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):
[x ] No fee required
[ ] 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) 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):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
6)
7) [X ] Fee paid previously with preliminary materials.
8)
[ ] 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 February 5, 1999
<BOLD>
PHARMHOUSE CORP.
Route 18, Midstate Shopping Center
East Brunswick, New Jersey 08816
</BOLD>
February__ , 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 March 3rd, 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.
<BOLD>
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.
</BOLD>
Sincerely,
/s/ KENNETH A. DAVIS
Kenneth A. Davis
President, Chief Executive Officer
and Chief Operating Officer
<BOLD>
PHARMHOUSE CORP.
Route 18, Midstate Shopping Center
East Brunswick, New Jersey 08816
</BOLD>
-----------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 3RD, 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 March 3rd, 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
February____, 1999
<BOLD>
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.
</BOLD>
PHARMHOUSE CORP.
Route 18, Midstate Shopping Center
East Brunswick, New Jersey 08816
---------------------------------------
PROXY STATEMENT
---------------------------------------
- ----------------------------------------------------------------
SPECIAL MEETING OF SHAREHOLDERS
MARCH 3RD, 1999
- ----------------------------------------------------------------
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 March 3rd, 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 February
____, 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
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.
<Page 2>
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 a non-recurring gain resulting
from the cancellation of indebtedness in connection with 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 those
purposes. The most recent and current investment bank and financial
advisor retained by the Company was Jefferies & Company, Inc.
("Jefferies"). The Company has had a relationship with Robert M.
Salisbury since 1994. At that time Mr. Salisbury was affiliated with
another investment banking firm other than Jefferies, which
represented the Company in its acquisition of stores from Woolworth
Corporation in late April 1995. Mr. Salisbury became affiliated
with Jefferies in April 1997. Management was aware that Jefferies
has expertise in the discount drug industry, including representing
other parties in the industry, including Phar-Mor. The terms of the
Company's retention of Jefferies were negotiated by management in January,
1998 and members of the Board were advised of and approved such retention.
These terms included that Jefferies would act as the Company's financial
advisor in the event of any acquisition or sale of the Company and that,
if requested by the Company, Jefferies would be available to render a
fairness opinion.
During the past three years, the Company, directly and through
its financial advisors, furnished financial information to
approximately 15 potential capital sources. However, none of these
efforts to raise capital resulted in any interest by such parties to
participate in a transaction with the Company and all its efforts to
raise additional equity capital were unsuccessful.
In early 1998, the Company became involved in preliminary
discussions with a financial group to participate in a roll up
transaction. The transaction would have involved the proposed
combination of several companies in the discount drug store
industry, including Phar-Mor and the Company. Neither the Company
nor Phar-Mor was responsible for the origination of the proposed
roll-up or was to serve as the sponsor of such roll up transaction
or to arrange for its financing. In early 1998, Phar-Mor became
aware that Jefferies served as the Company's investment banker
because Jefferies had informed Phar-Mor that Jefferies was
representing the Company during the parties' discussions pertaining
to the then proposed roll up transaction. Management of the Company
continued to participate in negotiations pertaining to the roll up
transaction from time to time.
On September 3, 1998, Kenneth A. Davis, President and Chief
Executive Officer of the Company, initiated direct telephone
contact for the first time with David M. Schwartz, President
and Chief Operating Officer of Phar-Mor. The purpose of
this conversation was that Mr. Davis desired to speak to Mr. Schwartz
regarding the status of the roll up transaction and the role to be
played by Phar-Mor in the proposed transaction. The parties also
discussed the general status of the discount drug industry, and it was
agreed that on Mr. Schwartz's next scheduled visit to New York they
would meet for the first time. On September 22, 1998, Messrs. Davis
and Schwartz met in New York to discuss further the status of the
potential roll up transaction.
On October 13, 1998, Mr. Schwartz called Mr. Davis inviting
him to visit the offices and new store prototypes of Phar-Mor.
Mr. Davis accepted the invitation, and on October 13, 1998 went to
Youngstown, Ohio, where he met with Mr. Schwartz and two members
of the senior management team. At this meeting, the status of the
potential roll up transation was discussed as well as the potential
merits of a combination involving the Company and Phar-Mor should
the roll up transaction not be consummated.
On October 14, 1998, Jefferies received a request from Phar-Mor
for certain information about the Company in order to explore various
alternatives with the Company in the event the roll up transaction would
not occur. As noted above, Phar-Mor was aware that Jefferies was acting
as the Company's financial advisor in connection with the proposed roll
up transaction. On October 15, 1998, upon receiving authorization from the
Company, Jefferies sent Phar-Mor the requested information. No further
discussions or negotiations transpired between the Company and Phar-Mor
between that date and October 29, 1998. Management of the Company
subsequently concluded that it was unlikely that the roll up transaction
would be implemented because the sponsor of the transaction appeared to be
unable to raise sufficient equity capital to consummate the transaction.
