Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1 Registration Statement (General Form) 112 656K
9: EX-10.10 Amendment No. 2 to Loan and Security Agreement 10 32K
10: EX-10.11 Pledge Agreement, Made as of March 31, 1995 17 46K
11: EX-10.12 Pledge Agreement, Made as of March 31, 1995 16 45K
12: EX-10.13 Subordination Agreement, Dated March 31, 1995 9 34K
13: EX-10.14 Unconditional Guaranty, Made March 31, 1995 12 35K
14: EX-10.15 Subordinated Note, Dated March 31, 1995 16 68K
15: EX-10.16 Subordinated Note, Dated March 31, 1995 11 45K
16: EX-10.17 Form of Distribution Agreement 19 54K
17: EX-10.18 Form of Amendment Agreement 15 24K
18: EX-10.19 Addendum to Form of Distribution Agreement 4 18K
19: EX-10.22 Employment Agreement:Adzia 9 40K
20: EX-10.23 Employment Agreement:Garcia De Quevedo 16 40K
21: EX-10.24 Employment Agreement: Andruskiewicz 9 39K
22: EX-10.25 Employment Agreement:Foley 13 38K
2: EX-10.3 Stock Subscription Warrant, Dated March 31, 1995 26 96K
3: EX-10.4 Agreement Dated November 10, 1994 88 268K
4: EX-10.5 Purchase Agreement Amendment Dated Feb. 24, 1995 25 72K
5: EX-10.6 Second Purchase Agreement Amendment 2 15K
6: EX-10.7 Third Purchase Agreement Amendment 2 14K
7: EX-10.8 Loan and Security Agreement Dated March 31, 1995 185 566K
8: EX-10.9 Amendment No. 1 to Loan and Security Agreement 8 26K
23: EX-21.1 Subsidiaries of the Company 1 8K
24: EX-23.1 Consent of Kpmg Peat Marwick LLP 1 9K
25: EX-23.2 Consent of Price Waterhouse LLP 1 8K
26: EX-27.1 Financial Data Schedule 1 11K
| Page | (sequential) | | | | (alphabetic) | Top |
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| | |
- Alternative Formats (Word, et al.)
- Additional Information
- Amended Management Option Plan (1995)
- Business
- Capacity Constraints; Ability to Implement Network Optimization Program
- Capitalization
- Cart Delivery System
- Certain Transactions
- Common Stock
- Competition
- Controlling Stockholder
- Customers
- David R. Parker
- Description of Capital Stock
- Dilution
- Director Shareholders Agreement
- Dividend Policy
- Executive Compensation and Other Matters
- Exhibits and Financial Statement Schedules
- Experts
- Financial Statements
- Foodservice Distribution Industry
- Forward-Looking Statements
- Future Non-recurring Charges to Earnings
- General
- Indemnification of Directors and Officers
- Independent Auditors' Report
- Legal Matters
- Liquidity and Capital Resources
- Management
- Management's Discussion and Analysis of Financial Condition and Results of Operations
- Management Shareholders Agreement
- Margin Improvement/Cost Reduction Programs
- Money Purchase Plan
- No Assurance of Achieving Anticipated Cost Savings
- Offering, The
- Onex Management Fees
- Onex Subordinated Notes
- Operations and Distribution
- Option Plans
- Order Fulfillment
- Other Expenses of Issuance and Distribution
- Principal Stockholders
- Product Replenishment
- Pro Forma
- ProSource, Inc. Consolidated Statements of Cash Flows for the years ended December 25, 1993, December 31, 1994, December 30, 1995 and the periods ended July 1, 1995 and June 29, 1996
- ProSource, Inc. Consolidated Statements of Operations for the years ended December 25, 1993, December 31, 1994, December 30, 1995 and the periods ended July 1, 1995 and June 29, 1996
- ProSource, Inc. Consolidated Statements of Stockholders' Equity for the years ended December 25, 1993, December 31, 1994, December 30, 1995 and the period ended June 29, 1996
- ProSource, Inc. Notes to Consolidated Financial Statements
- Pro Source, Inc. Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations
- Pro Source, Inc. Unaudited Pro Forma Condensed Consolidated Statements of Operations for the six months ended June 29, 1996
- Pro Source, Inc. Unaudited Pro Forma Condensed Consolidated Statements of Operations for the year ended December 30, 1995
- Prospectus Summary
- Purchasing and Supply
- Quarterly Results and Seasonality
- Recent Sales of Unregistered Securities
- Report of Independent Accountants
- Risk Factors
- Selected Consolidated Financial Data
- Shareholders Agreements
- Shares Available for Future Sale
- Strategies
- Technological Leadership
- The Offering
- Undertakings
- Underwriters
- Use of Proceeds
- 10.15 Subordinated Note, dated March 31, 1995, executed by ProSource, Inc. and payable to the order of The Martin-Brower Company in the original principal amount of $10,000,000
- 1.1 Form of Underwriting Agreement(1)
- 1996 Stock Option Plan
- 401(k) Plan
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| 1 | 1st Page - Filing Submission
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| " | David R. Parker
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| 5 | Prospectus Summary
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| 6 | Strategies
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| " | Margin Improvement/Cost Reduction Programs
|
| 7 | Technological Leadership
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| 8 | The Offering
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| 10 | Future Non-recurring Charges to Earnings
|
| 12 | Risk Factors
|
| 13 | No Assurance of Achieving Anticipated Cost Savings
|
| 14 | Capacity Constraints; Ability to Implement Network Optimization Program
|
| " | Competition
|
| " | Shares Available for Future Sale
|
| 15 | Forward-Looking Statements
|
| 16 | Use of Proceeds
|
| " | Dividend Policy
|
| 17 | Dilution
|
| 18 | Capitalization
|
| 19 | Selected Consolidated Financial Data
|
| 21 | Management's Discussion and Analysis of Financial Condition and Results of Operations
|
| " | General
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| 26 | Liquidity and Capital Resources
|
| 27 | Quarterly Results and Seasonality
|
| 29 | Business
|
| " | Foodservice Distribution Industry
|
| 32 | Customers
|
| 34 | Purchasing and Supply
|
| 35 | Operations and Distribution
|
| " | Product Replenishment
|
| 36 | Order Fulfillment
|
| " | Cart Delivery System
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| 39 | Controlling Stockholder
|
| 40 | Management
|
| 43 | Executive Compensation and Other Matters
|
| 45 | Option Plans
|
| " | Amended Management Option Plan (1995)
|
| " | 1996 Stock Option Plan
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| 46 | 401(k) Plan
|
| " | Money Purchase Plan
|
| 49 | Certain Transactions
|
| " | Shareholders Agreements
|
| " | Management Shareholders Agreement
|
| " | Director Shareholders Agreement
|
| 50 | Onex Management Fees
|
| " | Onex Subordinated Notes
|
| 51 | Principal Stockholders
|
| 52 | Description of Capital Stock
|
| " | Common Stock
|
| 55 | Underwriters
|
| 56 | Legal Matters
|
| " | Experts
|
| " | Additional Information
|
| 58 | Financial Statements
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| 59 | Independent Auditors' Report
|
| 61 | ProSource, Inc. Consolidated Statements of Operations for the years ended December 25, 1993, December 31, 1994, December 30, 1995 and the periods ended July 1, 1995 and June 29, 1996
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| 62 | ProSource, Inc. Consolidated Statements of Stockholders' Equity for the years ended December 25, 1993, December 31, 1994, December 30, 1995 and the period ended June 29, 1996
|
| 63 | ProSource, Inc. Consolidated Statements of Cash Flows for the years ended December 25, 1993, December 31, 1994, December 30, 1995 and the periods ended July 1, 1995 and June 29, 1996
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| 64 | ProSource, Inc. Notes to Consolidated Financial Statements
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| 83 | Report of Independent Accountants
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| 95 | Pro Source, Inc. Unaudited Pro Forma Condensed Consolidated Statements of Operations for the year ended December 30, 1995
|
| 96 | Pro Source, Inc. Unaudited Pro Forma Condensed Consolidated Statements of Operations for the six months ended June 29, 1996
|
| " | Pro Forma
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| 97 | Pro Source, Inc. Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations
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| 99 | Item 13. Other Expenses of Issuance and Distribution
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| " | Item 14. Indemnification of Directors and Officers
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| 100 | Item 15. Recent Sales of Unregistered Securities
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| 101 | Item 16. Exhibits and Financial Statement Schedules
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| " | 1.1 Form of Underwriting Agreement(1)
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| 102 | 10.15 Subordinated Note, dated March 31, 1995, executed by ProSource, Inc. and payable to the order of The Martin-Brower Company in the original principal amount of $10,000,000
|
| " | Item 17. Undertakings
|
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 6, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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PROSOURCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
[Download Table]
DELAWARE 5141 65-0335019
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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550 BILTMORE WAY, 10TH FLOOR
CORAL GABLES, FLORIDA 33134
(305) 529-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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DAVID R. PARKER
CHAIRMAN OF THE BOARD
PROSOURCE, INC.
550 BILTMORE WAY, 10TH FLOOR
CORAL GABLES, FLORIDA 33134
(305) 529-2500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
[Download Table]
JOEL I. GREENBERG, ESQ. WINTHROP B. CONRAD, JR., ESQ.
KAYE, SCHOLER, FIERMAN, HAYS & HANDLER, LLP DAVIS POLK & WARDWELL
425 PARK AVENUE 450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10017
(212) 836-8000 (212) 450-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
AGGREGATE OFFERING AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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Class A Common Stock, par value $.01 per share.......................... $57,500,000 $19,827.59
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(1) Estimated pursuant to Rule 457(o) under the Securities Act solely for the
purposes of calculating the registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
PROSPECTUS (Subject to Completion)
Issued September 6, 1996
Shares
ProSource, Inc.
CLASS A COMMON STOCK
------------------------
ALL OF THE SHARES OF CLASS A COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE
CLASS A COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE
INITIAL OFFERING PRICE PER SHARE WILL BE BETWEEN $ AND
$ . SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS
TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING
PRICE.
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APPLICATION HAS BEEN MADE TO HAVE THE CLASS A COMMON STOCK APPROVED FOR
QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "PSDS."
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THE COMPANY HAS TWO CLASSES OF COMMON STOCK, THE CLASS A COMMON STOCK BEING
OFFERED HEREBY AND CLASS B COMMON STOCK. THE CLASS B COMMON STOCK IS
IDENTICAL TO THE CLASS A COMMON STOCK, EXCEPT WITH RESPECT TO VOTING
POWER AND CONVERSION RIGHTS. EACH SHARE OF CLASS A COMMON STOCK IS
ENTITLED TO ONE VOTE AND EACH SHARE OF CLASS B COMMON STOCK IS
ENTITLED TO TEN VOTES. EACH SHARE OF CLASS B COMMON STOCK IS
CONVERTIBLE INTO CLASS A COMMON STOCK ON A ONE-TO-ONE BASIS AT
ANY TIME AT THE OPTION OF THE HOLDER THEREOF AND IN CERTAIN
OTHER CIRCUMSTANCES. SEE "DESCRIPTION OF CAPITAL STOCK."
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THE OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 10 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE $ A SHARE
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
--------------------- --------------------- ---------------------
Per Share............................. $ $ $
Total (3)............................. $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
additional Shares at the price to public less underwriting
discounts and commissions for the purpose of covering over-allotments,
if any. If the Underwriters exercise such option in full, the total
price to public, underwriting discounts and commissions and proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about , 1996 at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in immediately available funds.
------------------------
MORGAN STANLEY & CO.
Incorporated
MERRILL LYNCH & CO.
SMITH BARNEY INC.
, 1996
[ARTWORK -- TO BE FILED BY AMENDMENT]
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY
SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
Until , 1996 (25 days after the commencement of the offering),
all dealers effecting transactions in the securities, whether or not
participating in this distribution, may be required to deliver a
Prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a Prospectus when acting as Underwriters and with respect to
their unsold allotments of subscriptions.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................................................................... 3
Risk Factors.......................................................................... 10
Use of Proceeds....................................................................... 14
Dividend Policy....................................................................... 14
Dilution.............................................................................. 15
Capitalization........................................................................ 16
Selected Consolidated Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 19
Business.............................................................................. 27
Management............................................................................ 38
Executive Compensation and Other Matters.............................................. 41
Certain Transactions.................................................................. 47
Principal Stockholders................................................................ 49
Description of Capital Stock.......................................................... 50
Shares Available for Future Sale...................................................... 52
Underwriters.......................................................................... 53
Legal Matters......................................................................... 54
Experts............................................................................... 54
Additional Information................................................................ 54
Financial Statements.................................................................. F-1
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The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements examined by an independent public
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK (OR OTHER SECURITIES) OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
(including the notes thereto) included elsewhere in this Prospectus. Unless the
context otherwise requires, as used in this Prospectus, (i) the terms "Company"
and "ProSource" mean ProSource, Inc., together with its direct and indirect
wholly-owned subsidiaries, (ii) the term "Common Stock" means, collectively, the
Class A Common Stock and Class B Common Stock to be outstanding immediately
following completion of the offering and (iii) the term "pro forma" or "on a pro
forma basis" with respect to financial information for the Company's fiscal year
ended December 30, 1995 means such information, as adjusted to give effect to
the acquisition by the Company of the National Accounts Division of The
Martin-Brower Company and to the consummation of the offering and the
application of the estimated net proceeds thereof (assuming an initial public
offering price of $ per share) as if such events had occurred on January 1,
1995. Except as otherwise noted, all information in this Prospectus (i) gives
effect to the conversion of all of the Company's outstanding shares of Common
Stock into Class B Common Stock and a for one stock split that will
occur prior to the commencement of the offering (the "Recapitalization") and
(ii) assumes that the Underwriters' over-allotment option is not exercised. The
Company's fiscal year consists of a 52-53 week period ending on the last
Saturday of each calendar year. Fiscal 1994 consisted of 53 weeks.
THE COMPANY
ProSource is the nation's leading independent foodservice distributor
specializing in distribution to chain restaurants and is one of the largest
foodservice distributors in the United States. The Company distributes a wide
variety of items, including fresh and frozen meat and poultry, seafood, frozen
foods, canned and dry goods, fresh and pre-processed produce, beverages, dairy
products, paper goods and cleaning and other supplies. The Company specializes
in providing food and food-related products to two segments of the restaurant
industry -- limited-menu quick service restaurants, including Burger King,
Arby's, Long John Silver's, Sonic, Chick-fil-A, TCBY and Wendy's, and casual
dining restaurants, including Red Lobster, Olive Garden, TGIFriday's and
Chili's.
The Company was formed in 1992 to acquire Burger King Distribution Services
("BKDS"), the "in-house" distributor for Burger King Corporation ("BKC"), which
serviced approximately 4,150 Burger King restaurants. In the four years since
the acquisition, ProSource has, through a combination of acquisitions and
internal growth, become a leading distributor to chain restaurants, servicing
approximately 14,450 restaurants within 18 different restaurant chains. Through
a series of acquisitions during 1993 and 1994, the Company added approximately
1,100 of the restaurants included in its current customer base. In March 1995,
the Company entered the casual dining segment of the restaurant industry and
further expanded its quick service business with the acquisition of the National
Accounts Division ("NAD") of The Martin-Brower Company ("Martin-Brower"), which
added a total of approximately 8,000 restaurants within 12 chains included in
the Company's current customer base. The Company has also been successful in
expanding through internally generated sales. Since its formation, the Company
has added approximately 400 of the Burger King restaurants included in its
current customer base through the growth of existing franchisee customers and
the addition of new customers. The Company has also added approximately 570
Jenny Craig Weight Loss Centres and 150 Sonic restaurants through internal
growth. Since the Company's formation in 1992, net sales have grown from $1.3
billion in 1993 (the first full year of operations) to $4.0 billion in 1995 on a
pro forma basis.
The Company is a "systems" distributor specializing in distribution to
chain restaurants. The Company believes the chain restaurant segment of the
foodservice distribution industry is particularly attractive due to (i) the high
growth rate of the restaurants in this segment, with compound annual growth of
7% over the past three years according to industry sources, primarily due to the
growth of existing chain restaurants and the introduction of new chain
restaurant concepts, (ii) the uniformity of product offerings and consistency of
demand by chain restaurant customers, (iii) the increasingly important focus by
chain restaurants on foodservice distributors that can provide consistent
quality and reliable service on a nationwide basis to maintain the chain's
uniform standards and (iv) the fragmented nature of the foodservice distribution
segment
3
serving chain restaurants, with over 3,000 companies operating in the industry.
The Company believes that the consolidation in this industry will continue as
larger foodservice distributors with nationwide service are better able to meet
the need for consistent quality and reliable service by chain restaurants.
STRATEGIES
The Company believes that it has one of the most comprehensive distribution
networks of any independent distributor serving chain restaurants, based on
geographic coverage. With net sales of $4.0 billion in 1995 on a pro forma
basis, the Company believes, based on its estimates, that it has captured
approximately 10% of the $42 billion chain restaurant distribution market in the
United States. The Company estimates that the next largest independent systems
distributor has a market share of approximately 6%. The Company believes that
its size and scale give it an advantage over its competitors with respect to
purchasing power and lower distribution costs. The Company plans to strengthen
its position as a market leader by continuing to pursue the following strategies
for maximizing profitability and enhancing its long-term growth opportunities.
Pursue Internal and External Growth Opportunities. The Company intends to
continue to grow through a combination of adding new customers and products
within the chains that it currently serves, adding new chains and, where
appropriate, making selective acquisitions of other foodservice distributors.
- Growth With Existing Chains. The chain restaurant segment of the
restaurant industry has historically grown faster than the overall
industry. As the primary distributor to most of its customers, the
Company expects to continue to grow with the chain restaurants it serves.
In addition, the Company believes that there is the opportunity for
increased "product penetration" by increasing the range of products,
including produce, dairy and bakery products, distributed to existing
customers.
- Growth Through Addition of New Chains. The Company is continually
monitoring the marketplace for opportunities to expand the portfolio of
chains that it serves. Primary targets include chains offering menu
categories not covered by the Company's existing customers, chains
operating in geographic areas in which the Company could benefit from
increased customer density, and regional chains which could be added to
the national chains which have traditionally been the Company's focus.
