condition of its entering into the Merger
Agreement, Buyer has requested that the Holder agree, and the
Holder has agreed, (i) to vote the Subject Shares with respect to
the Merger Agreement and the Merger and (ii) to make certain
payments to Buyer, upon the terms and subject to the conditions
set forth herein.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements and covenants hereinafter set forth, and
intending to be legally bound hereby, the parties hereto hereby
agree as follows:
Section 1. Agreement to Vote Shares. (a) At every
annual or special meeting of the shareholders of the Company and
at every continuation or adjournment thereof, and on every action
or approval by written consent of the shareholders of the Company
in lieu of any such meeting, in which in either case the Merger
Agreement and the Merger are being considered or voted on, the
Holder shall vote the Subject Shares in accordance with the
recommendations of the Board of Directors of the Company. The
Holder may vote the Subject Shares on all other matters.
(b) No person executing this Agreement who is or becomes
during the term hereof a director of the Company makes any
agreement or understanding herein in his or her capacity as such
director. The Holder signs solely in his or her capacity as the
owner of the Subject Shares.
Section 2. Agreement to Make Payments. In the event
that (i) an Acquisition Proposal shall have been made known to
the Company or any Company Subsidiary, or has been made directly
to the Company's stockholders generally or any person shall have
publicly announced an intention (whether or not conditional) to
make an Acquisition Proposal and thereafter Company Stockholder
Approval is not obtained, or (ii) the Merger Agreement is
terminated by Buyer pursuant to Section 9.01(h) or Section
9.01(l) thereof, and if in either case during the period ending
June 30, 2000 the Holder sells, assigns or transfers all or any
of the Subject Shares (whether by operation of law or otherwise)
for consideration in excess of $3.25 per share, then Holder shall
pay to Buyer all consideration received by the Holder in
connection with such transfer in excess of $3.25 per share. The
Holder shall make such payment to Buyer promptly, and in any
event no later than three business days, after receipt by the
Holder of the consideration from the holder's transferee as
aforesaid.
Section 3. Representations and Warranties of the Holder.
The Holder hereby represents and warrants to Buyer that:
(a) this Agreement has been duly executed and
delivered by the Holder, and is the legal, valid and binding
obligation of the Holder;
(b) no consent of any court, governmental authority,
beneficiary, co-trustee or other person is necessary for the
execution, delivery and performance of this Agreement by the
Holder;
(c) the Holder owns the Subject Shares free and clear
of any pledge, lien, security interest, charge, claim,
equity or encumbrance of any kind, other than this
Agreement;
(d) the Holder has the present power and right to vote
all of the Subject Shares; and
(e) except as provided herein, the Holder has not (i)
granted any power-of-attorney or other authorization or
interest with respect to any of the Subject Shares, (ii)
deposited any of the Subject Shares into a voting trust or
(iii) entered into any voting agreement of other arrangement
with respect to the voting of any of the Subject Shares.
Section 4. Representations and Warranties of Buyer.
Buyer hereby represents and warrants to the Holder that:
(a) this Agreement has been duly executed and
delivered by Buyer, and is the legal, valid and binding
obligation of Buyer; and
(b) no consent of any court, governmental authority,
beneficiary, co-trustee or other person is necessary for the
execution, delivery and performance of this Agreement by
Buyer.
Section 5. Covenants of the Holder. The Holder hereby
agrees and covenants that:
(a) any shares of capital stock of the Company
(including the Company Common Stock) that the Holder
purchases or with respect to which the Holder otherwise
acquires beneficial ownership (including by reason of stock
dividends, split-ups, recapitalizations, combinations,
exchanges of shares or the like) after the date of this
Agreement and prior to the termination of the covenants of
the Holder set forth in Section 1 shall be considered
Subject Shares and subject to the covenants of Section 1 and
Section 2 of this Agreement;
(b) the Holder will not sell, assign, pledge or
otherwise transfer any of the Subject Shares at any time
prior to the termination of the covenants of the Holder set
forth in Section 1; provided, however, that the foregoing
limitation shall not apply to any transfer effected pursuant
to the laws of descent and distribution or intestate succession
following the death of the Holder during the subject period,
but shall apply to any further transfer by any permitted
successor or assign of the Holder pursuant to such laws; and
(c) during the period beginning on the date of the
termination of the covenants of the Holder set forth in
Section 1 and ending on June 30, 2000, the Holder will not
sell, assign or transfer all or any of the Subject Shares
other than for value in a bona fide arms' length transaction
to an unaffiliated transferee; provided, however, that the
foregoing limitation shall not apply to any transfer
effected pursuant to the laws of descent and distribution
following the death of the Holder during the subject period,
but shall apply to any further transfer by any permitted
successor or assign of the Holder pursuant to such laws.
Section 6. Termination. This covenants of the Holder
set forth in Section 1 hereof shall terminate on the earlier of
(a) the Effective Time and (b) the date 30 calendar days after
the date on which the Merger Agreement is terminated. The
covenants of the Holder set forth in Section 2 hereof shall
terminate on June 30, 2000.
Section 7. Notices. All notices, requests and other
communications given or made pursuant hereto to any party
hereunder shall be in writing (including facsimile or similar
writing) and shall be given:
if to Buyer:
Phar Mor, Inc.
20 Federal Plaza West
Youngstown, OH 44503
Attention: General Counsel
Facsimile: 330-740-2985
with a copy to:
Swidler Berlin Shereff Friedman, LLP
3000 K Street, N.W., Suite 300
Washington, D.C. 20007
Attention: Morris F. DeFeo, Jr.
Facsimile: 202-424-7643
if to the Holder:
Manfred Brecker
17099 Whitehaven Drive
Boca Raton, FL 33496
Facsimile: 561-470-1349
with a copy to:
Herrick, Feinstein LLP
2 Park Avenue
New York, NY 10016
Attention: Stephen M. Rathkopf
Facsimile: 212-889-7577
and to:
Maloney, Mehlman & Katz
405 Lexington Avenue
New York, NY 10174
Attention: Melvin Katz
Facsimile: (212) 972-0111
or such other address or facsimile numbers as such party may
hereafter specify for the purpose by notice to the other parties
hereto. Each such notice, request or other communication shall
be effective (a) if given by facsimile, when such facsimile is
transmitted to the facsimile number specified in this Section and
the appropriate facsimile confirmation is received, or (b) if
given by any other means, when delivered at the address specified
in this Section.