On October 29th, the Company received a written offer from
Phar-Mor 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. Management of the
Company, with the assistance of Jefferies, 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. The Board determined 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 Phar-Mor 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.
In light of the significant representation on the Board of members of
management of the Company, the Board determined to establish the
Special Committee for the purpose of having the non-management directors
review the terms of the proposed merger with Phar-Mor to ascertain
whether the proposed transaction was fair to the shareholders of the
Company. The members of the Special Committee were Michael Feder,
Peter Gerard, Melvin Katz and Raymond L. Steele.
Representatives of Jefferies were invited to join the November
16th Board meeting since, as the Company's investment banker, Jefferies
had participated in the negotiations with Phar-Mor on behalf of the Company.
In addition to advising the Board and the Special Committee regarding the
Merger, Jefferies was also prepared to make a presentation to the Board
concerning other potential strategic alternatives available to the Company.
During the November 16th meeting, the Board was informed by management
of the relationships between Jefferies and Phar-Mor and the principal
stockholder of Phar-Mor. Another representative of Jefferies then
described certain professionals at Jefferies had a long-standing
investment banking relationship with Phar-Mor's principal stockholder,
including representing such stockholder in its acquisition of a
controlling interest in Phar-Mor. 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.
<Page 4>
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
to Jefferies by the Company upon the consummation of a merger
between the Company and Phar-Mor. See "THE MERGER-Interests of
Certain Persons in the Merger-Jefferies' Other Relationships".
Based on the information furnished by Jefferies at the November 16th
Board meeting, the fact that Jefferies did not represent Phar-Mor in
connection with negotiating the terms of the Merger, the individuals
at Jefferies who represented Phar-Mor would not be those primarily
involved in preparing and rendering the fairness opinion to the Company,
and the fact that the Company had retained Jefferies as its financial
advisor for purposes other than in contemplation of a transaction
with Phar-Mor, the Special Committee concluded that Jefferies' prior
relationship with Phar-Mor would not preclude retention of Jefferies.
However, in light of such relationship, the Special Committee
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 did not represent
Phar-Mor or render any advice to Phar-Mor in any respect in
Connection with the Merger.
At the November 20th Board meeting, Jefferies then presented
management's and its analysis of various strategic alternatives,
including attempting to raise additional capital promptly 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 such alternatives were not feasible because they either 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' and management's 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, including reduction of
duplicative overhead expenses and the additional sales volume
which the Company stores would add to Phar-Mor's operations. 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 as to 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.
<Page 5>
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 the Shareholders vote to approve and adopt the
Merger Agreement. The Board determined that the Merger was 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 and took into account the following material factors:
(a) The lack of feasible financial or business 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 thirty 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. <BOLD>Shareholders are urged to read such
opinion is its entirely.</BOLD>
(e) The likelihood that the Merger will be consummated after the
execution of the Merger Agreement, including the fact that
Phar-Mor's obligations 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 Phar-Mor".
(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
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.
<Page 6>
In light of the foregoing factors and considerations, neither the
Special Committee nor the Board believed that there were any material
negative factors to the Merger. 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 different
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, Phar-Mor
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, its investment banker and financial advisor, 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
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. See "THE
MERGER-Background of the Merger".
<Page 7>
The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to
particular circumstances and, therefore, such an opinion is not
readily susceptible to 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 analysis 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 MERGER-Background of
the Merger".
<BOLD>
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.
</BOLD>
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
receive approximately $520,000 if the Merger is consummated.
Jefferies has 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 employment 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 due to expire on
January 30, 1999. The prior agreements and the new agreements with
Messrs. Brecker and Kenneth Davis both provided for substantially the
same change of control provisions and payments upon termination of the
executive's employment (i) by the Company in breach of the agreement
or (ii) by the executive for "Good Reason", upon the occurrence of
specified events subsequent to a change of control of the Company.
In such circumstances, the executives would be entitled under both
the prior and the new agreements to continue to be paid his base
salary then in effect for a period of three years from the date of
such termination of employment or, in lieu thereof, a lump sum amount
equal to the discounted present value of such three years of base salary.
Both the prior and new employment agreements with Mr. Richard Davis
provided for one year's additional compensation based on substantially
the same termination provisions as the agreement with Messrs. Brecker and
Kenneth Davis. None of the new agreements executed by Messrs. Brecker,
Kenneth Davis or Richard Davis increased the compensation such officers
received under their prior agreements.
The Company also executed written employment agreements with
Marcie B. Davis, Executive Vice President and Secretary; Joseph Keller,
Senior Vice President-Administration and Operations; Daniel Thigpen,
Vice President-Store Operations; and Eileen Abbate, Vice President-
Advertising. All of these employment agreements were authorized in
principle by the Board in January, 1998. The invididuals covered by
these employment agreements received nominally higher compensation
when the agreements were executed as a result of the annual raises
to which they were then entitled. 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 as of February 1, 1999, is as follows: Kenneth Davis:
$330,750, 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: $147,000, subject to annual cost of living increases;
Richard Davis: $138,915, 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. The change of
control provisions and the compensation payable contained in the new
employment agreements granted to Mr. Brecker, Mr. Kenneth Davis and
Mr. Richard Davis did not differ from the change of control provisions
and compensation payable which were contained in the expired agreements
with the exception that Mr. Brecker's compensation was reduced from
$175,000 plus $25,000 bonus to $100,000 annually.