- Selective Acquisitions. The Company believes the fragmented nature of
the industry and consolidation activity offer the Company opportunities
to supplement internal growth through selective acquisitions. The Company
intends to continue to focus its acquisition strategy on systems
specialists that distribute principally to limited-menu quick service and
casual dining chain restaurants which will expand its customer base or
improve geographic customer density.
Margin Improvement/Cost Reduction Programs. The Company is undertaking
several initiatives to increase margins and reduce its overall cost structure.
- Network Optimization. The Company is initiating a major project to
restructure its distribution network and create a new national
distribution system. Through this process, which is expected to take 3-5
years to complete, the Company intends to consolidate and integrate its
existing distribution network of 34 centers into 23 centers consisting of
six large regional distribution centers and 17 local distribution
centers. The Company estimates the capital investment for this network
optimization program will be approximately $27 million and is projecting
cost savings following full implementation of the new system of
approximately $20-25 million annually compared to projected network costs
under its existing system.
- Enhanced Delivery Systems. The Company has recently introduced an
innovative value-added cart delivery system which the Company estimates
should result in restaurant deliveries which are 2-3 times faster than
methods currently used in the industry. The Company is currently using
cart delivery for approximately 17% of its customers and expects to
service approximately 75% through this method within three years. The
Company estimates the capital investment required for implementation of
the cart delivery system will be approximately $8 million and is
projecting cost savings to the Company, when fully implemented, of
approximately $10 million annually compared to projected costs of
4
conventional delivery methods. The Company believes that cart delivery
will also benefit its customers by reducing the disruption caused by
deliveries and labor costs associated with unloading.
- Corporate Unification Program. The Company is in the process of
integrating its preexisting operations with the NAD operations acquired
from Martin-Brower into a new corporate support center located in Coral
Gables, Florida. The corporate support center will allow the Company to
centralize all purchasing, routing, in-bound transportation and
operations support functions. This process, which is expected to be
completed by mid-1997, should reduce overall personnel levels by 75
positions and is expected to result in aggregate costs savings of
approximately $5-6 million annually.
There can be no assurance that any of the above programs will be completed
within the projected time periods or will not have costs or require investment
in excess of the amounts anticipated, or that the projected cost savings will be
realized. See "Risk Factors -- No Assurance of Achieving Anticipated Cost
Savings."
Establish Position as Preeminent Supply Chain Manager. The Company
believes that its size, scale and expertise in foodservice distribution and
transportation systems allow it to assist its customers in managing the entire
chain of supply, from the vendor location to the customer's storeroom. Emphasis
on supply chain management has allowed the Company to identify value-added
services (such as the purchasing of non-proprietary products and transportation
services from the vendor to the distribution center) which the Company can
provide to its customers, resulting in reduced costs for its customers and
improved margins for the Company.
Technological Leadership. The Company believes that it is a leader within
the industry in the application of information technology to its operations. The
Company currently has in place a variety of information technology systems,
including electronic ordering, inventory management, financial and routing
systems. The Company continues to invest in technology. Among a new generation
of information technology being installed are new systems in the area of
electronic customer ordering, "order optimization" to manage the Company's
purchasing and inventory functions, and freight management. In addition, in
connection with its "network optimization" program, the Company intends to put
in place new customer ordering and warehouse management systems.
Service Quality Program. The Company places a significant emphasis on
providing a high level of service to its customers. The Company continuously
measures its service performance levels by monitoring the completeness of the
order, the timeliness of delivery and the customer's satisfaction. The Company
believes it is a leader in the industry in quality and reliability of service to
its customers. By providing a high level of service and reliability, the Company
believes it can reduce the number of reorders and redeliveries, reducing costs
for both the Company and its customers and improving customer loyalty.
5
THE OFFERING
[Enlarge/Download Table]
Class A Common Stock offered................. shares
Common Stock to be outstanding after the
offering:
Class A Common Stock....................... shares
Class B Common Stock(1).................... shares
Total.............................. shares
Use of Proceeds.............................. To prepay a portion of the Company's
outstanding indebtedness.
Nasdaq National Market Symbol................ "PSDS"
Voting Rights; Dividends..................... Each share of Class A Common Stock is
entitled to one vote and each share of Class
B Common Stock is entitled to ten votes.
Except as otherwise required by law, the
Class A Common Stock and Class B Common Stock
will vote together on all matters submitted
to a vote of stockholders, including the
election of directors. Following the
offering, the outstanding shares of Class A
Common Stock will represent approximately
% of the combined voting power of the
outstanding Common Stock ( % if the
Underwriters' over-allotment option is
exercised in full). Each share of Class B
Common Stock is convertible into Class A
Common Stock on a one-to-one basis at any
time at the option of the holder thereof and
in certain other circumstances. Class A
Common Stock and Class B Common Stock will be
entitled to share ratably, as a single class,
in any dividends declared by the Company on
the Common Stock. See "Description of Capital
Stock."
---------------
(1) Includes shares of Class B Common Stock to be issued to Onex
Corporation (collectively with its affiliates, "Onex"), or an affiliate
thereof, upon conversion of $2.5 million of principal and $1.0 million of
accrued interest outstanding under a convertible subordinated note (the
"Onex Convertible Note") immediately prior to the offering. Excludes
shares of Class B Common Stock reserved for issuance (i) upon the
exercise of stock options granted under the Company's Amended Management
Option Plan (1995) (the "1995 Option Plan"), (ii) upon the exercise of stock
options granted under the Company's 1996 Stock Option Plan and (iii) under
an outstanding warrant and certain other indebtedness which is convertible
into shares of Class B Common Stock at the option of the holder thereof at
any time. Also excludes shares of Class B Common Stock to be
issued to Onex in consideration for the agreement of Onex to relinquish its
right to receive an annual fee for management services rendered to the
Company. On a fully diluted basis using the treasury stock method, assuming
an initial public offering price equal to the midpoint of the range set
forth on the cover page of this Prospectus, the Company will have
shares of Class B Common Stock issued and outstanding after the offering.
See "Capitalization," "Executive Compensation and Other Matters -- Option
Plans" and "Certain Transactions."
6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AND CERTAIN OTHER DATA)
[Enlarge/Download Table]
SIX MONTHS FISCAL YEARS ENDED SIX MONTHS ENDED
ENDED ------------------------------------------ ----------------------------
DECEMBER 31, DECEMBER 25, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29,
1992(a) 1993(b) 1994(c) 1995(d) 1995 1996
------------ ------------ ------------ ------------ ----------- --------------
(26 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS) (26 WEEKS) (26 WEEKS)
STATEMENT OF OPERATIONS DATA:
Net sales..................... $618.4 $1,329.3 $1,598.1 $3,461.8 $ 1,447.8 $2,014.1
Cost of sales................. 560.0 1,210.9 1,464.5 3,193.3 1,332.9 1,859.0
--------- -------- -------- -------- -------- --------
Gross profit.................. 58.4 118.4 133.6 268.5 114.9 155.1
Operating expenses............ 51.7 114.2 131.0 255.2 110.7 149.8
Loss on impairment of
long-lived assets(e)........ -- -- -- -- -- 15.7
Restructuring charges(e)...... -- -- -- 0.7 0.1 10.9
--------- -------- -------- -------- -------- --------
Earnings (loss) from
operations.................. 6.7 4.2 2.6 12.6 4.1 (21.3)
Interest expense, net......... 3.0 5.5 6.6 13.3 6.3 7.3
--------- -------- -------- -------- -------- --------
Earnings (loss) before income
taxes and extraordinary
charge...................... 3.7 (1.3) (4.0) (0.7) (2.2) (28.6)
Income tax (provision)
benefit..................... (1.5) 0.5 1.6 (0.1) 1.0 10.6
--------- -------- -------- -------- -------- --------
Earnings (loss) before
extraordinary charge........ 2.2 (0.8) (2.4) (0.8) (1.2) (18.0)
Extraordinary charge, net..... -- -- -- (0.8) (0.8) --
--------- -------- -------- -------- -------- --------
Net earnings (loss)........... $ 2.2 $ (0.8) $ (2.4) $ (1.6) $ (2.0) $ (18.0)
========= ======== ======== ======== ======== ========
PER SHARE DATA:
Earnings (loss) before
extraordinary
charge per common and
common equivalent share.....
Net earnings (loss) per common
and common equivalent
share(f)....................
Average outstanding common and
common equivalent shares....
OTHER DATA:
EBITDA (g)...................... $ 10.2 $ 12.3 $ 10.8 $ 27.4 $ 9.5 $ 11.5
Net operating asset
turnover(h)................... 11.0x 13.6x 16.5x 18.3x 16.9x 18.9x
Depreciation and amortization... $ 3.4 $ 7.9 $ 8.0 $ 12.7 $ 5.6 $ 5.3
Capital expenditures............ $ 1.9 $ 3.5 $ 1.4 $ 5.7 $ 1.7 $ 8.0
Number of restaurants served
(at end of period)............ 4,184 5,113 6,752 14,562 14,700 14,451
[Enlarge/Download Table]
AT JUNE 29, 1996
DECEMBER 31, DECEMBER 25, DECEMBER 31, DECEMBER 30, ----------------------------
1992 1993(b) 1994(c) 1995(d) ACTUAL AS ADJUSTED(i)
------------ ------------ ------------ ------------ ----------- --------------
BALANCE SHEET DATA (at end of
period):
Working capital............... $ 39.5 $ 42.7 $ 41.6 $ 115.9 $ 113.5 $
Total assets.................. 158.1 200.0 218.3 489.2 502.0
Total debt.................... 61.1 68.5 65.6 163.2 173.4
Stockholders' equity.......... 24.7 25.3 22.5 49.4 32.7
---------------
(a) The Company was formed to effect the acquisition of BKDS on June 30, 1992.
(b) Includes the acquisition of certain operating assets of McCabe's Quality
Foods, California, Inc. on February 27, 1993 and the acquisition of certain
assets and the assumption of certain liabilities of Valley Food Services,
Inc. on March 27, 1993.
(c) Includes the acquisition of certain assets and the assumption of certain
liabilities of Malone Products, Inc. on October 31, 1994.
(d) Includes the acquisition of substantially all of the assets and the
assumption of certain liabilities of NAD on March 31, 1995.
7
(e) Charges resulting from the corporate and network consolidation program,
primarily for termination of leases and losses on the sale of furniture,
equipment and leasehold improvements, loss on impairment in value of land
and owned buildings and certain capitalized software costs.
(f) Computed on the basis described in Note 1(j) of the Notes to Consolidated
Financial Statements.
(g) EBITDA represents earnings (loss) before provision for interest expense,
income taxes, depreciation, amortization, extraordinary charges, loss on
impairment of long-lived assets and restructuring charges. EBITDA should
not be considered in isolation or as a substitute for operating income,
cash flows from operating activities and other income or cash flow
statement data prepared in accordance with generally accepted accounting
principles or as a measure of the Company's profitability or liquidity.
(h) Annualized net sales divided by the average balance of stockholders' equity
plus long-term debt.
(i) Includes pro forma adjustments to give effect to (i) the consummation of
the offering and (ii) the application of the estimated net proceeds thereof
as described in "Use of Proceeds," assuming an initial offering price equal
to the midpoint of the range set forth on the cover page of this
Prospectus.
FUTURE NON-RECURRING CHARGES TO EARNINGS
The Company expects to incur certain non-recurring charges after the
offering is consummated. These charges are summarized as follows:
Expenses associated with the amendment or termination of various agreements to
be reflected in the quarter in which the offering is consummated:
- A non-cash charge of $ to record the effect of an amendment to
the 1995 Option Plan prior to the offering under which unvested options
will vest according to a specified time schedule. Such charge will equal
the aggregate difference between the initial public offering price of the
Class A Common Stock and the exercise price for such options. Vested
options will be unaffected. See "Executive Compensation and Other
Matters -- Option Plans." Although total stockholders' equity will be
unchanged, there will be an increase in the Company's retained deficit,
which will be offset by a corresponding increase in additional paid-in
capital.
- A charge of $1.3 million for the termination of a consulting agreement
between the Company and certain former owners of Valley Food Services,
Inc., which agreement was due to expire on March 28, 1998.
- Onex currently receives an annual fee for management services rendered to
the Company. Onex has agreed to relinquish its right to receive such fee
upon completion of the offering, in consideration for which Onex will
receive $4.0 million payable in Class B Common Stock valued at the
initial public offering price. See "Certain Transactions -- Onex
Management Fees." Although total stockholders' equity will be unchanged,
there will be an increase in the Company's retained deficit, which will
be offset by a corresponding increase in Common Stock and additional
paid-in capital.
Extraordinary charges:
- A pre-tax charge of up to $10.0 million associated with prepayment
penalties and the write-off of deferred financing costs to the extent and
at the time that the Company replaces its revolving credit facility and
term loans. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
8
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
FISCAL YEAR
ENDED SIX MONTHS ENDED
------------- -------------------------
DECEMBER 30, JULY 1, JUNE 29,
1995(a) 1995(a) 1996(b)
------------- ---------- ----------
(52 WEEKS) (26 WEEKS) (26 WEEKS)
STATEMENT OF OPERATIONS DATA:
Net sales............................................ $ 3,993.4 $1,979.4 $2,014.1
Cost of sales........................................ 3,689.4 1,829.1 1,859.0
------------- ---------- ----------
Gross profit......................................... 304.0 150.3 155.1
Operating expenses................................... 290.9 146.4 149.8
Loss on impairment of long-lived assets(c)........... -- -- 15.7
Restructuring charges(c)............................. 0.7 0.1 10.9
------------- ---------- ----------
Earnings (loss) from operations...................... 12.4 3.8 (21.3)
Interest expenses, net............................... 11.1 6.5 4.9
------------- ---------- ----------
Earnings (loss) before income taxes and extraordinary
charge............................................ 1.3 (2.7) (26.2)
Income tax (provision) benefit....................... (0.9) 1.2 9.6
------------- ---------- ----------
Earnings (loss) before extraordinary charges......... 0.4 (1.5) (16.6)
Extraordinary charge, net............................ (0.8) (0.8) --
------------- ---------- ----------
Net earnings (loss).................................. $ (0.4) $ (2.3) $ (16.6)
========== ========= =========
PER SHARE DATA:
Earnings (loss) before extraordinary charge per
common and common equivalent share................
Net earnings (loss) per common and common equivalent
share(d)..........................................
Average outstanding common and common equivalent
shares............................................
---------------
(a) Includes pro forma adjustments to give effect to the acquisition of NAD and
the consummation of the offering and the application of the estimated net
proceeds thereof as described in "Use of Proceeds," assuming an initial
public offering price equal to the midpoint of the range set forth on the
cover page of this Prospectus, as if such events had occurred on January 1,
1995. For a detailed description, see Notes to Unaudited Pro Forma
Condensed Consolidated Financial Information.
(b) Includes pro forma adjustments to give effect to the consummation of the
offering and the application of the estimated net proceeds thereof as
described in "Use of Proceeds," assuming an initial public offering price
equal to the midpoint of the range set forth on the cover page of this
Prospectus, as if such events had occurred on January 1, 1996. For a
detailed description, see Notes to Unaudited Pro Forma Condensed
Consolidated Financial Information.
(c) See Note (e) to Summary Consolidated Financial Data.
(d) See Note (f) to Summary Consolidated Financial Data.
9
RISK FACTORS
In addition to the other information set forth in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the shares of Class A Common Stock offered
hereby.
Net Losses. Although the Company was profitable in its first six months of
operation in 1992, the Company had net losses of $0.8 million, $2.4 million and
$0.8 million (before an extraordinary charge in 1995 of $0.8 million related to
the write-off of certain deferred debt issuance costs) in 1993, 1994 and 1995,
respectively, due to (i) high interest expense associated with financing
incurred in connection with the formation of the Company and the Company's
subsequent acquisitions, (ii) competitive price pressures resulting in lower
gross margins and (iii) costs associated with the addition of new customers
(both internally and through acquisitions) and the development of new products
and services. In addition, the Company incurred a net loss of $18.0 million in
the six months ended June 29, 1996 due to restructuring charges and losses on
impairment in value of long-lived assets and expects to reflect certain
non-recurring charges to earnings in the quarter in which the offering is
consummated. See "Selected Consolidated Financial Data -- Future Non-recurring
Charges to Earnings." As a result, the Company expects to record a net loss for
1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." While the Company intends to use the net proceeds of the
offering to reduce outstanding indebtedness, there can be no assurance that the
Company will not increase the outstanding indebtedness after the offering in
connection with future capital expenditures or acquisitions, or that price
pressures and costs associated with the addition of new customers and the
development of new products and services will not continue to have an adverse
effect on the Company's operating results. Furthermore, there can be no
assurance that the Company will not sustain net losses in the future. See "-- No
Assurance of Achieving Anticipated Cost Savings" and "-- Competition."
Low Margin Business; Inflation. The foodservice distribution industry in
general, and the chain restaurant segment of the industry in which the Company
operates in particular, are characterized by low profit margins and high asset
turnover. As a result, the Company's results of operations are sensitive to, and
may be materially adversely impacted by, among other things, competitive price
pressures, unexpected increases in fuel or other transportation related costs,
severe weather conditions, difficulties with the collectibility of accounts
receivable and inventory losses. There can be no assurance that one or more of
such factors will not adversely affect the Company's operating results. In
addition, a majority of the restaurants served by the Company purchase products
from the Company based on product cost plus a negotiated fixed dollar amount per
unit of measure. Accordingly, while increases in the cost of food and other
products do not reduce the Company's gross profit, such increases do result in a
lower gross profit percentage. Furthermore, inflation in operating expenses
without corresponding productivity increases could adversely affect the
Company's operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Dependence on Certain Chains and Customers. The Company derives
substantially all of its net sales from certain limited-menu quick service and
casual dining chains. The largest chains serviced by the Company are Burger
King, Red Lobster and Arby's, representing 38%, 15% and 10% of 1995 net sales,
respectively, on a pro forma basis. Adverse developments affecting such chains
or a decision by a corporate owner or franchisor to revoke its approval of the
Company as a distributor could have a material adverse effect on the Company's
operating results.