Section 8. Amendments; No Waivers. (a) Any provision of
this Agreement may be amended or waived prior to the Effective
Time if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by Buyer and the Holder or
in the case of a waiver, by the party against whom the waiver is
to be effective.
(b) No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
Section 9. Expenses. All costs and expenses incurred in
connection with this Agreement shall be paid by the party
incurring such cost or expense.
Section 10. Successors and Assigns. The provisions of
this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns,
provided that no party may assign, delegate or otherwise transfer
any of its rights or obligations under this Agreement without the
prior written consent of each of the other parties hereto.
Section 11. Counterparts; Effectiveness. This Agreement
may be signed in any number of counterparts, each of which shall
be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement shall
become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
Section 12. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the
State of New York without reference to conflict of laws
principles applied in such State.
Section 13. Jurisdiction; Jury Trial Waiver. (a) Any
suit, action or proceeding seeking to enforce any provision of,
or based on any matter arising out of or in connection with this
Agreement or the transactions contemplated by this Agreement
shall be brought in any federal court located in the Southern
District of the State of New York or any New York state court
sitting in New York City, and each of the parties hereto hereby
consents to the exclusive jurisdiction of such courts (and of the
appropriate appellate courts therefrom) in any such suit, action
or proceeding and waives any objection to venue laid therein.
Process in any such suit, action or proceeding may be served on
any party anywhere in the world, whether within or without the
State of New York. Without limiting the generality of the
foregoing, each party hereto agrees that service of process upon
such party at the address referred to in Section 8, together with
written notice of such service to such party, shall be deemed
effective service of process upon such party.
(b) EACH PARTY HERETO HEREBY WAIVES ALL RIGHTS TO TRIAL BY
JURY IN ANY ACTION OR PROCEEDING INSTITUTED BY EITHER OF THEM
AGAINST THE OTHER WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS
AGREEMENT, ANY ALLEGED TORTIOUS CONDUCT BY ANY PARTY, OR IN ANY
WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE
RELATIONSHIP AMONG THE PARTIES HERETO.
Section 14. Specific Performance. The parties hereto
agree that irreparable damage would occur in the event any
provision of this Agreement was not performed in accordance with
the terms hereof and that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions of this
Agreement in any federal court located in the Southern District
of the State of New York or any New York state court sitting in
New York City, in addition to any remedy to which they are
entitled at law or in equity.
Section 15. Interpretation. When a reference is made in
this Agreement to a Section, such reference shall be to a Section
of this Agreement unless otherwise indicated. Whenever the words
"include," "includes" or "including" are used in this Agreement
they shall be deemed to be followed by the words "without
limitation." The phrases "the date of this Agreement," "the date
hereof," and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to December 17,
1998.
Section 16. Entire Agreement. This Agreement constitutes
the entire agreement among the parties with respect to the
subject matter hereof and supersedes all prior written and oral
and all contemporaneous oral agreements and understandings with
respect to the subject matter hereof. Each party acknowledges
and agrees that no other party hereto makes any representations
or warranties, whether express or implied, other than the express
representations and warranties contained herein.
Section 17. Severability. If any term or other provision
of this Agreement is determined to be invalid, illegal or
incapable of being enforced by any rule of law, or public policy,
all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated
herein is not affected in any manner materially adverse to any
party hereto. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, or caused this Agreement to be duly executed by their
respective authorized officers, as of the day and year first
above written.
PHAR MOR, INC.
By:
Name:
Title:
THE HOLDER
By:
Name: Manfred Brecker
SCHEDULE I
HOLDER NUMBER OF SHARES
Manfred Brecker 1,281
SUBORDINATED CONVERTIBLE NOTE PURCHASE AGREEMENT
SUBORDINATED CONVERTIBLE NOTE PURCHASE AGREEMENT
(this "Agreement"), dated as of December 17, 1998,
among PHARMHOUSE CORP., a New York corporation
("Borrower"), and PHAR MOR, INC., a Pennsylvania corporation
("Lender").
WITNESSETH:
WHEREAS, Lender, PHARMACY ACQUISITION CORP., a New
York corporation and wholly-owned subsidiary of Lender
("Merger Subsidiary") and Borrower, propose to enter into an
Agreement and Plan of Merger to be dated as of the date
hereof (the "Merger Agreement"; capitalized terms used
herein and not otherwise defined are used herein as
defined in the Merger Agreement), pursuant to which Merger
Subsidiary will be merged with and into Borrower (the
"Merger"), and each outstanding share of the common stock,
par value $.01, of the Borrower (the "Borrower Common
Stock") will be converted into the right to receive cash on
the basis described in the Merger Agreement; and
WHEREAS, Borrower desires to borrow $2,000,000.00
from Lender in order to meet its working capital needs
pending the closing of the proposed Merger; and
WHEREAS, Lender desires to make a $2,000,000.00 loan
(the "Loan") to Borrower in exchange for the subordinated
convertible promissory note to be issued by Borrower in
substantially the form of Exhibit A hereto (the "Note").
NOW, THEREFORE, in consideration of the premises and
the mutual agreements and covenants hereinafter set
forth, and intending to be legally bound, the parties
hereto hereby agree as follows:
Section 1. Bridge Loan. Upon the execution and
delivery of the Merger Agreement by the parties thereto and
subject to the terms and conditions contained herein, Lender
hereby agrees to make the Loan to Borrower, and Borrower
agrees to issue and sell to Lender, the Note in the
principal amount of $2,000,000.00. All principal and
accrued interest on the Note shall be due and payable upon
the Maturity Date (as defined in the Note).
Section 2. Subordination. The Note and the indebtedness
evidenced thereby, including the principal and interest and
any renewals or extensions thereof, shall at all time be
subordinate and junior in right to the Senior Debt (as
defined in the Note), all in the manner and with the force
and effect set forth in the Note.
Section 3. Optional Conversion.