<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 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
owned by Mrs. Brecker, the wife of Manfred Brecker, and Shares held
by trusts for the 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 of 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 providesthat 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
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
<Page 12>
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 seven year 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.
<BOLD>
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
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.
</BOLD>
<Page 13>
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.
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 Phar-Mor.
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
subsequent to 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.
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
expired on January 25, 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 Phar-Mor
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
reduction in the Per Share Amount exceed $.20. See "THE MERGER-The
<Page 16>
Merger Agreement-Termination and Amendment to the Merger Agreement".
The Company is also required to prepare and deliver to Phar-Mor,
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, its 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
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.
<Page 17>
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 Phar-Mor
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 and 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 (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.
<BOLD>
All the foregoing conditions contained in the Merger Agreement
can be waived by either party, other than such matters relating to
the requisite approval of the Merger by the Shareholders of the
Company and matters relating to requisite federal and state
governmental filings.
</BOLD>
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 10 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 10 business days after the Company
delivers notice thereof (provided that at the time Phar-Mor 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 Phar-Mor 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
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
<Page 20>
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 Phar-Mor 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 million 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, tax-exempt 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.<BOLD>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.</BOLD>
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
Securities Act.
INFORMATION CONCERNING THE COMPANY
During the Company's fourth quarter of its fiscal year ended
January 30, 1999, the Company moved its principal offices from its
New York city location to its current offices located at 300
Route 18, Midstate Shopping Center, East Brunswick, New Jersey 08816;
the telephone number is (732) 698-1166. The Company, a New York
corporation, 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/A for the fiscal year ended
January 31, 1998 and the Company's Quarterly Report on Form 10-Q/A
for the quarterly period ended October 31, 1998, August 1, 1998,
May 2, 1998 and the Company's Current Report on Form 8-K, dated
December 22, 1998, all of which are incorporated herein by reference.
<BOLD>
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
has 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.
</BOLD>
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 officers of Phar-Mor and Merger Sub are
located at 20 Federal Plaza West, Youngstown, Ohio 44501-0400; 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.
<BOLD>
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.
</BOLD>
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
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 $_______.
<Page 25>
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 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.
(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
Corporation, with respect to which Mrs. Brecker disclaims
beneficial ownership.
(2)Includes 153,663 shares subject to options granted to Mr.
Davis pursuant to Corporation's 1991 Non-Qualified Stock
Option Plan (the "Non-Qualified Plan") and 64,691 shares
subject to options granted pursuant to the Corporation'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.
<Page 26>
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 Corporation'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 766,117 (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 Corporation's 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.
<Page 27>
(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 Corporation's 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 215,514 shares subject to options
granted under the Corporation's 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 (anticipated
to be held in July 1999 if the Merger is not consummated) must be in
writing and must be received by the Company at its executive offices
by no later than May 15, 1999.
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-of-pocket 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.
<BOLD>
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.
</BOLD>
<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
MARCH 3, 1999 Approvaland 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 of the
represent and vote all the Company's common stock, par value $.01
shares of common stock of per share, would be converted into the
Pharmhouse Corp. (the "Company) right to receive $3.25 in cash, subject
held of record by the to certain adjustments described in the
undersigned on January 13, 1999, Proxy Statement.
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 March 3, 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 THIS PROXY WILL BE VOTED FOR THE
Statement of said meeting, PROPOSAL UNLESS INSTRUCTIONS TO THE
receipt of which is CONTRARY ARE INDICATED. Please note
acknowledged, and (2) in their that abstaining from the vote on the
discretion on such other matters proposal will have the same effect as a
as may properly come before the vote AGAINST the proposal.
Meeting or any adjournment or Please sign exactly as your name
postponement thereof. 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 box below corporation, please sign in full
- ------------------------ corporate name by an authorized officer.
If a partnership, please sign in
Shareholder 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
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
Withholding 21
Subordinated Convertible Loan Provided By
Phar-Mor 21
INFORMATION CONCERNING THE COMPANY 22
INFORMATION CONCERNING MERGER SUB AND PHAR-MOR 22
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 25
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/A FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
FORM 10-Q/A FOR THE FISCAL QUARTER ENDED MAY 2, 1998
FORM 10-Q/A FOR THE FISCAL QUARTER ENDED AUGUST 1, 1998
FORM 10-Q/A FOR THE FISCAL QUARTER ENDED OCTOBER 31, 1998
CURRENT REPORT ON FORM 8-K DATED DECEMBER 22, 1998