The Company's customers are generally individual franchisees or
corporate-owned restaurants within such restaurant chains. Although the
corporate owner or franchisor of a chain generally reserves the right to approve
the distributors for its franchisees, each customer makes its selection of a
foodservice distributor from an approved group of distributors. The Company's
largest customer is Darden Restaurants, Inc. (owner of Olive Garden and Red
Lobster), representing 21% of the Company's 1995 net sales on a pro forma basis.
No other customer accounted for more than 10% of the Company's pro forma net
sales in 1995. Adverse events affecting any of the Company's largest customers,
a material decrease in sales to any of such customers or the loss of a major
customer through the acquisition thereof by a company with an internal
foodservice
10
distribution business or otherwise could have a material adverse effect on the
Company's operating results. In addition, the Company's continued growth is
dependent in part on the continued growth and expansion of its customers.
In connection with the acquisition of BKDS in 1992, the Company entered
into an exclusive distributor agreement and related distribution agreements with
BKC, pursuant to which, through 2002, (i) the Company is designated as the
exclusive distributor to BKC's company-owned and operated Burger King
restaurants in the United States (which accounted for 3.9% of 1995 net sales on
a pro forma basis), (ii) the Company is a BKC-approved distributor to franchised
Burger King restaurants in the United States and (iii) BKC has agreed that the
Company will remain the sole national distributor to Burger King restaurants.
The Company has also entered into distribution agreements through 1998 with
Olive Garden and Red Lobster pursuant to which the Company is the primary
distributor to the restaurants owned by Olive Garden and Red Lobster operating
in the United States. Such contracts may be terminated at the option of BKC,
Olive Garden or Red Lobster, as the case may be, upon a material breach by the
Company and under certain other circumstances. See "Business -- Customers."
Ability to Integrate Acquisitions; No Assurance of Future
Acquisitions. The Company has achieved a significant portion of its growth
since 1992 through acquisitions. Although each of the acquired companies has a
significant operating history, the Company has a limited history of owning and
operating these businesses on a consolidated basis. The Company was formed in
1992 to acquire BKDS. Through a series of acquisitions during 1993 and 1994, the
Company added approximately 1,100 of the restaurants included in its current
customer base. In March 1995, the Company entered the casual dining segment of
the restaurant industry and further expanded its quick service business with the
acquisition of NAD from Martin-Brower, its largest acquisition to date, adding
approximately 8,000 of the restaurants included in the Company's current
customer base. While the Company believes that the acquisition of NAD provides
significant opportunities to increase margins and reduce costs through among
other things, the realization of economies of scale through corporate
integration, there can be no assurance that the Company's expectations for the
performance of the combined companies will be met or that management will be
able to successfully implement such integration on a timely, cost-efficient
basis without disruption in the quality and reliability of service to its
customers or diversion of management resources. The integration of such
businesses will also require improvements in the Company's management
information systems which are currently in progress. There can be no assurance,
however, that such improvements will be realized on a timely, cost-efficient
basis.
As part of the Company's growth strategy, the Company will continue to
review acquisition opportunities in the future. There can be no assurance,
however, that the Company will be able to continue to acquire businesses on
satisfactory terms or that it will be able to integrate successfully any such
acquired businesses into existing operations.
No Assurance of Achieving Anticipated Cost Savings. The Company is
undertaking several initiatives to reduce its overall cost structure (the "Cost
Savings Initiatives"). These include (i) a "network optimization" process under
which it intends to consolidate and integrate its existing distribution network
of 34 centers into 23 centers, (ii) a cart delivery system intended to reduce
the time and labor associated with restaurant deliveries and (iii) integration
of its preexisting operations with the NAD operations acquired from Martin-
Brower into a corporate support center. Management estimates that the Cost
Savings Initiatives will result in significant net cost savings for the Company.
See "Business -- Strategies -- Margin Improvement/Cost Reduction Programs" for
an estimate of such savings. These estimates necessarily make numerous
assumptions as to future sales levels and other operating results, the
availability of funds for capital expenditures, as well as general industry and
business conditions and other matters, many of which are beyond the control of
the Company. Management believes that such assumptions are reasonable in light
of existing business conditions and prospects. However, any actual net costs
savings which might be realized by the Company could vary from the estimates
contained herein. Such estimated net cost savings could be impacted by a number
of factors such as inflation and changes in volume or service levels. There also
can be no assurance that unforeseen costs and expenses or other factors will not
offset the projected net cost savings in whole or in part or that such net cost
savings will be achieved.
11
Capacity Constraints; Ability to Implement Network Optimization
Program. The Company's continued growth has created and will continue to create
the need for the expansion and improvement of its facilities. As the Company
nears maximum utilization of a given facility, operations may be constrained and
inefficiencies may be created which could adversely affect operating results
until such time as either such facility is expanded or volume is shifted to
another facility. Conversely as the Company implements its network optimization
program, excess capacity may also create certain inefficiencies and adversely
affect operating results. In addition, there can be no assurance that management
will be able to successfully implement its network optimization program on a
timely, cost-effective basis without disruption in the quality and reliability
of service to its customers or diversion of management resources. See
"Business -- Strategies -- Margin Improvement/Cost Reduction Programs -- Network
Optimization."
Competition. The foodservice distribution industry is highly competitive.
The Company competes with other systems foodservice distribution companies
focused on chain restaurants and with broadline foodservice distributors which
distribute to a wide variety of customers. The Company believes that
distributors in the foodservice industry compete on the basis of price and the
quality and reliability of service. The Company believes that its size,
centralized purchasing operations and ability to offer broad market coverage
through a wide network of distribution centers give it a competitive advantage
over smaller regional and local distributors. However, in light of the
consolidation in the foodservice distribution industry, the Company could face
increased competition to the extent that there is an increase in the number of
foodservice distributors specializing in distribution to chain restaurants on a
nationwide basis. In addition, distribution fees received from a number of the
Company's customers decreased significantly in 1993 and 1994 as a result of
competitive pricing pressures. While distribution fees have stabilized in 1995
and the first six months of 1996, and management expects such stabilization to
continue through 1996, there can be no assurance that competitive pricing
pressure will not recur in the future. See "Business -- Competition" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on Key Personnel. The Company's success is substantially
dependent upon the continued services of its senior management. The loss of the
services of one or more of the Company's senior management could adversely
affect the Company's operating results. In addition, the Company's continued
growth depends on the ability to attract and retain skilled operating managers
and employees and the ability of its key personnel to manage the Company's
growth and consolidate and integrate its operations. See "Management."
Control of the Company; Benefit of the Offering to Controlling
Stockholder. Upon completion of the offering, Onex will beneficially own % of
the outstanding shares of Class B Common Stock. Each share of Class B Common
Stock entitles the holder thereof to ten votes as compared to one vote for the
holder of each share of Class A Common Stock. Consequently, Onex will control
% of the combined voting power of the outstanding Common Stock after
completion of the offering and will be able to control the vote on all matters
submitted to a vote of the holders of Common Stock, including the election of
directors and approval of significant corporate transactions such as amendments
to the Company's Restated Certificate of Incorporation and mergers and sales of
all or substantially all of the Company's assets. Such consolidation of voting
power could have the effect of delaying, deterring or preventing a change in
control of the Company that might be otherwise beneficial to stockholders. See
"Business -- Controlling Stockholder" and "Principal Stockholders." Mr. Gerald
W. Schwartz, the Chairman, President and Chief Executive Officer of Onex and a
director of the Company, owns a controlling interest in Onex, and, therefore,
effectively controls the affairs of the Company. Approximately $15 million of
the proceeds of the offering will be used to retire subordinated indebtedness
payable to Onex. See "Use of Proceeds." In addition, Onex currently receives an
annual fee for management services rendered to the Company. Onex has agreed to
relinquish its right to receive such fee upon completion of the offering, in
consideration for which Onex will receive $4.0 million payable in Class B Common
Stock valued at the initial public offering price. See "Certain Transactions."
Shares Available for Future Sale. Sales of substantial amounts of Class A
Common Stock, or the perception that such sales could occur, after the offering
could adversely affect prevailing market prices for the Class A Common Stock. Of
the shares of Class A Common Stock to be outstanding upon completion
of the offering, all of such shares will be freely tradeable without restriction
or further registration
12
under the Securities Act of 1933, as amended (the "Securities Act"), unless such
shares are acquired by an "affiliate" of the Company as that term is defined
under Rule 144 under the Securities Act ("Rule 144"). The shares of Class B
Common Stock to be outstanding upon completion of the offering are convertible
into shares of Class A Common Stock on a one-to-one basis at the option of the
holder and in certain other circumstances. Shares of Class A Common Stock
issuable upon conversion of Class B Common Stock have not been registered under
the Securities Act and may not be sold unless they are registered or unless an
exemption from registration, such as the exemption provided by Rule 144, is
available. Certain holders of Class B Common Stock have registration rights with
respect to the shares of Class A Common Stock issuable upon conversion thereof.
Pursuant to certain "lock up" agreements described herein, all shares of Class A
Common Stock issuable upon conversion of Class B Common Stock held by the
Company's existing stockholders will be eligible for sale beginning 180 days
from the date of this Prospectus, subject to certain limitations under Rule 144.
See "Shares Available for Future Sale."
Absence of Public Market; Volatility of Market Price for Stock. Prior to
the offering, there has been no public market for the Class A Common Stock, and
there can be no assurance that an active trading market for the Class A Common
Stock will develop or continue after the offering. The initial public offering
price of the Class A Common Stock will be determined by negotiations between the
Company and the Underwriters and may not be indicative of the market price of
the Class A Common Stock after the offering. See "Underwriters." From time to
time after the offering, there may be significant volatility in the market price
for the Class A Common Stock. Quarterly operating results of the Company or
other foodservice distributors, changes in general conditions in the economy,
the financial markets or the food distribution or foodservice industries,
announcements of proposed acquisitions and failure to complete announced
acquisitions, unusual weather conditions, failure to meet the projections of
securities analysts or other developments affecting the Company or its
competitors could cause the market price of the Class A Common Stock to
fluctuate substantially. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations. This volatility has had a
significant effect on the market prices of securities issued by many companies
for reasons unrelated to their operating performance.
Dilution; Dividend Policy. Investors in the offering will experience
immediate and substantial dilution, and current stockholders will receive a
material increase in the net tangible book value of their shares. See
"Dilution." The Company does not anticipate paying dividends on the Class A
Common Stock in the foreseeable future. The Company's ability to pay cash
dividends is restricted by the terms of its credit agreement.
Forward-Looking Statements. This Prospectus includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Such forward-looking statements include those concerning the Company's business
strategy, operations, cost savings initiatives, economic performance, financial
condition and liquidity and capital resources. Such statements are subject to
various risks and uncertainties. The Company's actual results may differ
materially from the results discussed in such forward-looking statements because
of a number of factors, including those identified in this "Risk Factors"
section and elsewhere in this Prospectus. See "Prospectus Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." The forward-looking statements are made as of the
date of this Prospectus, and the Company assumes no obligation to update the
forward-looking statements, or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Class A Common Stock offered hereby are estimated to be $ million, assuming an
initial public offering price equal to the midpoint of the range set forth on
the cover page of this Prospectus, and after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company. The
Company intends to use the net proceeds of the offering as follows:
- to prepay outstanding indebtedness of $15 million under a subordinated
note payable to Onex and $ million under a subordinated note payable to
Martin-Brower, which notes bear interest at effective rates of 12% and
approximately 9% per annum over the life of such notes, respectively, and
mature on April 1, 2005 and March 31, 2002, respectively (the
"Subordinated Notes"); and
- to repay $ million of outstanding indebtedness under the Company's
revolving credit facility, which bears interest at prime plus 0.5% or the
Eurodollar rate plus 2.75% per annum, and matures on March 31, 2000 (on a
weighted average basis the interest rate was 9.06% for 1995).
The Company's credit agreement relating to its term loans and revolving
credit facility requires that the Company obtain the lending group's approval
(which has been obtained) to prepay the Subordinated Notes. See Note 6 of the
Notes to Consolidated Financial Statements.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since
inception. The current policy of the Company's Board of Directors is to retain
all earnings to provide funds for the operation and expansion of the Company's
business. The Company does not anticipate declaring or paying cash dividends on
the Common Stock in the foreseeable future. Future cash dividends, if any, will
be at the discretion of the Board of Directors and will depend upon, among other
things, future earnings, capital requirements and surplus, the general financial
condition of the Company, restrictive covenants and agreements to which the
Company may be subject, and such other factors as the Board of Directors may
deem relevant. The terms of the Company's credit agreement prohibit it from
paying dividends to its stockholders without the approval of the lending group.
The Company's Restated Certificate of Incorporation provides that the holders of
Class A Common Stock and Class B Common Stock share ratably in any dividend
declared by the Board of Directors, subject to the preferential rights of any
outstanding Preferred Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Capital Stock."
14
DILUTION
At June 29, 1996, the net tangible book value (deficit) of the Company was
$(10.4) million or $( ) per share of Common Stock. After giving effect to
the sale of shares of Class A Common Stock offered hereby by the
Company at an assumed initial public offering price equal to the midpoint of the
range set forth on the cover page of this Prospectus and the application of the
estimated net proceeds therefrom as described in "Use of Proceeds," the pro
forma net tangible book value of the Company at June 29, 1996 would have been
$ million or $ per share. This represents an immediate increase in pro
forma net tangible book value of $ per share to existing stockholders and an
immediate dilution of $ per share to new investors purchasing Class A Common
Stock in the offering. The following table illustrates this per share dilution:
[Download Table]
Assumed initial public offering price per share.................... $
Net tangible book value (deficit) per share at June 29,
1996(1)....................................................... $
Increase in net tangible book value per share attributable to the
offering......................................................
Pro forma net tangible book value per share after the offering.....
------
Dilution per share to new investors(2)............................. $
======
---------------
(1) Net tangible book value (deficit) per share of Common Stock is determined by
dividing the Company's tangible net value (tangible assets less liabilities)
at June 29, 1996 by the number of shares of Common Stock that will be
outstanding prior to the offering.
(2) Dilution is computed by subtracting pro forma net tangible book value per
share of Common Stock after the offering from the assumed initial public
offering price per share.
The following table summarizes, on a pro forma basis at June 29, 1996, the
differences between the total consideration and the average price per share paid
by the existing stockholders and by the new investors purchasing shares of Class
A Common Stock in the offering.
[Enlarge/Download Table]
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
Existing stockholders........................ % $ % $
New investors................................ % %
---------- --- ------------ ---
Total...................................... 100% $ %
========== === ============ ===
The table assumes the issuance of shares of Class B Common Stock
to be issued to Onex upon conversion of the Onex Convertible Note immediately
prior to the offering. The table also assumes (i) no exercise of any outstanding
options or warrants to purchase Common Stock, (ii) no conversion of any other
outstanding indebtedness which is convertible into Common Stock and (iii) no
issuance of Class B Common Stock to Onex in consideration for the agreement of
Onex to relinquish its right to receive an annual fee for management services
rendered to the Company. See "Certain Transactions." To the extent such options
or warrants are exercised or such indebtedness is converted, there will be
further dilution to new investors.
15
CAPITALIZATION
The following table sets forth, on an unaudited basis, the capitalization
of the Company as of June 29, 1996, and the capitalization as of such date as
adjusted to give effect to (i) the consummation of the offering and (ii) the
application of the estimated net proceeds thereof as described in "Use of
Proceeds," assuming an initial offering price equal to the midpoint of the range
set forth on the cover page of this Prospectus. The data presented below should
be read in conjunction with the Company's financial statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other information included elsewhere in this
Prospectus.
[Enlarge/Download Table]
AS OF JUNE 29, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
Total debt, including current maturities:
Senior debt......................................................... $144,594 $
Subordinated notes payable.......................................... 24,832 --
Convertible subordinated notes payable(1)........................... 4,001
-------- --------
Total debt.................................................. $173,427 $
Stockholders' equity:
Preferred stock, par value $0.01 per share; shares
authorized....................................................... -- --
Class A Common Stock, par value $0.01 per share;
shares authorized;
0 shares issued and outstanding actual and shares
issued and outstanding on an as adjusted basis.................. --
Class B Common Stock, par value $0.01 per share;
shares authorized;
shares issued and outstanding actual and
shares issued and outstanding on an as adjusted basis(2)........ 1
Additional paid-in capital.......................................... 53,140
Retained deficit.................................................... (20,497)
Accumulated foreign currency translation adjustment................. 68
-------- --------
Total stockholders' equity.................................. 32,712
-------- --------
Total capitalization.................................................. $206,139 $
======== ========
---------------
(1) On an actual basis, includes $2.5 million of principal and $1.0 million of
accrued interest outstanding under the Onex Convertible Note, which Onex
intends to convert into Common Stock immediately prior to the offering. See
"Certain Transactions -- Onex Subordinated Notes."
(2) On an adjusted basis, includes shares of Class B Common Stock to
be issued to Onex upon conversion of the Onex Convertible Note immediately
prior to the offering. Excludes shares of Class B Common Stock
reserved for issuance (i) upon the exercise of stock options granted under
the Company's 1995 Option Plan, (ii) upon the exercise of stock options
granted under the Company's 1996 Stock Option Plan and (iii) under an
outstanding warrant and certain other indebtedness which is convertible into
shares of Class B Common Stock at the option of the holder thereof at any
time. Also excludes shares of Class B Common Stock to be issued to
Onex in consideration for the agreement of Onex to relinquish its right to
receive an annual fee for management services rendered to the Company. On a
fully diluted basis using the treasury stock method, assuming an initial
public offering price equal to the midpoint of the range set forth on the
cover page of this Prospectus, the Company will have shares of
Class B Common Stock issued and outstanding after the offering. See
"Executive Compensation and Other Matters -- Option Plans" and "Certain
Transactions."
16
SELECTED CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AND CERTAIN OTHER DATA)
The historical selected consolidated financial data presented below as of
and for the six months ended December 31, 1992 (the Company began operations in
July 1992) and the years ended December 25, 1993, December 31, 1994 and December
30, 1995, are derived from, and are qualified by reference to, the Company's
financial statements that have been audited by KPMG Peat Marwick LLP,
independent auditors. The selected consolidated financial data presented below
for the six months ended July 1, 1995 and June 29, 1996 have been derived from
unaudited financial information prepared by the Company. In the opinion of
management, the income statement and balance sheet data for the six months ended
July 1, 1995 and June 29, 1996 reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of results of
interim periods. Operating results for the six months ended June 29, 1996 are
not necessarily indicative of results to be expected for the full fiscal year.