(a) The Note shall be convertible, at the
option of Lender, into shares of Borrower's common stock,
par value $.01 per share (the "Common Stock"), at any
time on or after the Maturity Date, at the conversion
rate of $3.25 per share, subject to adjustment as
provided in Section 7 below.
(b) To exercise the right of conversion, Lender
shall surrender the Note to Borrower at its office at
the notice address set forth herein, accompanied by a
written notice in the form of Exhibit A to the Note,
properly completed (the "Conversion Notice"). Within five
business days following its receipt of this Note and
Conversion Notice, Borrower shall issue and deliver (i) a
certificate or certificates for the number of full
Conversion Shares issuable, registered in the Lender's name,
and (ii) if less than the entire remaining outstanding
principal balance of this Note is being converted, a
replacement note in the remaining outstanding principal
amount of this Note. Such conversion shall be deemed to
have been effected and the number of Conversion Shares
issuable in connection with such conversion shall be
determined as of the close of business on the date on
which the Note and Conversion Notice shall have been
received by Borrower.
Section 4. Registration Rights.
(a) At any time during the period commencing on
the Maturity Date and expiring five years thereafter, the
holder(s) (the "Holder(s)") of the Note and of the shares
of Common Stock issued or issuable upon conversion of
the Note (the "Note Shares") representing a Majority
(as defined below) of such securities shall have the right
(which right is in addition to the registration rights
under Section 4(b) hereof), exercisable by written notice
to Borrower, to require that Borrower prepare, file and use
its best efforts to have declared effective by the
Securities and Exchange Commission (the "Commission"), on
two occasions, a registration statement and such other
documents, including a prospectus, as may be necessary in
the opinion of both counsel for Borrower and counsel for
the Holder(s), in order to comply with the provisions of
the Securities Act of 1933, as amended (the "Securities
Act") so as to permit a public offering and sale of their
respective Note Shares for 24 consecutive months (or 16
consecutive months in the event of the unavailability of
Form S-3) by such Holder(s) and any other Holder(s) of
Note Shares who notify Borrower within ten days
after receiving notice from Borrower of such request.
Borrower covenants and agrees to give written notice of any
registration request under this Section 4(a) by any
Holder(s) to all other registered Holder(s) of Note or
Note Shares within ten days from the date of the receipt of
any such registration request.
(b) If at any time commencing on the Maturity
Date, Borrower proposes to register any of its securities
under the Securities Act (other than in connection with
a merger, acquisition or exchange offer, pursuant to Form
S-8 or successor form or otherwise on a form which does not
permit registration of the Note Shares) it will give
written notice by registered mail, at least 20 days prior
to the filing of each such registration statement, to the
Holder(s) of the Note and/or Note Shares of its intention to
do so. Upon the written request of any Holder of the
Note and/or Note Shares given within ten days after receipt
of any such notice of its or their desire to include any
Note Shares in such proposed registration statement,
Borrower shall afford such Holder(s) the opportunity to
have such Note Shares registered under such registration
statement. The "piggy-back" registration rights
described in this Section 4(b) shall terminate at such time
as the Note Shares are saleable in one or more transactions
pursuant to Rule 144 of the Securities Act during a 90-day
period. Notwithstanding anything to the contrary contained
in the provisions of this Section 4(b), Borrower shall have
the right at any time after it shall have given written
notice pursuant to this Section 4(b)(irrespective of whether
a written request for inclusion of any such securities shall
have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the
filing but prior to the effective date hereof. Borrower
will undertake commercially reasonable efforts to ensure
that any sales of Note Shares pursuant to such registration
statement shall be effected through the underwriter of the
public offering, if any, and the holders thereof shall
compensate the underwriter in accordance with its customary
compensation practices.
(c) Borrower shall indemnify and hold harmless
the Holder(s) from and against any and all losses, claims,
damages and liabilities caused by any untrue statement of a
material fact contained in any registration statement filed
by Borrower under the Securities Act by reason of this
Agreement, any posteffective amendment to such registration
statements or any prospectus included therein, or caused by
any omission to state therein a material fact required to
be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses,
claims, damages or liabilities are caused by any such
untrue statement or omission based upon information
furnished or required to be furnished in writing to Borrower
by the Holder(s) (or the authorized representatives or
agents of the Holder(s)) expressly for use therein, which
indemnification shall include each person, if any, who
controls the Holder(s) within the meaning of the Securities
Act and each officer, director, employee and agent of the
Holder(s); provided, however, that the indemnification in
this Section 4(c) with respect to any prospectus shall
not inure to the benefit of the Holder(s) (or to the
benefit of any person controlling the Holder(s)) on account
of any such loss, claim, damage or liability arising from
the sale of Note Shares by the Holder(s), if a copy of a
subsequent prospectus correcting the untrue statement or
omission in such earlier prospectus was provided to the
Holder(s) by Borrower prior to the subject sale and the
subsequent prospectus was not delivered or sent by the
Holder(s) to the purchaser of such securities prior to such
sale; and provided further, that Borrower shall not be
obligated to so indemnify the Holder(s) or any other person
referred to above unless the purchaser or other person, as
the case may be, shall at the same time indemnify Borrower,
its directors, each officer signing the registration
statement and each person, if any, who controls Borrower,
within the meaning of the Securities Act, from and against
any and all losses, claims, damages and liabilities caused
by any untrue statement of a material fact contained in any
registration statement or any prospectus required to be
filed or furnished by reason of this Agreement or caused by
any omission to state therein a material fact required to
be stated therein or necessary to make the statements
therein not misleading, insofar as such losses, claims,
damages or liabilities are caused by any untrue statement or
omission based upon information furnished in writing to
Borrower by the Holder(s) expressly for use therein.
(d) If for any reason the indemnification
provided for in the preceding paragraph is held by a court
of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, claim, damage,
liability or expense referred to therein, then the
indemnifying party, in lieu of indemnifying such indemnified
party thereunder, shall contribute to the amount paid or
payable by the indemnified party as a result of such loss,
claim, damage or liability in such proportion as is
appropriate to reflect not only the relative benefits
received by the indemnified party and the indemnifying
party, but also the relative fault of the indemnified party
and the indemnifying party, as well as any other relevant
equitable considerations.