The data presented below should be read in conjunction with the Company's
financial statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other information
included elsewhere in this Prospectus.
[Enlarge/Download Table]
SIX MONTHS FISCAL YEARS ENDED SIX MONTHS ENDED
ENDED ------------------------------------------ ---------------------
DECEMBER 31, DECEMBER 25, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29,
1992(a) 1993(b) 1994(c) 1995(d) 1995 1996
------------ ------------ ------------ ------------ ---------- ----------
(26 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS) (26 WEEKS) (26 WEEKS)
STATEMENT OF OPERATIONS DATA:
Net sales............................. $618.4 $1,329.3 $1,598.1 $3,461.8 $1,447.8 $2,014.1
Cost of sales......................... 560.0 1,210.9 1,464.5 3,193.3 1,332.9 1,859.0
------ ------ ------ ------- ------ ------
Gross profit.......................... 58.4 118.4 133.6 268.5 114.9 155.1
Operating expenses.................... 51.7 114.2 131.0 255.2 110.7 149.8
Loss on impairment of long-lived
assets(e)........................... -- -- -- -- -- 15.7
Restructuring charges(e).............. -- -- -- 0.7 0.1 10.9
------ ------ ------ ------- ------ ------
Earnings (loss) from operations....... 6.7 4.2 2.6 12.6 4.1 (21.3)
Interest expense, net................. 3.0 5.5 6.6 13.3 6.3 7.3
------ ------ ------ ------- ------ ------
Earnings (loss) before income taxes
and extraordinary charge............ 3.7 (1.3) (4.0) (0.7) (2.2) (28.6)
Income tax (provision) benefit........ (1.5) 0.5 1.6 (0.1) 1.0 10.6
------ ------ ------ ------- ------ ------
Earnings (loss) before extraordinary
charge.............................. 2.2 (0.8) (2.4) (0.8) (1.2) (18.0)
Extraordinary charge, net............. -- -- -- (0.8) (0.8) --
------ ------ ------ ------- ------ ------
Net earnings (loss)................... $ 2.2 $ (0.8) $ (2.4) $ (1.6) $ (2.0) $ (18.0)
====== ====== ====== ======= ====== ======
PER SHARE DATA:
Earnings (loss) before extraordinary
charge per common and common
equivalent share....................
Net earnings (loss) per common and
common equivalent share(f)..........
Average outstanding common and common
equivalent shares...................
BALANCE SHEET DATA (at end of period):
Working capital(g).................... $ 39.5 $ 42.7 $ 41.6 $ 115.9 $ 95.9 $ 113.5
Total assets.......................... 158.1 200.0 218.3 489.2 483.2 502.0
Total debt (g)........................ 61.1 68.5 65.6 163.2 142.8 173.4
Stockholders' equity ................. 24.7 25.3 22.5 49.4 48.9 32.7
OTHER DATA:
EBITDA (h)............................ $ 10.2 $ 12.3 $ 10.8 $ 27.4 $ 9.5 $ 11.5
Net operating asset turnover (i)...... 11.0x 13.6x 16.5x 18.3x 16.9x 18.9x
Depreciation and amortization......... $ 3.4 $ 7.9 $ 8.0 $ 12.7 $ 5.6 $ 5.3
Capital expenditures.................. $ 1.9 $ 3.5 $ 1.4 $ 5.7 $ 1.7 $ 8.0
Number of restaurants served (at end
of period).......................... 4,184 5,113 6,752 14,562 14,700 14,451
---------------
(a) The Company was formed to effect the acquisition of BKDS on June 30, 1992.
17
(b) Includes the acquisition of certain operating assets of McCabe's Quality
Foods, California, Inc. on February 27, 1993 and the acquisition of certain
assets and the assumption of certain liabilities of Valley Food Services,
Inc. on March 27, 1993.
(c) Includes the acquisition of certain assets and the assumption of certain
liabilities of Malone Products, Inc. on October 31, 1994.
(d) Includes the acquisition of substantially all of the assets and the
assumption of certain liabilities of NAD on March 31, 1995.
(e) Charges resulting from the corporate and network consolidation program,
primarily for termination of leases and losses on the sale of furniture,
equipment and leasehold improvements, loss on impairment in value of land
and owned buildings and certain capitalized software costs.
(f) Computed on the basis described in Note 1(j) of the Notes to Consolidated
Financial Statements.
(g) At July 1, 1995, working capital reflects $32.6 million payable to
Martin-Brower in connection with the acquisition of NAD. Total debt was
increased in August 1995 by borrowings incurred to pay such amount.
(h) EBITDA represents earnings (loss) before provision for interest expense,
income taxes, depreciation, amortization, extraordinary charges, loss on
impairment of long-lived assets and restructuring charges. EBITDA should
not be considered in isolation or as a substitute for operating income,
cash flows from operating activities and other income or cash flow
statement data prepared in accordance with generally accepted accounting
principles or as a measure of the Company's profitability or liquidity.
(i) Annualized net sales divided by the average balance of stockholders' equity
plus long-term debt, assuming that the incurrence of debt referred to in
(g) above occurred on March 31, 1995.
FUTURE NON-RECURRING CHARGES TO EARNINGS
The Company expects to incur certain non-recurring charges after the
offering is consummated. These charges are summarized as follows:
Expenses associated with the amendment or termination of various agreements to
be reflected in the quarter in which the offering is consummated:
- A non-cash charge of $ to record the effect of an amendment to
the 1995 Option Plan prior to the offering under which unvested options
will vest according to a specified time schedule. Such charge will equal
the aggregate difference between the initial public offering price of the
Class A Common Stock and the exercise price for such options. Vested
options will be unaffected. See "Executive Compensation and Other
Matters -- Option Plans." Although total stockholders' equity will be
unchanged, there will be an increase in the Company's retained deficit,
which will be offset by a corresponding increase in additional paid-in
capital.
- A charge of $1.3 million for the termination of a consulting agreement
between the Company and certain former owners of Valley Food Services,
Inc., which agreement was due to expire on March 28, 1998.
- Onex currently receives an annual fee for management services rendered to
the Company. Onex has agreed to relinquish its right to receive such fee
upon completion of the offering, in consideration for which Onex will
receive $4.0 million payable in Class B Common Stock valued at the
initial public offering price. See "Certain Transactions -- Onex
Management Fees." Although total stockholders' equity will be unchanged,
there will be an increase in the Company's retained deficit, which will
be offset by a corresponding increase in Common Stock and additional
paid-in capital.
Extraordinary charges:
- A pre-tax charge of up to $10.0 million associated with prepayment
penalties and the write-off of deferred financing costs to the extent and
at the time that the Company replaces its revolving credit facility and
term loans. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company began operations in July 1992 following the acquisition of
certain assets and the assumption of certain liabilities of BKDS, the "in-house"
distributor for BKC, which serviced 4,150 Burger King restaurants. In the four
years since the acquisition, ProSource has, through a combination of
acquisitions and internal growth, become a leading distributor to chain
restaurants, servicing approximately 14,450 restaurants within 18 different
restaurant chains. Excluding the effect of acquisitions, the Company's net sales
increased at a compound annual rate of 9.8% from 1992 to 1995, compared to the
foodservice distribution industry's compound annual growth rate of approximately
2.4% over this period. The Company's acquisitions consisted of:
- The acquisition in February 1993 of certain operating assets of McCabe's
Quality Foods, California, Inc. ("McCabe's"), a regional systems
distributor based in California, for $3.9 million. Such acquisition
solidified the Company's market position in Northern California and
resulted in the addition of 127 of the Burger King restaurants included
in the Company's current customer base.
- The acquisition in March 1993 of certain assets and the assumption of
certain liabilities of Valley Food Services, Inc. ("Valley"), a regional
systems distributor based in Missouri, for $9.3 million. Such acquisition
resulted in the addition of 318 of the restaurants included in the
Company's current customer base, including certain Wendy's restaurants.
- The acquisition in October 1994 of certain assets and the assumption of
certain liabilities of Malone Products, Inc. ("Malone"), a regional
systems distributor based in Oklahoma, for $3.8 million. Such acquisition
resulted in the addition of 656 of the restaurants included in the
Company's current customer base, including certain Sonic and KFC
restaurants.
- The acquisition in March 1995 of substantially all of the assets and the
assumption of certain liabilities of NAD headquartered in Chicago,
Illinois, a national systems distributor operating eleven distribution
centers located throughout the United States and one center in Canada,
for $170 million. Such acquisition resulted in the addition of
approximately 8,000 of the restaurants included in the Company's current
customer base, including Arby's, Chick-fil-A, Chili's, Long John
Silver's, Olive Garden, Red Lobster, TCBY and TGIFriday's restaurants.
Primarily as a result of these acquisitions, the Company's net sales
increased from $1.3 billion in 1993 to $3.5 billion in 1995. The NAD
acquisition, funded primarily by debt, resulted in a substantial increase in net
interest expense from approximately $6.6 million in 1994 to approximately $13.3
million in 1995; however, net interest expense as a percentage of net sales
decreased during this period from .41% to .39%. All of the Company's
acquisitions were accounted for as purchases and are included in the Company's
consolidated financial statements from their respective dates of acquisition.
With the acquisition of NAD in March 1995, the Company initiated a program
of evaluating the profitability of its customer accounts which includes setting
target levels of profitability and developing procedures to attain these
targeted goals. Under this program, if the Company is not able to attain the
targeted level of profitability for a particular customer through price
increases, reduced operating costs or providing value-added services within a
reasonable period of time, the Company may discontinue its relationship with the
customer. In addition, certain chains decide from time to time to close
restaurants or concepts which do not meet their long-term profitability targets.
As a result of the Company's new customer evaluation program and the decision of
a certain customer to close a restaurant concept, the Company no longer sells to
604 restaurants which accounted for $74.0 million of net sales in 1995 on a pro
forma basis.
Although the Company was profitable for the first six months of operations
ended December 31, 1992, the Company had net losses of $0.8 million, $2.4
million and $0.8 million (before an extraordinary charge in 1995 of $0.8 million
related to the write-off of certain deferred debt issuance costs) in 1993, 1994
and 1995, respectively, due to (i) high interest expense associated with
financing incurred in connection with the
19
formation of the Company and the Company's subsequent acquisitions, (ii)
competitive price pressures resulting in lower gross margins and (iii) costs
associated with the addition of new customers (both internally and through
acquisitions) and the development of new products and services. In addition, the
Company incurred a net loss of $18.0 million in the six months ended June 29,
1996 due to restructuring charges and losses on impairment in value of
long-lived assets, and expects to reflect certain non-recurring charges to
earnings in the quarter in which the offering is consummated. See "Selected
Consolidated Financial Data -- Future Non-recurring Charges to Earnings." As a
result, the Company expects to record a net loss for 1996. As the net proceeds
of the offering will be used to reduce the outstanding indebtedness of the
Company, management expects that interest expense will decrease following the
offering. See "Use of Proceeds." In addition, while distribution fees received
from a number of the Company's customers decreased significantly in 1993 and
1994 as a result of competitive pricing pressures, distribution fees have
stabilized in 1995 and the first six months of 1996. While management expects
such stabilization to continue through 1996, there can be no assurance that
competitive pricing pressure will not recur in the future. The Company is also
undertaking several initiatives to increase margins and reduce its overall cost
structure, including the development of a new national distribution network, the
implementation of an innovative cart delivery system and the integration of
operations into a new corporate support center located in Coral Gables, Florida.
For a description of certain projected cost savings and costs to be incurred in
connection with such programs, see "Business -- Strategies -- Margin
Improvement/Cost Reduction Programs" and "Risk Factors -- No Assurance of
Achieving Anticipated Cost Savings."
As of June 29, 1996 the Company had recorded net deferred tax assets of
$23.7 million. Management believes that it is more likely than not that the net
deferred tax assets will be realized through the reversal of net deductible
temporary differences during periods in which the Company generates taxable
income. In order to fully realize the net deferred tax assets, the Company will
need to generate future taxable income of approximately $56.1 million. The
Company anticipates that increases in taxable income will result primarily from
(i) future projected revenue growth through the addition of new restaurant
chains and the expansion of existing restaurant chains, (ii) a reduction in
interest expense due to a reduction in indebtedness, (iii) cost savings through
its corporate and network consolidation plan and (iv) other cost reduction
initiatives.
As a result of a study to analyze, among other things, ways to integrate
the NAD operations, improve customer service, reduce operating costs and
increase existing warehouse capacity, the Company adopted a plan to consolidate
its corporate and network operations. As a result, in the first quarter of 1996,
the Company accrued restructuring charges and recorded a loss on impairment in
value of long-lived assets of $10.9 million and $15.7 million, respectively.
These are anticipated costs associated with the termination of leases on
existing facilities, losses on the sale of furniture, equipment, buildings and
leasehold improvements and write-off of certain capitalized software costs which
do not meet the long-term information technology strategy of the Company. In
1995 the Company incurred restructuring charges of $0.7 million primarily
related to the integration of the Company's preexisting operations with the NAD
operations acquired from Martin-Brower into a new corporate support center in
Coral Gables, Florida. As of June 29, 1996, the Company had approximately $10.5
million of accrued unpaid restructuring charges.
The Company derives its revenues primarily from the distribution of a wide
variety of items to chain restaurants, including fresh and frozen meat and
poultry, seafood, frozen foods, canned and dry goods, fresh and pre-processed
produce, beverages, dairy products, paper goods and cleaning and other supplies.
The foodservice distribution industry in general, and the chain restaurant
segment of the industry in which the Company operates in particular, is
characterized by high asset turnover and low profit margins. As a "systems"
distributor specializing in distribution to chain restaurants, the Company
generally generates higher volume, lower gross margin sales requiring fewer but
larger deliveries than a broadline distributor which distributes to a wide
variety of customers, such as independent and chain restaurants, schools,
cafeterias and hospitals. In addition, systems distribution allows for more
efficient use of vehicles, facilities and personnel, resulting in lower
operating expenses as a percentage of net sales when compared to broadline
distribution. As a result, the Company believes systems distributors are better
able to service chain restaurants than broadline distributors because they can
offer their customers a higher quality of service at a lower cost. See
"Business -- Foodservice Distribution Industry."
20
A majority of the restaurants served by the Company purchase products from
the Company based on product cost plus a negotiated fixed dollar amount per unit
of measure. As a result, the Company's gross margin percentage may be positively
or negatively impacted as the product cost per unit of measure decreases or
increases, respectively. The Company's product mix changed substantially in 1995
as a result of the NAD acquisition because casual dining chain restaurants,
particularly those which serve seafood, have a higher average product cost per
unit of measure, thereby reducing gross margin as a percentage of sales.
Similarly, periods of inflation in food and other product prices result in
higher sales values and product costs per unit of measure. While such increases
do not affect the Company's gross profit, they do result in a lower gross profit
percentage. However, inflation in operating expenses without corresponding
productivity improvements can have a negative effect on the Company's operating
results as operating expenses increase while gross profit remains constant.
Conversely, periods of deflation can have a positive effect on the Company's
results.
The principal components of the Company's expenses include (i) cost of
sales, which represents the net amount paid to product vendors plus amounts paid
for in-bound freight, and (ii) operating expenses which include primarily labor
and equipment charges related to warehousing and delivery. Because warehousing
and delivery expenses can be relatively fixed in the short term, unexpected
changes in the Company's net sales, such as those resulting from adverse weather
or other events, can have a significant short-term impact on operating income.
See "-- Quarterly Results and Seasonality."
The Company's fiscal year ends on the Saturday closest to December 31.
Consequently, the Company will periodically have a 53 week fiscal year. 1995 and
1993 each consisted of 52 weeks, while 1994 consisted of 53 weeks.
RESULTS OF OPERATIONS
The following sets forth, for the periods indicated, the components of the
Company's consolidated statements of operations expressed as a percentage of net
sales.
[Enlarge/Download Table]
FISCAL YEARS ENDED SIX MONTHS ENDED
-------------------------------------------- -------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------------ ------------ ------------ ------- --------
Net sales............................. 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of sales......................... 91.09 91.64 92.24 92.07 92.30
------ ------ ------ ------ ------
Gross profit........................ 8.91 8.36 7.76 7.93 7.70
Operating expenses.................... 8.59 8.20 7.37 7.65 7.44
Loss on impairment of long-lived
assets.............................. -- -- -- -- 0.78
Restructuring charges................. -- -- 0.02 -- 0.54
------ ------ ------ ------ ------
Earnings (loss) from operations..... 0.32 0.16 0.37 0.28 (1.06)
Interest expense, net................. (0.42) (0.41) (0.39) (0.43) (0.36)
Earnings (loss) before income taxes
and extraordinary charge............ (0.10) (0.25) (0.02) (0.15) (1.42)
Income tax (provision) benefit........ 0.04 0.10 -- 0.06 0.53
------ ------ ------ ------ ------
Earnings (loss) before extraordinary
charge.............................. (0.06) (0.15) (0.02) (0.09) (0.89)
Extraordinary charge, net........... -- -- (0.02) (0.05) --
------ ------ ------ ------ ------
Net earnings (loss)................. (0.06)% (0.15)% (0.04)% (0.14)% (0.89)%
====== ====== ====== ====== ======
SIX MONTHS ENDED JUNE 29, 1996 COMPARED TO SIX MONTHS ENDED JULY 1, 1995
Net sales increased 39.1% to $2,014.1 million in the six month fiscal
period ended June 29, 1996 (the "1996 fiscal period") from $1,447.8 million in
the six month fiscal period ended July 1, 1995 (the "1995 fiscal period"). The
increase in net sales is primarily attributable to the acquisition of NAD on
March 31, 1995. Net sales increased 1.8% in the 1996 fiscal period when compared
to net sales for the 1995 fiscal period presented on a pro forma basis. Sales in
the 1996 fiscal period were adversely impacted by the elimination of certain
21
customers, as well as the adverse winter weather conditions experienced in a
number of the Company's markets during the first quarter. Net sales to existing
customers in the 1996 fiscal period increased by $86.6 million or 4.5% when
compared to the 1995 fiscal period presented on a pro forma basis. This increase
in net sales is primarily due to increased sales to such customers as a result
of the addition of new restaurants and increased sales volume at existing
restaurants. Such increase was partially offset by declining sales volume at
certain chains as they redesigned their menus and product offerings for broader
consumer appeal.