(e) All expenses, filing fees and other costs
incurred by Borrower in connection with any registration of
securities pursuant to this Section 4 (exclusive of
underwriting discounts and selling commissions applicable
to any sale of registered securities) shall be borne by
Buyer.
(f) In the case of each registration effected by
Borrower pursuant to this Section 4, Borrower will (i)
furnish to the holders of the Note Shares registered
thereunder such numbers of copies of a prospectus, including
a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents
as such holders may reasonably request in order to
facilitate the disposition of such registered Note Shares
owned by them, and (ii) notify each holder of Note Shares
registered under such registration statement at any time
when a prospectus relating thereto is required to be
delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such
registration statement, as then in effect, includes an
untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of
the circumstances then existing.
(g) For the purposes of this Agreement, the
term "Majority" in reference to the Holders of the Note and
the Note Shares shall mean in excess of 50% of the then
outstanding Note Shares (assuming for such purpose the
conversion of the Note in its entirety) that (i) are not
held by Borrower, by any affiliate, officer, creditor,
employee or agent thereof or by any of their respective
affiliates, members of their family, persons acting as
nominees or in conjunction therewith or (ii) have not been
resold to the public pursuant to a registration statement
filed with the Commission under the Securities Act.
5. Common Stock. Borrower covenants and agrees that
all Note Shares will, upon issuance, be duly and validly
issued, fully paid and non-assessable and that no personal
liability will attach to the holder thereof. Borrower
further covenants and agrees that, during the periods within
which the Note may be converted, Borrower will at all times
have authorized and reserved a sufficient number of shares
of Common Stock for issuance upon conversion of the Note.
6. No Stockholder Rights. The Note shall not entitle
any holder thereof to any voting rights or other rights as
a stockholder of Borrower.
7. Adjustment of Rights. In the event that the
outstanding shares of Common Stock are at any time increased or
decreased or changed into or exchanged for a different
number or kind of share or other security of Borrower,
or of another corporation through reorganization,
merger, consolidation, liquidation, recapitalization, stock
split, combination of shares or stock dividends payable
with respect to such Common Stock, appropriate adjustments
in the number and kind of such securities then subject to
the Note shall be made effective as of the date of such
occurrence so that the position of holder of the Note upon
exercise will be the same as it would have been had it owned
immediately prior to the occurrence of such events the
Common Stock issuable upon conversion of the Note. Such
adjustment shall be made successively whenever any event
listed above shall occur and Borrower will notify the holder
of the Note of each such adjustment. Any fraction of a
share resulting from any adjustment shall be eliminated and
the price per share of the remaining shares subject to the
Note adjusted accordingly.
Section 8. Representations and Warranties of
Borrower. Borrower hereby represents and warrants to Lender
as follows:
(a) Borrower (i) is a corporation duly
organized, validly existing and in good standing under the
laws of the State of New York and (ii) has all requisite
power and authority to carry on its business, to own and
hold its properties and assets, to enter into and perform
this Agreement and to issue and carry out the provisions of
the Note.
(b) The execution, delivery and performance by
Borrower of this Agreement and the Note have been duly
and validly authorized by Borrower's Board of Directors
and no authorization or approval of Borrower's shareholders
is required in connection therewith. This Agreement and
the Note constitute the legal, valid and binding obligations
of Borrower and each is enforceable against Borrower in
accordance with its respective terms, except as such
enforcement may be limited by bankruptcy, insolvency and
other similar laws affecting the enforcement of creditors'
rights generally.
(c) The execution, delivery and performance
by Borrower of this Agreement and the issuance of the Note
(i) will not conflict with, result in a breach of or
constitute a default under any contract, agreement,
indenture, loan or credit agreement, deed of trust,
mortgage, lease, security agreement or other arrangement
to which Borrower is a party or by which Borrower or
any of its properties or assets is bound or affected; (ii)
will not cause Borrower to violate or contravene any
provision of its Certificate of Incorporation or Bylaws; or
(iii) require any authorization, consent, approval, permit,
exemption or other action by or notice to any court or
administrative or governmental body pursuant to the
Certificate of Incorporation or Bylaws of Borrower, any law,
statute, rule or regulation to which Borrower is subject or
any agreement, instrument, order, judgment or decree to
which Borrower is subject.
Section 9. Covenants of Borrower. Borrower makes
the following covenants to lender, upon which Lender is
relying in entering into this Agreement:
(a) Prior to repayment in full of the Note,
Borrower shall not incur any new indebtedness (contingent
or otherwise), except for (i) purchase money
indebtedness incurred in the ordinary course of
business up to $100,000.00 in principal amount; (ii)
unsecured obligations incurred, currently payable and paid
by Borrower in the ordinary course of business; (iii)
indebtedness approved in writing by Lender; and (iv)
additional borrowings pursuant to Borrower's credit
arrangements existing as of the date hereof.
(b) Prior to repayment in full of the Note,
Borrower shall provide Lender with (i) unaudited
financial statements within 45 days of the end of each
of Borrower's first three fiscal quarters and (ii)
audited financial statements within 90 days of the end of
Borrower's fiscal year.
(c) Borrower shall comply in all material
respects with all applicable statutes, rules, regulations
and orders of and all applicable restrictions imposed
by all governmental authorities related to the conduct
of its business and the ownership of its property
(including, without limitation, applicable statutes,
rules, regulations, orders and restrictions relating to
environmental, safety and other similar standards or
controls) unless the failure so to comply would not
have a material adverse effect on the business or
condition (financial or otherwise) of Borrower.
(d) Borrower shall promptly notify Lender of
any material litigation or legal proceedings initiated
against Borrower or any violation or potential violation
of any representation, warranty or covenant under this
Agreement or the Note.
Section 10. Restrictions on Transfer and
Lender Representations. In acquiring the Note and any Note
Shares issuable upon exercise of the Note collectively, the
"Securities"), Lender makes the following representations,
warranties and agreements:
(a) Lender understands that the
Securities will be issued by Borrower without
registration under the Securities Act and without
qualification and/or registration under applicable
state securities laws pursuant to specific
exemptions from registration and/or qualification
contained in the Securities Act and in applicable
state securities laws. Lender understands that the
foregoing exemptions depend upon, among other
things, the bona fide nature of its investment intent
as expressed herein.