Gross profit increased 35.1% to $155.1 million in the 1996 fiscal period
compared to $114.9 million in the 1995 fiscal period. The gross profit
percentage decreased to 7.7% in the 1996 fiscal period compared to 7.9% in the
1995 fiscal period. The gross profit percentage decrease is primarily
attributable to the higher cost of the product mix purchased by customers added
through the acquisition of NAD (which customers had a 6.8% gross profit margin
for the 1996 fiscal period) and, to a lesser extent, negotiation of new
contracts with certain NAD customers which resulted in lower distribution fees.
In most cases, in consideration for the decrease in distribution fees, the
Company was able to secure a longer term contract and the right to provide
in-bound transportation and/or purchasing services for such customers. Gross
profit margin excluding the effect of the NAD acquisition increased to 8.7% in
the 1996 fiscal period compared to 8.6% in the 1995 fiscal period, primarily as
a result of improved inventory management which resulted in a reduction of
product cost.
Operating expenses increased 35.3% to $149.8 million in the 1996 fiscal
period from $110.7 million in the 1995 fiscal period. As a percentage of net
sales, operating expenses declined to 7.4% in the 1996 fiscal period from 7.7%
in the 1995 fiscal period. This decrease is primarily a result of the
acquisition of NAD, which has a product mix with a higher unit sales value.
Operating expenses as a percentage of net sales, excluding the NAD acquisition,
were 8.4% in both fiscal periods. Operating expenses as a percentage of NAD
sales were 6.6% in the 1996 fiscal period compared to 6.4% in the 1995 fiscal
period, principally as a result of higher delivery costs due, in part, to the
start-up costs of the cart delivery program.
Losses from operations in the 1996 fiscal period were $21.3 million, as a
result of restructuring charges of $10.9 million and a loss on impairment in
value of long-lived assets of $15.7 million. Both the restructuring charges and
impairment losses are related to a plan to consolidate and integrate the
Company's corporate and network operations following the NAD acquisition. Of the
restructuring charges, approximately $7.9 million relates to the termination of
existing facility leases, $1.2 million represents costs to be incurred after
cessation of operations in the closed facilities and $1.8 million represents all
other costs. The application of Statement of Financial Accounting Standards No.
121, which became effective on January 1, 1996 and requires that long-lived
assets be reviewed for impairment (measured based on the fair value of the
assets), required the Company to recognize a loss of approximately $7.3 million
on land and owned buildings which management plans to dispose of, $4.3 million
on furniture and equipment and leasehold improvements it plans to abandon, and
$4.1 million of capitalized software costs which do not meet the long-term
information technology strategy of the Company. Earnings from operations
excluding restructuring charges and impairment losses were $5.3 million in the
1996 fiscal period compared to $4.1 million in the 1995 fiscal period.
Net interest expense increased 16.6% to $7.3 million in the 1996 fiscal
period from $6.3 million in the 1995 fiscal period, primarily attributable to
the additional borrowings associated with the acquisition of NAD. Net interest
expense as a percentage of net sales decreased 16.2% from 0.43% to 0.36% as a
result of improved net operating asset turnover. See "-- Liquidity and Capital
Resources."
The income tax benefit for the 1996 fiscal period increased $9.6 million
over the benefit for the 1995 fiscal period. The increase in the tax benefit was
attributable to the Company's greater pre-tax loss in the 1996 fiscal period.
The effective rates of the Company's income tax benefit (expressed as a
percentage of pre-tax loss) were 37.1% for the 1996 fiscal period and 44.1% for
the 1995 fiscal period, which reflect the anticipated annual effective rates for
the respective fiscal years.
The extraordinary charge in the 1995 fiscal period represents the write-off
of unamortized deferred debt issuance costs of $1.3 million, net of the related
tax benefit of $0.5 million, associated with debt that was refinanced as a
result of the NAD acquisition. See "-- Liquidity and Capital Resources."
22
YEAR ENDED DECEMBER 30, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales increased 116.6% to $3,461.8 million in 1995 from $1,598.1
million in 1994. The increase in net sales was primarily attributable to the
acquisition of NAD on March 31, 1995 and the full year effect of the Malone
acquisition on October 31, 1994. Net sales excluding the effect of the NAD and
Malone acquisitions in 1995 increased by $95.8 million or 6.1% when compared to
1994 net sales. The increase in net sales is primarily due to increased sales to
existing accounts as a result of the addition of new restaurants and increased
sales volume at existing restaurants, offset, in part, by an additional week of
net sales in 1994.
Gross profit increased 101.0% to $268.5 million in 1995 from $133.6 million
in 1994. The gross profit percentage decreased to 7.8% in 1995 compared to 8.4%
in 1994. The gross profit percentage decrease is primarily attributable to the
higher cost of the product mix purchased by customers added through the NAD
acquisition. Gross profit excluding the effect of the NAD and Malone
acquisitions increased to 8.7% of sales in 1995 compared to 8.4% in 1994. The
increase is primarily a result of the renegotiation of a contract with one of
the Company's largest customers and the growth of a new account added in
mid-1994, for which the Company records a distribution fee without any related
product cost.
Operating expenses increased 94.8% to $255.2 million in 1995 from $131.0
million in 1994. As a percentage of net sales, operating expenses declined to
7.4% in 1995 from 8.2% in 1994. This decrease is a result of the acquisition of
NAD which has a product mix with a higher unit sales value. Operating expenses
as a percentage of net sales, excluding the NAD acquisition, increased to 8.4%
in 1995 from 8.2% in 1994, primarily attributable to increased personnel due to
growth of the business, the payment of management incentives which vested due to
achievement of business plan objectives, and higher workers' compensation and
vehicular insurance costs.
Earnings from operations increased to $12.6 million in 1995 from $2.6
million in 1994. The 1995 earnings were reduced by $0.7 million in restructuring
charges related to the consolidation and integration of the corporate support
functions following the NAD acquisition.
Net interest expense increased 102.2% to $13.3 million in 1995 from $6.6
million in 1994, primarily attributable to the additional borrowings associated
with the acquisition of NAD. However, net interest expense as a percentage of
net sales decreased 5.5% from .41% to .39% as a result of lower interest rates
and higher net operating asset turnover. See "-- Liquidity and Capital
Resources."
The income tax provision in 1995 was $0.1 million compared to an income tax
benefit of $1.6 million in 1994. The 1995 provision resulted from a lower
pre-tax loss in 1995 which, because of permanent differences resulting from the
NAD acquisition, translated into a relatively small amount of taxable income.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 25, 1993
Net sales increased 20.2% to $1,598.1 million in 1994 from $1,329.3 million
in 1993. Net sales excluding the effect of the Valley and Malone acquisitions
increased by $229.3 million, or 18.1% of 1993 net sales, primarily from the
growth in sales to Burger King restaurants. 1994 also included an additional
week of sales.
Gross profit increased 12.8% to $133.6 million in 1994 from $118.4 million
in 1993. Gross profit as a percentage of sales decreased to 8.4% in 1994
compared to 8.9% in 1993. The decrease is primarily a result of competitive
pricing pressures on distribution fees. See "-- General."
Operating expenses increased 14.7% to $131.0 million in 1994 from $114.2
million in 1993. As a percentage of net sales, operating expenses declined to
8.2% in 1994 from 8.6% in 1993. This decrease is attributable to the planned
staff reductions during 1994 and the impact of increased sales in 1994 without a
corresponding increase in fixed operating expenses.
Earnings from operations decreased to $2.6 million in 1994 from $4.2
million in 1993, primarily as a result of the decrease in gross profit
percentage.
Net interest expense increased 19.4% to $6.6 million in 1994 from $5.5
million in 1993, primarily as a result of higher interest rates.
23
Income tax benefit for 1994 increased $1.1 million over the benefit for
1993. The increase in the tax benefit was attributable to the Company's greater
pre-tax loss in 1994. The Company's income tax benefit reflects an effective tax
rate of 40.9% for 1994, compared to an effective rate of 37.5% for 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations and growth primarily
with cash flow from operations, borrowings under its credit facilities,
operating leases and normal vendor trade credit terms. The Company's cash flow
from operations was $9.0 million, $0.9 million and $50.0 million, in 1993, 1994
and 1995, respectively. The significant cash flow in 1995 was attributable to
the one-time benefit of acquiring assets without assuming certain corresponding
operating liabilities in connection with the acquisition of NAD. During the 1996
fiscal period, cash used in operations was $3.0 million, primarily as a result
of lower earnings from operations in the first quarter and other seasonal
fluctuations.
Cash used in investing activities was $8.0 million in the 1996 fiscal
period, all of which related to capital expenditures, primarily for cart
delivery equipment ($2.6 million) and computer systems upgrades ($3.8 million).
The Company anticipates capital expenditures of approximately $15 to $20 million
in each of the next three to five years in connection with the implementation of
its new distribution network, including the expansion of warehousing facilities
to accommodate expected growth, continued investment in computer systems and the
further deployment of cart deliveries. Cash used in investing activities was
$175.6 million in 1995, primarily to fund the NAD acquisition for $170.3 million
and capital expenditures of $5.7 million (primarily for cart delivery equipment
and computer systems upgrades). In 1994 net cash provided by investing
activities was $1.9 million. Proceeds from the settlement of certain purchase
price provisions relating to the BKDS acquisition were $6.6 million, offset by
$3.8 million used in the Malone acquisition and $1.4 million for capital
expenditures, primarily related to computer systems upgrades. Cash used in
investing activities was $16.1 million in 1993, of which $13.2 million was for
the Valley and McCabe's acquisitions and $2.4 million was for capital
expenditures related to computer systems upgrades.
The Company's financing activities include borrowings under, and
refinancings of, various credit facilities and the issuance of equity securities
and subordinated notes principally to finance acquisitions. The Company's
financing activities resulted in net cash provided by financing activities of
$11.5 million in the 1996 fiscal period, $126.7 million in 1995 and $8.7 million
in 1993 and net cash used by financing activities of $3.2 million in 1994. In
March 1995, the Company entered into a $240 million loan agreement with
NationsBank of Georgia N.A. and certain other financial institutions. Such
agreement provides for a revolving credit facility of up to $210 million and
term loans aggregating $30 million. Such facility and term loans were used to
finance the acquisition of NAD and refinance certain of the Company's
outstanding indebtedness. Availability under the revolving credit facility may
also be used to fund the Company's working capital requirements. As of June 29,
1996, there was an aggregate of $144.6 million outstanding under such loan
agreement. The loan agreement terminates on March 31, 2000 and the revolving
credit facility and term loans bear interest at prime plus 0.5% or the
Eurodollar borrowing rate plus 2.75%. The revolving credit facility and term
loans are secured by a lien on substantially all of the Company's assets. In
addition, the loan agreement contains restrictions on, among other things, the
Company's ability to pay dividends, prepay subordinated indebtedness, dispose of
assets, make future capital expenditures and investments and make loans and
other financial accommodations to affiliates, as well as the flow of funds from
the Company's subsidiaries to the parent company.
The net proceeds of the offering will be used as follows: (i) $15.0 million
to prepay the $15 million Subordinated Note held by Onex, (ii) $ million to
prepay at a discount the $10 million Subordinated Note held by Martin-Brower and
(iii) $ million to repay amounts outstanding under the Company's revolving
credit facility. The reduction of outstanding indebtedness with the proceeds of
the offering will result in a reduction of interest expense. At June 29, 1996,
the Company had $173.4 million of total indebtedness, which had an overall
weighted average annual interest rate of 9.14%, excluding the amortization of
deferred financing costs. See Note 6 of the Notes to Consolidated Financial
Statements. After giving effect to the offering and the use of the estimated net
proceeds thereof as described in "Use of Proceeds," assuming an initial public
offering price equal to the midpoint of the range set forth on the cover page of
this Prospectus, as of June 29, 1996, pro forma total indebtedness would have
been $ million, with an overall weighted
24
average annual interest rate of %, excluding the amortization of any new
deferred financing costs. After giving effect to the offering, as of June 29,
1996, the Company's pro forma borrowing availability under its revolving credit
facility would have been $ million.
The Company is in preliminary discussions with several bank groups to
refinance its revolving credit facility and term loans with new bank financing
or an asset-backed securitization facility. Based on proposals received by the
Company, the Company believes that interest on the remaining outstanding amounts
could be reduced by 100-200 basis points by such refinancing. To the extent the
Company replaces its revolving credit facility, it expects to incur a pre-tax
extraordinary charge of up to $10.0 million associated with prepayment penalties
and write-off of the deferred financing costs. The Company believes a new credit
facility will also provide more flexibility in managing the Company's working
capital requirements. There can be no assurance that the Company will be
successful in refinancing its outstanding credit facility and term loans or
consummating an asset-backed securitization.
The Company believes that the combination of cash flow generated from
operations and borrowings available under its current credit facilities (or any
refinancing thereof) are sufficient to satisfy its anticipated short-term
working capital needs. Management may determine that it is necessary or
desirable to obtain financing for growth through additional bank borrowings or
the issuance of new debt or equity securities. The Company's loan agreement
includes certain restrictive covenants which limit the flow of funds from the
Company's subsidiaries to the parent company. Such covenants are not expected to
have a material effect on the ability of the parent to meet its cash
obligations.
ASSET MANAGEMENT
Net operating asset turnover on average was 13.6 times, 16.5 times, 18.3
times and 18.9 times for 1993, 1994, 1995 and the 1996 fiscal period,
respectively. As a percentage of net sales, working capital on average was
3.30%, 2.99%, 2.95% and 3.13% for 1993, 1994, 1995, and the 1996 fiscal period,
respectively. Working capital turnover (net sales divided by working capital),
which measures the Company's effectiveness in managing its net current assets,
was on average 30.3 times, 33.4 times, 33.8 times and 31.9 times for 1993, 1994,
1995 and the 1996 fiscal period, respectively.
The Company's inventory turnover averaged 40.4 times, 44.4 times, 24.8
times, and 27.2 times for 1993, 1994, 1995, and the 1996 fiscal period,
respectively. The decrease in 1995 and 1996 is attributable to the acquisition
of NAD, which has a lower inventory turnover due to the increased complexity and
greater number of stock keeping units maintained for casual dining restaurant
chains. The high rate of inventory turnover benefits the Company by allowing it
to finance a portion of its working capital requirements through payables to its
vendors. Average accounts payable days, which measures the number of days
accounts payable are outstanding, were 19.1 days, 23.3 days, 22.4 days, and 21.9
days, for 1993, 1994, 1995, and the 1996 fiscal period, respectively.
Most of the Company's sales are made on open account terms. Credit terms
vary by customers and most allow discounts for early payment. The number of days
sales on average accounts receivable, which represents the Company's experience
in converting sales into cash, was 22.3 days, 26.1 days, 20.9 days, and 20.0
days for 1993, 1994, 1995, and the 1996 fiscal period, respectively. The
increase in days sales outstanding during 1994 resulted from inefficiencies
encountered in converting the Company's accounts receivable system.
QUARTERLY RESULTS AND SEASONALITY
Set forth is summary information with respect to the Company's operations
for the most recent ten fiscal quarters. Historically, the restaurant and
foodservice business is seasonal with lower sales in the first calendar quarter.
In addition, the weather in the first quarter of 1996 was particularly severe,
adversely impacting sales. Furthermore, the Company may experience quarterly
fluctuations in net sales depending on the timing of any acquisitions.
Management believes the Company's quarterly results will continue to be impacted
by the seasonality of the restaurant business and the timing of any future
acquisitions.
25
[Enlarge/Download Table]
FISCAL YEAR 1994
---------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER(a)(b)
------- -------- -------- -------------
(IN MILLIONS)
Net sales....................................... $ 356.6 $ 389.5 $ 399.8 $ 452.2
Gross profit.................................... 29.9 32.3 33.0 38.4
Earnings (loss) from operations................. (0.5) 2.6 0.9 (0.4)
Net earnings (loss)............................. (1.2) 0.5 (0.5) (1.2)
[Enlarge/Download Table]
FISCAL YEAR 1995
---------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER(c) QUARTER QUARTER
------- -------- -------- -------------
(IN MILLIONS)
Net sales....................................... $ 411.4 $1,036.4 $1,008.1 $ 1,005.9
Gross profit.................................... 35.4 79.5 78.3 75.3
Earnings (loss) from operations................. (0.5) 4.6 3.1 5.4
Earnings (loss) before extraordinary charge..... (1.3) 0.1 (0.7) 1.1
Net earnings (loss)............................. (2.1) 0.1 (0.7) 1.1
[Download Table]
FISCAL 1996
--------------------
1ST 2ND
QUARTER QUARTER
------- --------
(IN MILLIONS)
Net sales....................................... $ 968.7 $1,045.4
Gross profit.................................... 73.2 81.9
Earnings (loss) from operations................. (26.9) 5.6
Net earnings (loss)............................. (19.2) 1.2
---------------
(a) Includes the acquisition of certain assets and the assumption of certain
liabilities of Malone on October 31, 1994.
(b) Includes fourteen weeks of operations due to the 53 week year.
(c) Includes the acquisition of substantially all of the assets and the
assumption of certain liabilities of NAD on March 31, 1995.
BUSINESS COMBINATIONS
All of the Company's acquisitions have been accounted for using the
purchase method and accordingly the acquired assets and liabilities have been
recorded at fair value at the date of acquisition. The excess of the purchase
price over the fair value of tangible net assets acquired related to these
business combinations was approximately $41.3 million, including the effect of a
revision on March 31, 1996 of the estimates of certain costs related to the NAD
acquisition which increased goodwill by $7.6 million. The Company's intangible
assets, including goodwill, are being amortized on a straight-line basis ranging
from 3 to 40 years. The Company has determined that goodwill should be amortized
over 40 years, which reflects management's best estimate of the appropriate
period over which to amortize goodwill associated with those acquisitions and is
consistent with industry practice.
26
BUSINESS
ProSource is the nation's leading independent foodservice distributor
specializing in distribution to chain restaurants and is one of the largest
foodservice distributors in the United States. The Company distributes a wide
variety of items, including fresh and frozen meat and poultry, seafood, frozen
foods, canned and dry goods, fresh and pre-processed produce, beverages, dairy
products, paper goods and cleaning and other supplies. The Company specializes
in providing food and food-related products to two segments of the restaurant
industry -- limited-menu quick service restaurants, including Burger King,
Arby's, Long John Silver's, Sonic, Chick-fil-A, TCBY and Wendy's, and casual
dining restaurants, including Red Lobster, Olive Garden, TGIFriday's and
Chili's.
The Company was formed in 1992 to acquire BKDS, the "in-house" distributor
for BKC, which serviced approximately 4,150 Burger King restaurants. In the four
years since the acquisition, ProSource has, through a combination of
acquisitions and internal growth, become a leading distributor to chain
restaurants, servicing approximately 14,450 restaurants within 18 different
restaurant chains. In February 1993, the Company acquired certain operating
assets of McCabe's, and in connection therewith added 127 of the Burger King
restaurants included in the Company's current customer base. In March 1993, the
Company acquired certain assets and assumed certain liabilities of Valley,
adding 318 of the restaurants included in the Company's current customer base,
including certain Wendy's restaurants. In October 1994, the Company acquired
certain assets and assumed certain liabilities of Malone, adding 656 of the
restaurants included in the Company's current customer base, including certain
Sonic and KFC restaurants. In March 1995, the Company entered the casual dining
segment of the restaurant industry and further expanded its quick service
business with the acquisition of substantially all of the assets and the
assumption of certain liabilities of NAD from Martin-Brower, which added a total
of approximately 8,000 restaurants within 12 chains included in the Company's
current customer base. The Company has also been successful in expanding through
internally generated sales. Since its formation, the Company has added
approximately 400 of the Burger King restaurants included in its current
customer base through the growth of existing franchisee customers and the
addition of new customers. The Company has also added approximately 570 Jenny
Craig Weight Loss Centres and 150 Sonic restaurants through internal growth.
Since the Company's formation in 1992, net sales have grown from $1.3 billion in
1993 (the first full year of operations) to $4.0 billion in 1995 on a pro forma
basis.
The Company was incorporated in 1992 as a Delaware corporation. Its
principal executive offices are located at 550 Biltmore Way, 10th Floor, Coral
Gables, Florida 33134, and the Company's telephone number is (305) 529-2500. The
Company operates under the name "ProSource Distribution Services."
FOODSERVICE DISTRIBUTION INDUSTRY
The foodservice distribution business involves the purchasing, warehousing,
marketing and transportation of fresh and frozen meat and poultry, seafood,
frozen foods, canned and dry goods, fresh and pre-processed produce, beverages,
dairy products, paper goods and cleaning and other supplies from manufacturers
to a broad range of enterprises, including restaurants, cafeterias, nursing
homes, hospitals, other health care facilities and schools. The foodservice
distribution business generally does not include distribution to supermarkets
and other retail grocery stores. In 1995, the United States foodservice
distribution industry had an estimated $129 billion in net sales. Industry
sources indicate that the industry has grown at a rate of approximately 2.4%
over the past three years.
Within the foodservice distribution industry, there are two primary types
of distributors: broadline distributors and specialist distributors. Broadline
foodservice distributors service a wide variety of customers including both
independent and chain restaurants, schools, cafeterias and hospitals. Broadline
distributors may purchase and inventory as many as 25,000 different food and
food-related items. Customers utilizing broadline foodservice distributors
typically purchase inventory from several distributors. Specialist foodservice
distributors may be segregated into three categories: (i) product specialists
which distribute only one or a limited number of products such as produce or
meat, (ii) market specialists which distribute to one type of restaurant such as
Mexican and (iii) "systems" specialists which focus on one type of customer such
as chain restaurants or health care facilities. Systems specialists typically
serve as a single source of supply for their customers.
27
The Company is a systems distributor specializing in distribution to the
chain restaurant segment. With aggregate net sales in 1995 estimated by the
Company at approximately $42 billion, the chain restaurant segment represents a
significant portion of the foodservice distribution industry. The Company
believes the chain restaurant foodservice distribution segment is particularly
attractive due to (i) the high growth rate of chain restaurants, with compound
annual growth of 7% over the past three years according to industry sources,
primarily due to the growth of existing chain restaurants and the introduction
of new chain restaurant concepts, (ii) the uniformity of product offerings and
consistency of demand by chain restaurant customers, (iii) the increasingly
important focus by chain restaurants on foodservice distributors that can
provide consistent quality and reliable service on a nationwide basis to
maintain the chain's uniform standards and (iv) the fragmented nature of the
foodservice distribution segment serving chain restaurants, with over 3,000
companies operating in the industry. The Company believes that the consolidation
in this industry will continue as larger foodservice distributors with
nationwide service are better able to meet the need for consistent quality and
reliable service by chain restaurants.
The Company believes systems distributors are better able to service chain
restaurants than broadline distributors because they can offer their customers a
higher quality of service at a lower cost. Given the uniformity of product
offerings and the consistency of demand of chain restaurants, a systems
distributor has the opportunity to reduce its overall costs and consequently
those of its customers through purchasing and holding in inventory fewer stock
keeping units ("SKUs") than a broadline distributor. This reduces both the
in-bound and outbound freight costs through higher volumes and larger drop sizes
and provides more efficient and reliable distribution schedules thereby reducing
labor costs of both the systems distributor and its customer. In addition,
systems distributors generally require a smaller sales force than broadline
distributors require. The Company believes that the uniformity of product
offerings and frequency of deliveries also result in higher volumes, allowing a
systems distributor to chain restaurants to significantly improve net asset
turnover as compared to a broadline distributor. In addition, management
believes that the larger systems distributors have the volume and scale to offer
chain restaurants an opportunity to further reduce their costs through
value-added services such as procurement of non-proprietary items and in-bound
transportation management as well as the capital to invest in systems and
business processes to continually improve supply chain management from the
vendor to the restaurant.
STRATEGIES
The Company is the nation's leading independent foodservice distributor
specializing in distribution to chain restaurants, and believes that it has one
of the most comprehensive distribution networks of any independent distributor
serving chain restaurants, based on geographic coverage. With net sales of $4.0
billion in 1995 on a pro forma basis, the Company believes, based on its
estimates, that it has captured approximately 10% of the $42 billion chain
restaurant distribution market in the United States. The Company estimates that
the next largest independent systems distributor has a market share of
approximately 6%. The Company believes that its size and scale give it an
advantage over its competitors with respect to purchasing power and lower
distribution costs. The Company plans to strengthen its position as a market
leader by continuing to pursue the following strategies for maximizing
profitability and enhancing its long-term growth opportunities.
Pursue Internal and External Growth Opportunities. The Company intends to
continue to grow through a combination of adding new customers and products
within the chains that it currently serves, adding new chains and, where
appropriate, making selective acquisitions of other foodservice distributors.
- Growth With Existing Chains. The chain restaurant segment of the
restaurant industry has historically grown faster than the overall
industry. As the primary distributor to most of its customers, the
Company expects to continue to grow with the chain restaurants it serves.
Such growth can result from a variety of factors, including increased
traffic in existing restaurants, the addition of new customers within the
chain and the acquisition or development of new chains by the Company's
existing customers. In addition, the Company believes that there is the
opportunity for increased "product penetration" by increasing the range
of products, including produce, dairy and bakery products, distributed to
existing customers.
28
- Growth Through Addition of New Chains. The Company is continually
monitoring the marketplace for opportunities to expand the portfolio of
chains that it serves. Primary targets include chains offering menu
categories not covered by the Company's existing customers, chains
operating in geographic areas in which the Company could benefit from
increased customer density, and regional chains which could be added to
the national chains which have traditionally been the Company's focus. In
seeking potential new customers, the Company attempts to concentrate on
growing chains served by broadline distributors who might benefit from
the industry focus that a systems distributor brings, as well as chains
which the Company believes would benefit from the quality of service and
attention to supply chain management that the Company provides to its
customers.
- Selective Acquisitions. The Company believes the fragmented nature of
the industry and consolidation activity offer the Company opportunities
to supplement internal growth through selective acquisitions. In
addition, the Company believes that the strength of its balance sheet
following the offering will put it in a position to take advantage of
such opportunities. The Company intends to continue to focus its
acquisition strategy on systems specialists that distribute principally
to limited-menu quick service and casual dining chain restaurants which
will expand its customer base or improve geographic customer density.
Margin Improvement/Cost Reduction Programs. The Company is undertaking
several initiatives to increase margins and reduce its overall cost structure.
- Network Optimization. The Company is initiating a major project to
restructure its distribution network and create a new national
distribution system. Through this process, which is expected to take 3-5
years to complete, the Company intends to consolidate and integrate its
existing distribution network of 34 centers into 23 centers consisting of
six large regional distribution centers and 17 local distribution
centers. The new network should provide the Company with additional
distribution center capacity for continued growth. The Company estimates
the capital investment for this network optimization program will be
approximately $27 million and is projecting cost savings following full
implementation of the new system of approximately $20-25 million annually
compared to projected network costs under its existing system. However,
there can be no assurance that the proposed network will be completed
within the time period projected, that costs to implement the network
will not be higher than currently estimated or that projected costs
savings will be realized. See "-- Operations and Distribution -- Product
Replenishment," "Risk Factors -- No Assurance of Achieving Anticipated
Cost Savings" and "Risk Factors -- Capacity Constraints; Ability to
Implement Network Optimization Program."
- Enhanced Delivery Systems. The Company has recently introduced an
innovative value-added cart delivery system which the Company estimates
should result in restaurant deliveries which are 2-3 times faster than
methods currently used in the industry. The Company is currently using
cart delivery for approximately 17% of its customers and expects to
service approximately 75% through this method within three years. The
Company estimates the capital investment required for implementation of
the cart delivery system will be approximately $8 million and is
projecting cost savings to the Company, when fully implemented, of
approximately $10 million annually compared to projected costs of
conventional delivery methods. The Company believes that cart delivery
will also benefit its customers by reducing the disruption caused by
deliveries and labor costs associated with unloading. However, there can
be no assurance that costs to complete implementation will not be higher
or that projected cost savings will be realized. See "-- Operations and
Distribution -- Cart Delivery System" and "Risk Factors -- No Assurance
of Achieving Anticipated Cost Savings."
- Corporate Unification Program. The Company is in the process of
integrating its preexisting operations with the NAD operations acquired
from Martin-Brower into a new corporate support center located in Coral
Gables, Florida. The corporate support center will allow the Company to
centralize all purchasing, routing, in-bound transportation and
operations support functions. This process, which is expected to be
completed by mid-1997, should reduce overall personnel levels by 75
positions and is expected to result in aggregate cost savings of
approximately $5-6 million annually. However, there can
29
be no assurance that the projected reductions in personnel and cost
savings will be realized. See "Risk Factors -- No Assurance of Achieving
Anticipated Cost Savings."
Establish Position as Preeminent Supply Chain Manager. The Company
believes that its size, scale and expertise in foodservice distribution and
transportation systems allow it to assist its customers in managing the entire
chain of supply, from the vendor location to the customer's storeroom. Emphasis
on supply chain management has allowed the Company to identify value-added
services to customers which result in reduced costs for its customers and
improved margins for the Company. Two examples of value-added services which the
Company is currently offering to customers are the purchasing of non-proprietary
products and the management and provision of in-bound transportation services
(i.e., transportation of products from the vendor to the distribution center).
Technological Leadership. The Company believes that it is a leader within
the industry in the application of information technology to its operations. The
Company has invested approximately $10 million in information systems since its
inception in 1992 through June 29, 1996, and has budgeted approximately $5
million per year for the next three to five years for new systems and upgrades.
The Company currently has in place a variety of information technology systems,
including electronic ordering, inventory management, financial and routing
systems. The Company continues to invest in technology. Among a new generation
of information technology being installed are new systems in the area of
electronic customer ordering, "order optimization" to manage the Company's
purchasing and inventory functions, and freight management. In addition, in
connection with its "network optimization" program, the Company intends to put
in place new customer ordering and warehouse management systems. Management
believes that these systems will allow the Company to manage the complexity and
diversity of its business at a lower cost and with higher service levels. See
"-- Operations and Distribution -- Order Fulfillment."
Service Quality Program. The Company places a significant emphasis on
providing a high level of service to its customers. The Company continuously
measures its service performance levels by monitoring (i) its delivery of the
cases ordered by a customer, the "order fill rate", (ii) its successful delivery
of an order within one hour of the pre-arranged time, "on-time delivery", (iii)
its delivery of all the cases ordered by a customer, the "perfect order" and
(iv) its customers' perception of the quality of service ProSource provides, the
"customer satisfaction index". The Company believes it is a leader in the
industry in quality and reliability of service to its customers. By providing a
high level of service and reliability, the Company believes it can reduce the
number of reorders and redeliveries, reducing costs for both the Company and its
customers and improving customer loyalty. See "-- Operations and
Distribution -- Order Fulfillment."
CUSTOMERS
The Company's customers as of June 29, 1996 consisted of 2,780 franchisees
and 17 corporate owners of approximately 14,450 limited-menu quick service and
casual dining chain restaurants representing 18 restaurant chains. The Company
is generally one of a limited number of suppliers to the chains it serves. The
largest chains served by the Company are Burger King, Red Lobster and Arby's,
representing 38%, 15% and 10% of 1995 net sales, respectively, on a pro forma
basis. The Company's largest customer is Darden Restaurants, Inc. (owner of
Olive Garden and Red Lobster), representing 21% of the Company's 1995 net sales
on a pro forma basis. No other chain or single customer accounted for more than
10% of the Company's pro forma net sales in 1995.
30
The following table sets forth a list of the chains the Company served as
of December 30, 1995:
[Enlarge/Download Table]
1995 PRO FORMA % OF TOTAL 1995
NUMBER OF RESTAURANTS NET SALES PRO FORMA
CHAIN CUSTOMERS SERVED (IN THOUSANDS) NET SALES
---------------------------------------- --------- ----------- -------------- ---------------
Quick Service
Burger King............................. 946 4,428 $1,531,774 38.4%
Arby's.................................. 442 2,513 404,781 10.1
Long John Silver's...................... 85 1,479 319,028 8.0
Chick-fil-A............................. 11 658 157,409 3.9
Sonic................................... 154 734 83,640 2.1
Wendy's................................. 29 258 74,788 1.9
KFC..................................... 94 346 51,856 1.3
Manchu Wok.............................. 52 145 11,345 0.3
----- ------ ---------- -----
1,853 10,561 2,634,621 66.0
Casual Dining
Red Lobster............................. 1 715 599,818 15.0
Olive Garden............................ 1 488 255,753 6.4
TGIFriday's............................. 50 328 197,948 5.0
Chili's................................. 14 326 143,492 3.6
Spaghetti Warehouse..................... 3 38 11,641 0.3
----- ------ ---------- -----
69 1,895 1,208,651 30.3
Other
TCBY.................................... 606 1,234 78,086 2.0
Other Chains............................ 79 285 67,547 1.6
Jenny Craig(1).......................... 1 587 4,537 0.1
----- ------ ---------- -----
686 2,106 150,170 3.7
TOTALS........................ 2,608 14,562(2) $3,993,443 100.0%
===== ====== ========== =====
---------------
(1) The Company does not take title to the products it delivers to Jenny Craig
Weight Loss Centres.
(2) During the six months ended June 29, 1996, the number of restaurants served
by the Company decreased by 903, which was partially offset by the addition
of 792 new restaurants.
The Company has contracts with approximately 70% of its customers, with
terms ranging from 2-7 years and an average term of three years. In connection
with the acquisition of BKDS in 1992, the Company entered into an exclusive
distributor agreement and related distribution agreements with BKC, pursuant to
which, through 2002, (i) the Company is designated as the exclusive distributor
to BKC's company-owned and operated Burger King restaurants in the United States
(which accounted for 3.9% of 1995 net sales on a pro forma basis), (ii) the
Company is a BKC-approved distributor to franchised Burger King restaurants in
the United States and (iii) BKC has agreed that the Company will remain the sole
national distributor to Burger King restaurants. BKC has the right to terminate
these contracts (i) upon a material failure to perform by the Company and (ii)
in the case of the exclusive distributor agreement, upon the bankruptcy of the
Company. In addition to the 521 BKC-owned restaurants, the Company also services
4,037 Burger King restaurants owned by franchisees. In the aggregate, this
represents 68% of all Burger King restaurants in the United States. The Company
has also entered into distribution agreements with Olive Garden and Red Lobster
pursuant to which the Company is the primary distributor to the restaurants
owned by Olive Garden and Red Lobster operating in the United States. Olive
Garden and Red Lobster have the right to terminate their respective agreements
upon (i) a material change in ownership of the Company other than as a result of
a public offering by the Company, (ii) a material breach by the Company, (iii)
the bankruptcy of the Company and (iv) a failure of the Company to meet certain
performance reliability standards. Both agreements terminate in 1998. The
Company believes that from time to time it may not have been in strict
compliance with all of the performance reliability standards in such contracts.
However, it is not aware of any issues of non-compliance which could reasonably
be expected to result in early termination of such contracts.
31
The Company considers its relationships with its customers to be good. The
Company holds regular meetings with its customers to discuss performance
reliability and other issues which have arisen from time to time. The Company
views the strength of its relationships with its customers, rather than its
contracts, as defining the commitment between them.
PURCHASING AND SUPPLY
Due to the high volume of proprietary products required by chain
restaurants, the chain typically negotiates product sourcing directly with
vendors and then requires the distributor to use such vendors and purchase at
the negotiated price. Furthermore, customers within the same chain often
cooperate to utilize internal or third party purchasing organizations.