(b) Lender agrees that none of the
Securities, nor any interest in the Securities, will
be sold, transferred or otherwise disposed of by it
without registration and/or qualification under the
Securities Act or applicable state securities laws
unless Lender first demonstrates to the satisfaction
of Borrower that specific exemptions from such
registration and qualification requirements are
available with respect to such resale or disposition
or provides Borrower an opinion of counsel
satisfactory to Borrower that a contemplated transfer
may be made without violation of the Securities Act
or applicable state securities laws.
(c) Lender represents and warrants to
Borrower as follows:
(i) Lender is acquiring the
Securities for investment purposes only, for Lender's
own account, and not as nominee or agent for any
other person, and not with a view to, or for resale
in connection with, any distribution thereof within
the meaning of the Securities Act.
(ii) Lender has received all the
information it considers necessary or appropriate to
evaluate the risks and merits of an investment in the
Securities, and has had an opportunity to discuss
Borrower's business, management, financial affairs and
prospects with Borrower's management.
(iii) Lender is an "accredited
investor" within the meaning of Rule 501 Regulation D
promulgated under the Securities Act.
(iv) Lender is able to bear the
economic risks related to a purchase of the
Securities. Lender either has a preexisting personal
or business relationship with Borrower or any of its
officers, directors of controlling persons, or by
reason of Lender's business or financial experience or
the business or financial experience of its
professional advisor who or which is affiliated with
and who or which is not compensated by Borrower or
any affiliated or selling agent of Borrower,
directly or indirectly, has the capacity to protect
his own interests in connection with the subject
transactions.
(d) Lender acknowledges that the
Securities to be issued to it will contain a legend
which prohibits an offer to transfer or a transfer of
all or any portion of the Securities unless the
Securities are registered under the Securities Act or
unless an exemption from registration is available
with respect to such resale or disposition.
Section 11. Miscellaneous.
(a) All notices, requests and other
communications given or made pursuant hereto to any
party hereunder shall be n writing (including
facsimile or similar writing) and shall be given:
if to Lender, to:
Phar Mor, Inc.
20 Federal Plaza
West Youngstown, OH 44503
Attention: General Counsel
Facsimile: 330-740-2985
with a copy to:
Swidler Berlin
Shereff Friedman, LLP
3000 K Street,N.W., Suite 300
Washington, D.C. 20007
Attention: Morris F. DeFeo, Jr.
Facsimile: 202-424-7643
if to the Borrower, to:
Pharmhouse Corp.
860 Broadway
New York, NY 10003
Attention: General Counsel
Facsimile: 212-358-9169
with a copy to:
Herrick, Feinstein LLP
2 Park Avenue
New York, NY 10016
Attention: Stephen M. Rathkopf
Facsimile: 212-889 7577
and to:
Maloney, Mehlman & Katz
405 Lexington Avenue
New York, NY 10174
Attention: Melvin Katz
Facsimile: 212-972-0111
or such other address or facsimile numbers as such
party may hereafter specify for the purpose by
notice to the other parties hereto. Each such
notice, request or other communication shall
be effective (i) if given by facsimile, when such
facsimile is transmitted to the facsimile number
specified in this Section and the appropriate
facsimile confirmation is received, or (ii) if given
by any other means, when delivered at the address
specified in this Section.
(b) In the event of any legal proceeding
between the parties hereto arising out of or
relating to this Agreement, the prevailing party
shall be entitled to recover from the non
prevailing party reasonable expenses,
including without limitation reasonable attorneys'
fees and reasonable accountants' fees.
(c) Any provision of this Agreement or the
Note may be amended or waived if, and only if, such
amendment or waiver is in writing and signed, in the
case of an amendment, by the Holder and Borrower,
or in the case of a waiver, by the party against
whom the waiver is to be effective.
(d) No failure or delay by any party in
exercising any right, power or privilege hereunder
or under the Note shall operate as a waiver
thereof nor shall any single or partial
exercise thereof preclude any other or further
exercise thereof or the exercise of any other
right, power or privilege. The rights and
remedies herein provided shall be cumulative and not
exclusive of any rights or remedies provided by law.
(e) Except as expressly provided in
Section 11(b), all costs and expenses incurred in
connection with this Agreement, the Note and the
transactions contemplated hereby and thereby shall
be paid by the party incurring such cost or expense.
(f) The provisions of this Agreement
and the Note shall be binding upon and inure to the
benefit of the parties hereto and thereto and their
respective successors and assigns, provided that
Borrower may not assign, delegate or otherwise
transfer any of its rights or obligations under this
Agreement or the Note without the prior written
consent of Lender.
(g) This Agreement may be signed in any
number of counterparts, each of which shall be an
original, with he same effect as if the signatures
thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party
hereto shall have received counterparts hereof
signed by all of the other parties hereto.
(h) This Agreement shall be governed by
and construed in accordance with the laws of the
State of New York without reference to the conflict
of laws principles applied in such State.
(i) Any suit, action or proceeding
seeking to enforce any provision of, or based on any
matter arising out of or in connection with this
Agreement, the Note or the transactions contemplated
hereby or thereby shall be brought in any federal
court located in the Southern District of the State
of New York or any New York state court sitting in
New York City, and each of the parties hereto hereby
consents to the exclusive jurisdiction of such
courts (and of the appropriate appellate courts
therefrom) in any such suit, action or proceeding and
waives any objection to venue laid therein. Process
in any such suit, action or proceeding may be served
on any party anywhere in the world, whether within or
without the State of New York. Without limiting the
generality of the foregoing, each party hereto agrees
that service of process upon such party at the
address referred to in Section 5(a), together with
written notice of such service to such party,
shall be deemed effective service of process upon
such party.
(j) EACH PARTY HERETO HEREBY WAIVES ALL
RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
INSTITUTED BY EITHER OF THEM AGAINST THE OTHER WHICH
PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT,
THE NOTE, ANY ALLEGED TORTIOUS CONDUCT BY ANY
PARTY, OR IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES
OUT OF OR RELATES TO THE RELATIONSHIP AMONG THE
PARTIES HERETO.