The Company's emphasis on supply chain management has allowed the Company
to identify the purchasing of non-proprietary products as a value-added service
which it can provide to customers. The Company has formed a purchasing
subsidiary which pools the needs of its customers for non-proprietary products,
such as unlabeled paper products, cleaning supplies and produce, and uses the
resulting purchasing power to negotiate lower prices with vendors. The Company
and its customers share in the cost savings, improving margins for the Company
and reducing costs for its customers. Of the $800 million in non-proprietary
products sold to its customers in 1995, $27.5 million were purchased by the
Company and resold to its customers on this basis, and the Company believes that
a total of approximately $400 million of such purchases were potentially
available for purchase and resale in this manner. The Company believes that
expansion of its purchasing services represents an important opportunity for
growth.
The Company purchases and distributes a wide variety of items, including
fresh and frozen meat and poultry, seafood, frozen foods, canned and dry goods,
fresh and pre-processed produce, beverages, dairy products, paper goods and
cleaning and other supplies. Because suppliers for proprietary products are
generally designated by the chain, the loss of any such supplier would likely
result in the development of a new source of supply by such chain. Accordingly,
the Company does not believe that the loss of any supplier would have a material
adverse effect on the Company's operating results or its ability to serve its
customers.
MARKETING AND CUSTOMER SERVICE
The Company's senior management, together with a team of marketing, sales
and customer service personnel, are involved in maintaining relationships with
key customers and securing new accounts. The Company targets as potential new
customers restaurant chains offering menu categories not covered by the
Company's existing customers, chains operating in geographic areas in which the
Company could benefit from increased customer density, and regional chains which
could be added to the national chains which have traditionally been the
Company's focus. In seeking new customers, the Company attempts to concentrate
on growing chains served by broadline distributors which might benefit from the
industry focus that a systems distributor brings, as well as chains which the
Company believes would benefit from the quality of service and attention to
supply chain management that the Company provides to its customers.
The Company's customer service activities are highly customized to the
unique needs of the customer. Each customer has a dedicated account manager who
is responsible for overseeing all of its service needs and coordinating the
services provided through an account team of customer service professionals,
including a dedicated "logistics services manager." The logistics services
manager is responsible for coordinating day-to-day product flow for the
customer, as well as working closely with the customer's purchasing and
marketing organization.
The Company rigorously monitors customer service levels. In order to manage
problem resolution, the Company is implementing professional help desk software
which tracks customer calls in order to ensure that appropriate action and
follow-up occurs. The Company utilizes frequent trips to the customer's site for
regularly scheduled reviews and key project meetings and telephone conferencing
in order to ensure close coordination between the Company and the customer. In
addition, the Company monitors customer perceptions through periodic surveys.
See "-- Operations and Distribution -- Order Fulfillment."
32
OPERATIONS AND DISTRIBUTION
The Company's operations can generally be categorized into two business
processes: (i) product replenishment and (ii) order fulfillment. Product
replenishment involves the management of logistics from the vendor location
through the delivery of products to the Company's distribution centers. Order
fulfillment involves all activities from customer order placement through
delivery to the restaurant location. Supporting the Company's business processes
are its innovative cart delivery system, its fleet of approximately 1,450
tractors and trailers and its management information systems.
Product Replenishment. While the Company is responsible for purchasing
products to be delivered to its customers, each chain typically selects the
vendor and negotiates the price at which most products will be purchased. See
"-- Purchasing and Supply." The Company determines the distribution centers
which will warehouse products for each customer and the quantities in which such
products will be purchased. Order quantities for each product are systematically
determined for each distribution center, taking into account both recent sales
history and projected customer demand. The number of distribution centers used
to serve a customer is based on the number and location of the restaurants to be
serviced. Given the Company's experience in managing its product flow, losses
due to shrinkage, damage and product obsolescence represent less than 0.1% of
1995 net sales. The Company is in the process of implementing a new order
optimization system which will utilize a demand forecasting program to (i)
establish order quantities and product availability levels and (ii) order
products as needed. The new system incorporates proprietary decision support
technology that optimizes the trade-off between in-bound transportation costs
and inventory carrying costs.
The Company works with its chain customers in order to optimize
transportation from vendor locations to distribution warehouses. By utilizing
the collective demand of its customers for in-bound transportation, its existing
fleet of trucks and its expertise in managing transportation, the Company can
offer its customers in-bound transportation, in many instances on a more
economical basis than that offered by the vendors that have traditionally
provided such services. The Company believes it can offer its customers lower
in-bound transportation costs through (i) use of the Company's delivery fleet to
backhaul products, (ii) consolidation of products from more than one vendor or
for use by more than one customer to increase truckloads and (iii) brokering the
freight to third party carriers with whom the Company has negotiated lower
transportation rates. In 1995, the Company managed approximately 30% of the
total freight tonnage to its distribution centers.
The Company currently warehouses 5,500 types of products for its customers
at 34 facilities in 27 cities. This distribution network includes the Company's
preexisting distribution centers, as well as the distribution centers acquired
in the NAD transaction. Currently, no one distribution center maintains
inventories for all customers and, as a result, some customers are not serviced
by the distribution center closest to them. The Company has begun plans to
implement a new national network of distribution centers. Through this process,
which is expected to take 3-5 years to complete, the Company intends to
consolidate and integrate its existing distribution network of 34 centers into
23 centers consisting of six large regional distribution centers ("RDCs") and 17
local distribution centers ("LDCs"). Under the new network, high volume products
will be shipped directly to both RDCs and LDCs, with low volume products being
shipped only to RDCs which will supply these products to the LDCs. The Company
expects its new distribution network to reduce costs primarily in two ways.
First, by enabling the Company to fully service more customers from a
distribution center closer to the customer, transportation costs should be
reduced. Second, more efficient utilization of its facilities should reduce by
approximately 10% the amount of warehouse space required for the same level of
business. In addition, the new network should provide the Company with
additional distribution center capacity for continued growth. See "Risk
Factors -- Capacity Constraints; Ability to Implement Network Optimization
Program." The Company estimates the capital investment for the proposed network
will be approximately $27 million and is projecting cost savings following full
implementation of the new system of approximately $20-25 million annually
compared to projected network costs under its existing system. However, there
can be no assurance that the proposed network will be completed within the time
period projected, that costs to implement the network will not be higher than
currently estimated or that projected costs savings will be realized. See "Risk
Factors -- No Assurance of Achieving Anticipated Cost Savings" and "Risk
Factors -- Capacity Constraints; Ability to Implement Network Optimization
Program." The
33
consolidation of all customers into common distribution facilities in
conjunction with the development of the network should optimize in-bound
transportation costs, outbound miles, inventory investment and warehouse
capacity.
Upon receipt of the product at the distribution centers, it is inspected
and stored in racks. Each distribution center contains ambient, refrigerated and
frozen space as well as offices for operating, sales and customer service
personnel and a computer networked with the Company's centralized computer
system. In conjunction with the network optimization and integration strategy,
the Company intends to modify the racking configurations of its distribution
centers and install a new distribution center management system that controls
routing, shipping control, trip management, invoicing, inventory control and
communications.
Order Fulfillment. The Company places a significant emphasis on providing
a high service level in order fulfillment. For the six months ended June 29,
1996, the Company achieved order fill rates of 99.7% and on-time deliveries of
92%. By providing a high level of service and reliability, the Company believes
that it can reduce the number of reorders and redeliveries, reducing costs for
both the Company and its customers. Each restaurant places product orders based
on recent usage, estimated sales and existing restaurant inventories. The
Company has developed pre-established routes and pre-arranged delivery times
with each customer. Product orders are placed with the Company one to three
times a week either through the Company's customer service representative or
through electronic transmission using the Company's proprietary software.
Approximately 42% of the restaurants served by the Company transmit product
orders electronically. Orders are generally placed on a designated day in order
to coordinate with the Company's pre-established delivery schedules. Processing
and dispatch of each order is generally completed within 24 hours of receipt and
the Company's standards require each order to be delivered to the customer
within one hour of a pre-arranged delivery time.
Products are picked and labeled at each distribution center. The products
are placed on either a pallet or one of the Company's delivery carts for loading
of outbound trailers. The Company utilizes radio frequency and bar code scanning
in two distribution centers, and intends to implement this technology in its new
distribution center management systems. Delivery routes are scheduled to both
fully utilize the trailer's load capacity and minimize the number of miles
driven. The Company transports approximately 1.65 million tons of product and
its trucks travel in excess of 60 million miles annually. The Company currently
utilizes several unloading methods at the restaurant including (i) gravity aided
rollers, (ii) hand carts and ramps and (iii) its new cart delivery system.
Cart Delivery System. The Company has recently introduced an innovative
value-added cart delivery system which the Company estimates should result in
restaurant deliveries which are 2-3 times faster than methods currently used in
the industry. Under this system, at the distribution center, products are loaded
into carts which are then loaded directly onto delivery trucks. At the delivery
site, instead of unloading products by conveyor or handcart, the entire cart is
simply unloaded and rolled into the customer's storeroom. The cart delivery
system improves productivity of the Company's drivers, enhances utilization of
its tractors and trailers and improves employee safety. The Company is currently
using cart delivery for approximately 17% of its customers and expects to
service approximately 75% through this method within three years. The Company
estimates the capital investment required for implementation of the cart
delivery system will be approximately $8 million and is projecting cost savings
to the Company, when fully implemented, of approximately $10 million per year
compared to projected costs of conventional delivery methods. The Company
believes that cart delivery will also benefit its customers by reducing the
disruption caused by deliveries and labor costs associated with unloading.
However, there can be no assurance that costs to complete implementation will
not be higher or that projected cost savings will be realized. See "Risk
Factors -- No Assurance of Achieving Anticipated Cost Savings."
The Company believes that the cart delivery system represents a major
innovation in foodservice distribution methods. In recognition of this
achievement, ID Magazine recently awarded ProSource an "Innovator of the Year"
Award for 1995. The Company hopes to expand the cart delivery system by leaving
the carts at the customer's location until the next delivery, allowing them to
be used as shelving by the customer, and developing new software which would
manage the loading of the carts and trailers, thereby
34
maximizing cart utilization and ease of customer use. See
"-- Strategies -- Margin Improvement/Cost Reduction Programs -- Enhanced
Delivery Systems."
Fleet. The Company operates a fleet of approximately 1,450 vehicles,
including approximately 600 tractors and 850 trailers. The Company leases
approximately 450 of the tractors from Ryder System, Inc. pursuant to
full-service leases which include maintenance, licensing and fuel tax reporting.
The remaining tractors are leased under similar full-service leases from a
variety of truck leasing companies. The trailers are leased primarily from GE
Capital Services. Lease terms average six years for tractors and 7-10 years for
trailers.
Substantially all of the Company's vehicles contain on-board computers. The
computers assist in managing fleet operations and provide expense controls,
automated service level data collection and real-time driver feedback, thereby
enhancing the Company's service level to customers. Substantially all of the
Company's trailers contain three temperature-controlled compartments, which
allow the Company to simultaneously deliver frozen food, refrigerated food and
dry goods. In order to implement its cart delivery system, as trailer leases
expire, the Company has begun the process of substituting new trailers which are
configured so as to accommodate the carts. This generally involves dividing the
trailers into thirds longitudinally in order to allow for separate carts to go
in each of the separate temperature controlled sections. Approximately 17% of
the Company's existing trailers are configured for cart delivery, and the
Company expects that 75% of its fleet of trailers will ultimately be so
configured. See "-- Strategies -- Margin Improvement/Cost Reduction
Programs -- Enhanced Delivery Systems."
Management Information Systems. The Company has invested approximately $10
million in information systems since its inception in 1992 through June 29,
1996, and has budgeted approximately $5 million per year for the next three to
five years for new systems and upgrades. The Company currently has in place a
variety of information technology systems, including electronic ordering,
inventory management, financial and routing systems. These systems represent a
combination of systems that were installed in 1993 following formation of the
Company and systems that were acquired in connection with the acquisition of
NAD. The Company is in the process of integrating these systems and installing
new system technologies in the areas of electronic customer ordering, "order
optimization" to manage the Company's purchasing and inventory functions, and
freight management. In addition, in connection with its "network optimization"
program, the Company intends to put in place new customer ordering and warehouse
management systems. Management believes that these systems will allow the
Company to manage the complexity and diversity of its business at a lower cost
and with higher service levels. See "-- Strategies -- Technological Leadership."
COMPETITION
The foodservice distribution industry is highly competitive. The Company
competes with other systems foodservice distribution companies focused on chain
restaurants and with broadline foodservice distributors. The Company's principal
national competitors are Sysco Corp., Alliant Foodservice Inc. (formerly Kraft
Distribution), MBM Corp., NEBCO-Ameriserv, Marriott Distribution Services Inc.,
King Provision Corp. and Pepsi Foodservices, an in-house distributor for
PepsiCo, Inc. The Company also competes with regional distributors, principally
for business from franchisee-owned Burger King restaurants. The Company believes
that distributors in the foodservice industry compete on the basis of price and
the quality and reliability of service. Because a number of the Company's
customers prefer a distributor that is able to service their restaurants on a
nationwide basis, the Company believes that it is in a strong position to
compete for national chain accounts. The Company attributes its ability to
compete effectively against smaller regional and local distributors in part to
the cost advantages resulting from its size, centralized purchasing operations
and ability to offer broad market coverage through a wide network of
distribution centers. However, in light of the consolidation in the foodservice
distribution industry, the Company could face increased competition to the
extent that there is an increase in the number of foodservice distributors
specializing in distribution to chain restaurants on a nationwide basis.
In addition, distribution fees received from a number of the Company's
customers decreased significantly in 1993 and 1994 as a result of competitive
pricing pressures. While distribution fees have stabilized in 1995
35
and the first six months of 1996, and management expects such stabilization to
continue through 1996, there can be no assurance that competitive pricing
pressure will not recur in the future. See "Risk Factors -- Competition."
PROPERTIES
The Company's principal executive office is located in Coral Gables,
Florida, with additional administrative facilities located in Chicago, Cleveland
and Coral Gables. The Company is currently in the process of consolidating these
operations into a new principal executive office and corporate support center
located in Coral Gables. This facility, consisting of approximately 83,000
square feet of leased space, is expected to be ready for full-scale operations
on or about October 1, 1996. See "-- Strategies -- Margin Improvement/Cost
Reduction Programs -- Corporate Unification Program."
The following table sets forth certain information with respect to the
Company's 34 operating distribution centers:
[Enlarge/Download Table]
APPROXIMATE
LOCATION SQUARE FEET
------------------------------------------------------------------------- -----------
Atlanta, Georgia(1)...................................................... 217,670
Burlington, New Jersey................................................... 60,880
Chester, New York........................................................ 131,400
Chicago, Illinois........................................................ 67,457
Cleveland, Ohio.......................................................... 40,540
Columbus, Ohio........................................................... 174,000
Dallas, Texas (1)(3)..................................................... 176,400
Denver, Colorado(4)...................................................... 57,608
Detroit, Michigan........................................................ 34,897
Greensboro, North Carolina............................................... 41,000
Gridley, Illinois........................................................ 151,000
Houston, Texas(1)........................................................ 77,900
Kansas City, Kansas(2)(5)................................................ 216,450
Lakeland, Florida........................................................ 31,806
Los Angeles, California(2)............................................... 245,540
Miami, Florida........................................................... 31,225
New Orleans, Louisiana................................................... 36,180
New York, New York....................................................... 35,000
Norman, Oklahoma (6)..................................................... 52,000
Orlando, Florida......................................................... 150,000
Oxford, Massachusetts.................................................... 40,000
Phoenix, Arizona......................................................... 38,200
Portland, Oregon......................................................... 74,500
San Jose, California..................................................... 31,500
Trenton, Ontario......................................................... 20,000
Virginia Beach, Virginia................................................. 23,045
Washington, DC(7)........................................................ 83,000
---------
Total:......................................................... 2,339,198
=========
---------------
(1) Two facilities.
(2) Three facilities.
(3) Includes approximately 39,200 square feet of supplemental space in three
remote facilities.
(4) Includes approximately 38,610 square feet of supplemental space in two
remote facilities.
(5) Includes approximately 23,500 square feet of supplemental space in a remote
facility.
(6) Includes approximately 11,000 square feet of supplemental space in a remote
facility.
(7) Includes approximately 30,000 square feet of supplemental space in a remote
facility.
36
Of the 34 facilities, 20 facilities (representing an aggregate of approximately
832,830 square feet) are leased and 14 facilities (representing an aggregate of
approximately 1,506,370 square feet) are owned by the Company.
EMPLOYEES
As of June 29, 1996, the Company had approximately 3,800 full-time
employees, of whom approximately 420 were employed in corporate support
functions and approximately 3,380 were warehouse, driver and administrative
staff in the distribution centers. Approximately 690 of the Company's employees
were covered by 11 collective bargaining contracts with seven local unions, six
of which are associated with the International Brotherhood of Teamsters, and one
of which is independent. Three contracts, covering approximately 90 employees,
will expire by the end of 1996, and three contracts, covering approximately 180
employees, will expire during 1997. The Company has not experienced any
significant labor disputes or work stoppages. The Company believes that its
relationships with its employees are good.
REGULATORY MATTERS
The Company is subject to a number of federal, state and local laws,
regulations and codes, including those relating to the protection of human
health and the environment, compliance with which has required, and will
continue to require, capital and operating expenditures. The Company is not
aware of any violations of, or pending changes in, such laws, regulations and
codes that are likely to result in material penalties or material increases in
compliance costs. The Company, however, is not able to predict the impact of any
changes in the requirements or mode of enforcement of these laws, regulations
and codes on its operating results.
The Company owns and leases distribution centers, at some of which on-site
vehicle fueling activities may have resulted in releases of diesel or other
petroleum products to the soil or groundwater. The Company may be subject to
liability for clean-up of contaminated soil or groundwater at these distribution
centers and is in the process of investigating or remediating the contamination.
Although there can be no assurances, the Company does not believe that the
estimated costs associated with any required investigation or remediation will
have a material adverse effect on the Company's financial condition, results of
operations or liquidity. The Company has engaged in a program to remove
underground fuel storage tanks located on its properties. As a result, with the
exception of two such tanks, which are scheduled to be removed during 1996, all
underground fuel storage tanks have been removed from the Company's properties.
In addition, several of the Company's facilities are located over areas of
regional groundwater contamination or are near sites which have contaminated
soil or groundwater. The Company has not been named a responsible party at, and
does not anticipate any liability associated with, any of these sites.