(k) When a reference is made in this
Agreement to a Section, such reference shall be to a
Section of this Agreement unless otherwise indicated.
Whenever the words "include," "includes" or
"including" are used in this Agreement or the Note
they shall be deemed to be followed by the words
"without limitation." The phrases "the date of this
Agreement," "the date hereof" and terms of similar
import, unless the context otherwise requires, shall
be deemed to refer to December 17, 1998.
(l) If any term or other provision of
this Agreement or of the Note is determined to be
invalid, illegal or incapable of being enforced by
any rule of law, or public policy, all other
conditions and provisions of this Agreement or the
Note, as applicable, shall nevertheless remain in
full force and effect so long as the economic or
legal substance of the transactions contemplated
herein is not affected in any manner materially
adverse to any party hereto. Upon such determination
that any term or other provision is invalid, illegal
or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the
parties as closely as possible in a mutually
acceptable manner.
IN WITNESS WHEREOF, the parties hereto have
caused this Agreement to be duly executed by their
respective authorized officers as of the day and
year first above written.
"LENDER"
"BORROWER"
PHAR MOR, INC., PHARMHOUSE CORP.,
a Pennsylvania corporation a New York corporation
By: By:
Name: Name:
Its: Its:
EXHIBIT A
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND HAS BEEN TAKEN FOR
INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO THE
DISTRIBUTION THEREOF, AND THIS NOTE MAY NOT BE SOLD
OR TRANSFERRED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING IT
OR THE COMPANY RECEIVES AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE
OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SUCH ACT.
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
$2,000,000.00
December 17, 1998
FOR VALUE RECEIVED, PHARMHOUSE CORP., a New York
corporation ("Maker"), hereby promises to pay on or
before the Maturity Date (as defined below) to PHAR
MOR, INC., a Pennsylvania corporation ("Payee"), at
such place(s) as the holder of this Note shall from
time to time designate, the principal sum set forth
above; plus simple interest from the date hereof at
the rate of eleven percent (11 %) per annum. This
Note is issued pursuant to that certain Subordinated
Convertible Note Purchase Agreement dated as of
December 17, 1998 (the "Agreement") by and between
Maker, as borrower, and Payee, as lender, and is
subject to and entitled to the benefits of the
Agreement. All capitalized terms not otherwise
defined herein shall have the meaning set forth in
the Agreement.
1. All principal and accrued interest on this
Note shall be due and payable upon the earlier of
(a) June 30, 1999 and (b) the date upon which Maker
terminates the Merger Agreement pursuant to
Section 9.01(h) or Section 9.01(l) thereof (the
"Maturity Date"). Payment of principal and interest
shall be made in lawful money of the United States of
America.
2. (a) This Note and the indebtedness
evidenced hereby, including the principal and
interest and any renewals or extensions hereof, shall
at all times be subordinate and junior
in right to the First Senior Debt (as defined below)
and the Second Senior Debt (as defined below) all in
the manner and with the force and effect hereinafter
set forth.
(b) As used herein, the term "First Senior
Debt" shall mean all indebtedness for principal or
interest and all other obligations including,
without limitation, interest or other payments on
such First Senior Debt paid or accruing after
commencement of any insolvency proceeding which
Borrower shall incur under that certain Loan and
Security Agreement dated as of May 15, 1998, among
Foothill Capital Corp., as lender
("Foothill"), and Maker as amended by that certain
First Amendment to Loan and Security Agreement and
Waiver dated as of August 1, 1998, as further amended
by that certain Second Amendment to Loan and Security
Agreement dated as of December 17, 1998, and under
the instruments and agreements executed or delivered
by Maker pursuant thereto in each case as the same
may be amended, supplemented or modified from time to
time;
(c) As used herein, the term "Second
Senior Debt" (collectively, the First Senior Debt and
the Second Senior Debt shall be referred to herein as
the "Senior Debt") shall mean all indebtedness for
principal or interest and all other obligations
including, without limitation, interest or other
payments on such Second Senior Debt paid or accruing
after commencement of any insolvency proceeding,
which Borrower shall incur under that certain Term
Loan and Promissory Note dated as of June 22, 1998,
between McKesson Corp., as lender ("McKesson"), and
Maker and under the instruments executed or delivered
by Maker pursuant thereto in each case as the same
may be amended, supplemented or modified from time to
time; and
(d) All indebtedness for principal or
interest which Maker may from time to time incur in
connection with the refinancing or replacement of the
indebtedness referred to in the preceding clauses
(b) and (c) (which refinancing indebtedness shall
constitute "Senior Debt" for all purposes hereof).
(e) As used in this Note, the term
"subordinate and junior in right" shall mean that no
part of this Note shall have any claim to the assets
of Maker on a parity with or prior to the claim of
the Senior Debt. Without limiting the foregoing, in
the event of any distribution, division or
application, partial or complete, voluntary or
involuntary, by operation of law or otherwise, of
all or any part of the assets of Maker or the
proceeds thereof to the creditors of Maker or
readjustment of the obligations and indebtedness of
Maker, whether by reason of liquidation, bankruptcy,
arrangement, receivership, assignment for the
benefit of creditors or any other action or
proceeding involving the readjustment of all or any
part or the indebtedness evidenced by this Note, or
the application of the assets of Maker to the
payment or liquidation thereof, or upon the
dissolution, liquidation, cessation or other winding
up of Maker's business, or upon the sale of all or
substantially all of Maker's assets, then, and in
any such event (i) Foothill, first in priority,
McKesson, second in priority, and all other holders
of Senior Debt, third in priority, shall be entitled
to receive payment in full of any and all of the
Senior Debt then owing prior to the payment of all or
any part of the indebtedness evidenced by this Note,
and (ii) any payment or distribution of any kind
or character, whether in cash, securities or other
property, which shall be payable or deliverable upon
or with respect to any or all of the indebtedness
evidenced by this Note shall be paid or delivered
directly to Foothill for application on any of the
First Senior Debt, due or not due, until such First
Senior Debt shall have first been full paid and
satisfied, then to McKesson for application on any of
the Second Senior Debt, due or not due, until such
Second Senior Debt shall have first been full paid
and satisfied and then to all other holders of
Senior Debt for application on any of such Senior
Debt, due or not due, until such Senior Debt shall
have been full paid and atisfied. In
order to enable Foothill to enforce its right
hereunder in any of the aforesaid actions or
proceedings, Foothill is hereby irrevocably
authorized and empowered, in its discretion, to make
and present for and on behalf of Payee such proofs
of claim against Maker on account of the
indebtedness evidenced by this Note as Foothill may
deem expedient or proper and to vote such proofs of
claim in any such proceeding and to receive and
collect any and all dividends or other payments or
disbursements made thereon in whatever form the same
may be paid or issued and to apply the same on
account of any of the Senior Debt. Payee irrevocably
authorizes and empowers Foothill to demand, sue for,
collect and receive each of the aforesaid payments
and distributions and give acquittance therefor and
to file claims and take such other actions, in the
name of Foothill or in the name of Payee or
otherwise, as Foothill may deem necessary or
advisable for the enforcement of this Agreement; and
Payee will execute and deliver to Foothill such
powers of attorney, assignments and other instruments
or documents, including notes (together with such
assignments or endorsements as Foothill shall deem
necessary) as may be requested by Foothill in order
to enable it to enforce any and all claims upon or
with respect to any or all of the indebtedness
evidenced by this Note and to collect and receive
any and all payments and distributions which may be
payable or deliverable at any time upon or with
respect to the indebtedness evidenced by this Note,
all for the benefit of Foothill, first, McKesson,
second, and all other holders of Senior Debt, third.
3. Unless and until, first, the First Senior
Debt, and second, the Second Senior Debt shall have
been paid in full in cash, the holder of this Note
will not take, demand or receive, and Maker will not
make, give or permit, directly or indirectly, by
setoff, redemption, purchase or in any other manner,
any payment or security for the whole or any part of
the principal of or interest on this Note; provided,
however, that Maker may pay any and all principal
hereof and interest accruing hereunder when due
under this Note as in effect on December 17, 1998
(but not any prepayments thereof) so long as no
Specified Event of Default (as defined below) shall
have occurred and be continuing. As used herein,
"Specified Event of Default" means any Event of
Default (as defined in any loan agreement relating to
the Senior Debt) other than an Event of Default
arising solely as a result of Maker's failure to pay
principal or interest under this Note or the
Agreement when due.
4. Should any payment or distribution or
security or the proceeds of any thereof be collected
or received by Payee which is required to be paid,
first, to Foothill, second, to McKesson and third, to
all other holders of Senior Debt under the terms
hereof, Payee will forthwith deliver the same to
Foothill, McKesson or other holders of Senior Debt,
as the case may be, in precisely the form received
(except for the endorsement without recourse or the
assignment without recourse of Payee where necessary)
and, until so delivered, the same shall be held in
trust by Payee as the property of Foothill, McKesson
or other holders of Senior Debt, as the case may be.
5. In the event of any refinancing of all or
any part of the Senior Debt as contemplated in
Section 2(d) above, Payee agrees to enter into any
subordination or intercreditor agreement requested by
the lender providing such refinancing loan, provided
that such subordination is effected pursuant to an
agreement containing such terms as are customarily
employed by such lender in similar transactions.
6. Each holder of Senior Debt, at any time
and from time to time, without the consent of or
notice to Payee, without incurring responsibility to
Payee and without impairing or releasing the
subordination provided herein or the obligations
hereunder of Payee to such holder, may (i) change
the manner, place or terms of payment or extent the
time of payment of, or renew or alter, all or any
of the Senior Debt held thereby, or otherwise amend
or supplement in any manner, or grant any waiver or
release with respect to, Senior Debt held thereby or
any instrument evidencing the same, (ii) sell,
exchange, release, not perfect or otherwise deal with
any property at any time pledged, assigned or
mortgaged to secure or otherwise securing, Senior
Debt held thereby, or amend or grant any waiver or
release with respect to, or consent to any departure
from any guarantee for all or any of the Senior Debt
held thereby, (iii) exercise or refrain from
exercising any rights against Maker and any other
person and (iv) apply any sums from time to time
received to the Senior Debt held thereby.
7. The subordination provisions contained
herein are for the benefit of the holders of the
Senior Debt and may not be rescinded, cancelled,
amended or modified in any way without the prior
written consent thereto of the holders of the Senior
Debt.
8. The provisions hereof shall continue to be
effective or be reinstated, as the case may be, if
at any time any payment of any of the Senior Debt is
rescinded or must otherwise be returned by any holder
of Senior Debt upon the insolvency, bankruptcy or
reorganization of Maker or otherwise, all as though
such payment had not been made.
9. Nothing herein shall impair, as between
Maker and the holder of this Note, the obligation of
Maker, which is unconditional and absolute, to pay
the principal and interest on this Note in accordance
with its terms, nor shall anything herein prevent
the holder of this Note from exercising all remedies
otherwise permitted by applicable law or hereunder
upon default hereunder, subject to Section 3 hereof
and the rights of the holders of the Senior Debt as
herein provided.
10. All or any portion of the unpaid principal
sum and accrued interest on this Note may be prepaid
from time to time without premium or penalty, the
amount of the prepayment to be applied first to
accrued interest and the remainder to unpaid
principal; provided, however, that no such prepayment
shall occur without the prior written consent of the
holders of the Senior Debt.
11. This Note is expressly made subject to the
provisions of Section 9.02(d) of the Merger
Agreement, providing for certain rights of setoff.
12. Notwithstanding anything in this Note to
the contrary, the entire unpaid principal amount of
this Note, together with all accrued but unpaid
interest thereon and other unpaid charges hereunder,
will become immediately all due and payable without
further notice at the option of Payee upon any of the
following: (i) if default shall be made in the due
and punctual performance or observance of any
material nonpayment term, condition or covenant
contained in the Agreement or this Note and such
default continues unremedied for a period of ten
days after written notice to Maker by the Holder;
(ii) if default shall be made in the due and punctual
payment, after applicable cure periods, of in excess
of $50,000.00 under any note, loan agreement,
security agreement or other agreement entered into by
Maker; (iii) if Maker ceases to carry on business on
a regular basis or enters into an agreement to sell
substantially all of its assets or an agreement
whereby it merges into, consolidates with or is
acquired by any other business entity (other than in
connection with the Merger); or (iv) if Maker makes
any assignment for the benefit of its creditors,
makes an election to wind up or dissolve or becomes
unable to pay its debts as they mature, becomes
insolvent or subject to any proceeding under any
bankruptcy, insolvency or debtor's relief law,
including without imitation any bankruptcy
proceeding.
13. If any amount payable to Payee under this
Note is not received by Payee on or before the
Maturity Date, then such amount (the "Delinquent
Amount") will bear interest from and after the
Maturity Date until paid at an annual rate of
interest equal to 18% (the "Default Rate").
14. If any payment on this Note shall become
due on a Saturday, Sunday or a bank or legal holiday
under the laws of the State of New York, such payment
shall be made on the next succeeding business day and
such extension of time shall in such case be
included in computing interest, if any, in
connection with such payment.
15. This Note and the right to payment
provided hereunder may not be sold, transferred or
otherwise disposed of at any time by the holder of
the Note.
16. No delay or omission on the part of the
holder hereof in the exercise of any right or remedy
hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any right or
remedy preclude any other or further exercise thereof
or the exercise of any other right or remedy.
17. Upon receipt of evidence reasonably
satisfactory to Maker (an affidavit of the holder of
this Note will be satisfactory) of the ownership and
the loss, theft, destruction or mutilation of this
Note, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably
satisfactory to Maker, or, in the case of any such
mutilation, upon surrender of this Note, Maker will
execute and deliver in lieu of this Note a new Note
of like tenor representing the same rights
represented by and dated the same date of such lost,
stolen, destroyed or mutilated Note.
18. In the event that legal proceedings are
instituted to collect any amount due under this Note,
Maker agrees to pay all costs of collection thereof,
including reasonable attorney's fees, whether or not
suit or action is commenced to enforce payment of
this Note. Presentment for payment, demand, notice
or dishonor and protest and notice of protest and
nonpayment are hereby waived by Maker.
19. This Note shall be governed by and
construed in accordance with the laws of the State
of New York without reference to the conflict of laws
principles applied in such State
20. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter
arising out of or in connection with this Note or the
transactions contemplated hereby shall be brought in
any federal court located in the Southern District
of the State of New York or any New York state court
sitting in New York City, and each of the parties
hereto hereby consents to the exclusive jurisdiction
of such courts (and of the appropriate appellate
courts therefrom) in any such suit, action or
proceeding and waives any objection to venue laid
therein. Process in any such suit, action or
proceeding may be served on any arty anywhere in the
world, whether within or without the State of New
York. Without limiting the generality of the
foregoing, each party hereto agrees that service of
process upon such party at the address referred to in
Section 5(a)of the Agreement, together with written
notice of such service to such party, shall be deemed
effective service of process upon such party.
21. EACH PARTY HERETO HEREBY WAIVES ALL RIGHTS
TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
INSTITUTED BY EITHER OF THEM AGAINST THE OTHER WHICH
PERTAINS DIRECTLY OR INDIRECTLY TO THIS NOTE, ANY
ALLEGED TORTIOUS CONDUCT BY ANY PARTY, OR IN ANY
WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR
RELATES TO THE RELATIONSHIP AMONG THE PARTIES HERETO.
22. All rights, remedies, and undertakings,
obligations, options, covenants, conditions and
agreements contained in this Note are cumulative and
no one of them will be exclusive of any other. Any
notice to any party concerning this Note will be
delivered as set forth in the Agreement. The Note
may not be changed, modified, amended or terminated
orally.
23. In the event that this Note shall require
the payment of interest in excess of the maximum
amount permissible under applicable law, Maker's
obligations hereunder shall automatically and
retroactively be deemed reduced to the highest
maximum amount permissible under applicable law. In
the event Holder receives as interest an amount that
would exceed such maximum applicable rate, the amount
of any excess interest shall not be applied to the
payment of interest hereunder, but shall
automatically and retroactively be applied to the
reduction of the unpaid principal balance due
hereunder. In the event and to the extent such
excess amount of interest exceeds the outstanding
unpaid principal balance hereunder, any such excess
amount shall be immediately returned to Maker by the
Holder.
24. On the Maturity Date, at the option of
Payee, the principal amount of this Note and all
accrued interest on this Note shall be convertible
into shares of Maker's common stock, par value $.01
per share, subject to and in accordance with the
provisions of the Agreement.
[This space intentionally left blank]
IN WITNESS WHEREOF, Maker has caused this Note
to be executed by its duly authorized officer as of
the date first written above.
"MAKER"
PHARMHOUSE CORP.,
a New York corporation
By:
Exhibit A
[FORM OF CONVERSION NOTICE]
TO: PHARMHOUSE CORP.
The undersigned owner of the attached
Subordinated Convertible Promissory Note (this
"Note") hereby: (i) irrevocably exercises the option
to convert this Note, or the portion hereof below
designated, for shares (the "Conversion Shares") of
the Common Stock of Pharmhouse Corp. (the
"Company") in accordance with the terms hereof
and (ii) directs that such Conversion Shares
deliverable upon the conversion, together with any
check in payment for fractional shares and
interest and the Note representing any unconverted
principal amount hereof, be issued and delivered
to the registered holder hereof unless a different
name has been indicated below. If Conversion Shares
are to be delivered or registered in the name of a
person other than the undersigned, the
undersigned will pay all transfer taxes with
respect thereto, and the Company will not be required
to issue or deliver a certificate for such
Conversion Shares until the undersigned has paid
to the Company the amount of such transfer tax or
has established to the satisfaction of the Company
that such transfer tax has been paid. Capitalized
terms used herein without definition are as
defined in the Note and in the Agreement
referred to therein.
Dated: ------------------------
-------------------- Signature
Fill in for registration of Conversion Shares if to
be delivered, and of the Note if to be reissued,
otherwise than to and in the name of the registered
holder.
-----------------------
Social Security or Other
Taxpayer Identifying
Number
- ---------------------------
(Name)
- ---------------------------
(Street Address)
- ---------------------------
(City, State and Zip Code)
(please print name and address)
Principal Amount to
be Converted (if less than all):
$
------------------------------