LITIGATION
From time to time the Company is involved in litigation relating to claims
arising out of its normal business operations. The Company is not currently
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company.
CONTROLLING STOCKHOLDER
The Company is controlled by Onex. Onex Corporation, based in Toronto,
Canada, is a publicly listed (on The Toronto Stock Exchange and The Montreal
Exchange) diversified company that operates through autonomous subsidiaries and
strategic partnerships. Onex had consolidated revenues of Cdn.$6.5 billion for
1995 and consolidated assets of Cdn.$2.8 billion at June 30, 1996. Onex
currently owns 86% of the outstanding Common Stock of the Company. Upon
completion of the offering, Onex will own % of the outstanding Class B Common
Stock, representing % of the combined voting power of the outstanding Common
Stock. See "Principal Stockholders" and "Certain Transactions."
37
MANAGEMENT
The following table sets forth certain information concerning the directors
and executive officers of the Company as of the date of this Prospectus.
[Enlarge/Download Table]
NAME AGE POSITION
------------------------------------------ --- ------------------------------------------
David R. Parker........................... 53 Chairman of the Board of Directors
Thomas C. Highland........................ 54 President, Chief Executive Officer and
Director
Daniel J. Adzia........................... 54 Vice-Chairman, Chief Marketing Officer and
Director
William F. Evans.......................... 48 Executive Vice President, Chief Financial
Officer
Paul A. Garcia de Quevedo................. 42 Vice President, Treasurer and Secretary
William G. Berryman....................... 53 Senior Vice President, Chief Information
Officer
Dennis T. Andruskiewicz................... 42 Senior Vice President, Operations Support
Robert S. Donaldson....................... 40 Senior Vice President, Field Operations
John E. Foley............................. 47 Senior Vice President, Operations
Development
John P. Gainor............................ 39 Senior Vice President, Logistics and
Purchasing
Gerald W. Schwartz........................ 54 Director
Anthony R. Melman......................... 49 Director
Michael E. Treacy......................... 40 Director
Michael Carpenter......................... 49 Director
Anthony Munk.............................. 36 Director
C. Lee Johnson............................ 64 Director
R. Geoffrey P. Styles..................... 65 Director
David R. Parker Mr. Parker has served as Chairman of the Board of
Directors since the formation of the Company in 1992. From July 1, 1991 to July
1, 1992, Mr. Parker was an independent investor, working primarily on the
formation of the Company and the acquisition of BKDS. Prior to such time, he was
Senior Executive Vice President of Ryder System, Inc. and President of the
Vehicle Leasing and Services Division. Previously, he was Chief Operating
Officer of Ryder's Business Services Group which included the company's
worldwide aviation support businesses and its insurance management services
businesses. Before joining Ryder System in 1984, Mr. Parker was Executive Vice
President and Sector Executive of American Can Company (Primerica). Mr. Parker
serves on the Boards of Directors of Premark International, Inc. and
SunBank/Miami, N.A.
Thomas C. Highland Mr. Highland has served as President, Chief Executive
Officer and a Director of the Company since its formation in 1992. Before
serving in this capacity, Mr. Highland was President of BKDS from 1988 to 1992.
Prior thereto, he held various executive positions at Warner Lambert Company,
including Vice President, U.S. Distribution, Director, Distribution Operations,
Pharmaceutical Group and Director, Distribution Center Operations from 1963 to
1988.
Daniel J. Adzia Mr. Adzia has served as Vice-Chairman, Chief Marketing
Officer of the Company since the acquisition of NAD in March 1995 and a Director
of the Company since April 1995. From 1975 to 1995, Mr. Adzia served in various
executive capacities at Martin-Brower including President of NAD. Prior to
joining Martin-Brower, Mr. Adzia held various sales and sales management
positions with Oscar Mayer & Co.
William F. Evans Mr. Evans has served as Executive Vice President, Chief
Financial Officer of the Company since July 1995. Prior to joining the Company,
he was the Senior Vice President, Corporate Operations of H&R Block, Inc. from
August 1992 to June 1995. Prior to 1992, Mr. Evans served in executive
capacities at D&B Software Services, Inc. from 1990 to 1992, Management Science
America, Inc. from 1989 to 1990 and Electromagnetic Sciences, Inc. from 1985 to
1989. From June 1980 to November 1985, Mr. Evans served as a partner of KPMG
Peat Marwick LLP, the Company's independent auditors. Mr. Evans serves as a
Director of LXE, Inc. and Interim Services, Inc. Mr. Evans is a certified public
accountant.
38
Paul A. Garcia de Quevedo Mr. Garcia has served as Vice President,
Treasurer and Secretary of the Company since its formation in 1992. Prior to
such time, Mr. Garcia served as Vice President, Finance, for BKDS. Mr. Garcia
joined BKDS in January 1986. Mr. Garcia is a certified public accountant.
William G. Berryman Mr. Berryman has served as Senior Vice President,
Chief Information Officer of the Company since May 1996. Before serving in such
capacity, Mr. Berryman was Chief Information Officer, Vice President, MIS for
The Penn Traffic Company, a food, general merchandise and drug retailer and
involved in the manufacture of various food products from May 1995 to April
1996, Vice President for Technology Solutions Co. from September 1994 to April
1995 and Vice President, MIS, for Dominick's Finer Foods from April 1989 to
December 1993.
Dennis T. Andruskiewicz Mr. Andruskiewicz has served as Senior Vice
President, Operations Support of the Company since the acquisition of NAD in
March 1995. Before serving in such capacity, Mr. Andruskiewicz was the Vice
President of Distribution for Martin-Brower from 1990 to 1995 and the Director
of Distribution for the Planters Life Savers Division of RJR Nabisco from 1974
to 1990.
Robert S. Donaldson Mr. Donaldson has served as Senior Vice President,
Field Operations of the Company since January 1995. From January 1993 to
December 1994, he served as Vice President of Business Development of the
Company. Prior to joining the Company, Mr. Donaldson was the President of
Institution Food House, Inc., a broadline foodservice distributor from 1986 to
1993 and Vice President of Sky Brothers, Inc., a foodservice distributor from
1973 to 1986.
John E. Foley Mr. Foley has served as Senior Vice President, Operations
Development of the Company since August 1995 and Senior Vice President, Finance
and Systems, Chief Financial Officer from April 1994 to July 1995. Prior to
joining the Company, Mr. Foley was the Senior Vice President, Grand Metropolitan
Computer Systems for Grand Metropolitan, PLC from 1992 to 1995 and Vice
President, MIS for Burger King Corporation from 1990 to 1992.
John P. Gainor Mr. Gainor has served as Senior Vice President, Logistics
and Purchasing of the Company since November 1995, Vice President, Operations
Support from July 1992 to May 1993 and from November 1994 to November 1995 and
Eastern Region, Vice President from June 1993 to October 1994. Prior to joining
the Company in April 1992, he held various executive positions, including
Director, Transportation and Planning, Manager, Transportation, Manager, Private
Carriage Operations and Regional Transportation Manager, at Warner Lambert
Company since 1982.
Gerald W. Schwartz Mr. Schwartz has served as a Director of the Company
since its formation in 1992. Mr. Schwartz is Chairman of the Board, President
and Chief Executive Officer of Onex Corporation and has served in such capacity
since its formation in 1983. Mr. Schwartz serves on the Board of Directors of
Alliance Communications Corporation.
Anthony R. Melman Mr. Melman has served as a Director of the Company since
its formation in 1992. Mr. Melman has been Vice President of Onex Corporation
since 1984. Prior to joining Onex, Mr. Melman held various executive positions
at Canadian Imperial Bank of Commerce and Union Acceptances Limited, a South
African merchant banking organization.
Michael E. Treacy Dr. Treacy has served as a Director of the Company since
October 1992. Dr. Treacy is the Managing Director of Treacy & Company, LLC and
has served as the President of Treacy Forum since 1985. Dr. Treacy holds a Ph.D.
in management science from M.I.T. and was a professor of management science at
the Sloan School of Management at M.I.T. from 1983 to 1989.
Michael Carpenter Mr. Carpenter has served as a Director of the Company
since October 1992. Since January 1995, he has been Chairman and Chief Executive
Officer of Travelers Life and Annuity Company. He also serves as Executive Vice
President of Travelers Group, Inc., responsible for business development and
planning. Mr. Carpenter was Chairman of the Board, President and Chief Executive
Officer of Kidder, Peabody Group Inc., a wholly owned subsidiary of General
Electric Company from January 1989 to June 1994.
39
Anthony Munk Mr. Munk has served as a Director of the Company since
January 1995. He joined Onex Corporation in April 1988, and is currently a Vice
President. During the period January 1995 to September 1995, Mr. Munk served as
Senior Vice President and is currently a Director of The Horsham Corporation, a
Canadian based company which has interests in gold, real estate and refining
ventures.
C. Lee Johnson Mr. Johnson has served as a Director of the Company since
October 1992. Since July 1986, he has been President of Limited Distribution
Services (a subsidiary of The Limited, Inc.). From 1984 to 1986, he was Senior
Vice President, Beatrice U.S. Food Corporation and President, Beatrice
Distribution, Inc. Mr. Johnson serves on the Board of Directors of Columbus Port
Authority and the Executive Committee and Board of Directors of Columbus Chamber
of Commerce.
R. Geoffrey P. Styles Mr. Styles has served as a Director of the Company
since October 1992 and is a director of Onex Corporation. Since 1990, he served
as Director of Drivers Jonas (Canada) Ltd. and since 1988, he served as Chairman
and Director of Grosvenor International Holdings Limited. He serves on the
Boards of Directors of Royal Trust Company, The Geon Company, Echo Bay Mines
Ltd., Fairwater Capital Corporation, Working Ventures Canadian Fund Inc. and
Scott's Hospitality Inc.
TERMS OF OFFICE AND COMMITTEES
All directors of the Company currently hold office until the next annual
meeting of stockholders of the Company or until their successors are elected and
qualified. Messrs. Parker and Highland were elected to the Board of Directors
pursuant to the Management Shareholders Agreement under which the management
shareholders have the right to have two designees nominated to the Board of
Directors by Onex. While the management shareholders' right to nominate
designees to the Company's Board of Directors will terminate upon completion of
the offering, Onex has indicated that it has no present intention to withdraw
its support for the continued service of Messrs. Parker and Highland on the
Board of Directors. See "Certain Transactions -- Shareholders
Agreements -- Management Shareholders Agreement." Executive officers hold office
until their successors are chosen and qualified, subject to earlier removal by
the Board of Directors. There are no family relationships among any of the
directors or executive officers of the Company.
The Board of Directors has established an Audit Committee comprising
Messrs. Treacy, Carpenter and Styles. The Audit Committee is responsible for
recommending to the Board of Directors the engagement of independent auditors of
the Company and reviewing with the independent auditors the scope and results of
the audits, the internal accounting controls of the Company, audit practices and
the professional services furnished by the independent auditors.
The Board of Directors has also established a Compensation and Nominating
Committee comprising Messrs. Schwartz, Melman and Johnson and an Equity
Compensation Committee comprising Messrs. Carpenter and Styles. The Compensation
and Nominating Committee is responsible for reviewing and approving all
non-equity based compensation arrangements for officers of the Company. In
addition, the Compensation and Nominating Committee advises and makes
recommendations to the Board of Directors on the selection of candidates as
nominees for election as directors. The Equity Compensation Committee is
responsible for reviewing and approving all equity based compensation
arrangements for officers of the Company and for administering the Company's
option plans. Prior to the offering, the Company did not have a compensation or
a nominating committee.
DIRECTOR COMPENSATION
Following completion of the offering, directors who are not officers or
employees of the Company or Onex will receive an annual fee of $20,000. All
directors will be reimbursed for out-of-pocket expenses.
40
EXECUTIVE COMPENSATION AND OTHER MATTERS
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
earned during the fiscal year ended December 30, 1995 by the Company's chief
executive officer and each of the four other most highly compensated executive
officers whose total annual salary and bonus exceeded $100,000 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION(1) -------------
----------------- SECURITIES ALL OTHER
FISCAL SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS(#)(2) ($)(3)
-------------------------------------------- ------ ------- ------- ------------- ------------
David R. Parker............................. 1995 300,000 150,000 153,120
Chairman of the Board of Directors
Thomas C. Highland.......................... 1995 300,000 150,000 103,120
President, Chief Executive Officer
Daniel J. Adzia(4).......................... 1995 225,385 112,500 21,410
Vice Chairman, Chief Marketing Officer
John E. Foley............................... 1995 170,000 70,000 3,400
Senior Vice President, Operations
Development
Robert S. Donaldson......................... 1995 157,500 58,575 3,109
Senior Vice President, Field Operations
---------------
(1) Excludes perquisites and other personal benefits because such compensation
did not exceed the lesser of $50,000 or 10% of the total annual salary and
bonus for any of the Named Executive Officers.
(2) Options to acquire shares of Common Stock.
(3) The amounts shown in the "All Other Compensation" column consist of the
following: (i) Mr. Parker: $150,000 consulting fee paid by Onex for services
rendered in 1995 (including amounts actually paid in 1996), and $3,120 in
Company matching contributions to the Company's Associates' Savings Plan, a
defined contribution plan (the "401-K Plan"), (ii) Mr. Highland: $100,000
consulting fee paid by Onex for services rendered in 1995 and $3,120 in
Company matching contributions to the 401-K Plan, (iii) Mr. Adzia: $21,410
in Company contributions to the Company's Money Purchase Plan for Former NAD
Salaried Employees, a defined contribution plan, (iv) Mr. Foley: $3,400 in
Company matching contributions to the 401-K Plan and (v) Mr. Donaldson:
$3,109 in Company contributions to the 401-K Plan.
(4) Represents amounts paid from April 1, 1995 through the end of 1995. Prior to
such time Mr. Adzia was employed by NAD.
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The following table provides information regarding stock options granted to
the Named Executive Officers during fiscal year 1995. No stock appreciation
rights were granted.
OPTION GRANTS DURING FISCAL YEAR 1995
[Enlarge/Download Table]
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
------------------------------------------------------------ RATES OF STOCK
NUMBER OF % OF TOTAL PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE -----------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) EXPIRATION DATE 5%($) 10%($)
------------------------- ------------ ------------ --------- ------------------ ------ ------
David R. Parker.......... December 31, 2000
Thomas C. Highland....... December 31, 2000
Daniel J. Adzia.......... December 31, 2000
John E. Foley............ December 31, 2000
Robert S. Donaldson...... December 31, 2000
The following table sets forth certain information regarding the number and
year-end value of unexercised options held by the Named Executive Officers at
December 30, 1995. No stock options were exercised by the Named Executive
Officers during fiscal year 1995.
AGGREGATE OPTION EXERCISES IN 1995 FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES(1)
[Enlarge/Download Table]
VALUE OF UNEXERCISED
NUMBER OF SECURITIES "IN-THE-MONEY"
UNDERLYING UNEXERCISED OPTIONS AT FISCAL
OPTIONS AT FISCAL YEAR-END($)
YEAR-END(#) EXERCISABLE/
NAME EXERCISABLE/UNEXERCISABLE(2) UNEXERCISABLE(2)(3)
--------------------------------------------------- ---------------------------- ---------------------
David R. Parker.................................... $
Thomas C. Highland.................................
Daniel J. Adzia....................................
John E. Foley......................................
Robert S. Donaldson................................
---------------
(1) No options were exercised in 1995.
(2) Options vest according to the following schedule: 10% at the end of years
1995 through 1999, with the remaining 50% vesting at the end of such
five-year period.
(3) Options are "in-the-money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The amounts set forth
represent the difference between an assumed initial public offering price
equal to the midpoint of the range set forth on the cover page of this
Prospectus and the exercise price of the option multiplied by the applicable
number of options.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into employment agreements (each an "Employment
Agreement") with each of Messrs. David R. Parker, Thomas C. Highland, Daniel J.
Adzia, Paul A. Garcia de Quevedo, Dennis Andruskiewicz and John E. Foley (each
an "Employee"). Each Employment Agreement provides that the Employee will
receive an annual salary (subject to increase at the discretion of the Board of
Directors), a cash bonus calculated in accordance with the Company's management
bonus or incentive compensation plan in effect from time to time and certain
benefits. The term of each Employment Agreement is three years (one year in the
case of Mr. Andruskiewicz), with automatic one year extensions unless terminated
earlier by the Company or the Employee upon prior written notice. In the event
that the Company terminates the Employee's employment for disability or without
cause, the Employee is entitled to receive his salary, a pro
42
rata portion of the actual incentive payment that he would have received under
the management incentive plan for the year in which termination occurs and all
other benefits in effect for senior management employees at the time of
termination ("Termination Benefits") for a period of one year from the date of
termination, except in the cases of Messrs. Highland and Adzia. In the event
that the Company terminates Mr. Highland's employment for disability or without
cause, he is entitled to receive payment in an amount equal to 150% of the sum
of the Termination Benefits for a period of eighteen months from the date of
termination. In the event that the Company terminates Mr. Adzia's employment for
disability or without cause, he is entitled to receive 100% of the Termination
Benefits for a period ending on the later of April 1, 1998 and eighteen months
from the date of termination. If the Company terminates the Employee's
employment, including Messrs. Highland or Adzia, for any other reason, the
Employee is entitled to receive the Termination Benefits through the date of
termination. Each Employee is also subject to a one-year covenant not to compete
effective upon termination of employment for any reason, except in the cases of
Messrs. Highland (eighteen months) and Adzia (terminating on the later of April
1, 1998 and eighteen months from the date of termination).
Pursuant to agreements with Onex, Messrs. Parker and Highland received
consulting fees from Onex in the following amounts: (i) $150,000 in 1995
(including amounts actually paid in 1996) and $100,000 in each of 1994 and 1993
in the case of Mr. Parker, and (ii) $100,000 in each of 1995 and 1994 in the
case of Mr. Highland. Such consulting arrangements will be terminated effective
upon completion of the offering, and, in consideration therefor, the base salary
payable to Messrs. Parker and Highland will be increased to a rate of $425,000
per annum for the remainder of 1996 and $450,000 per annum for 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation and Nominating Committee, which currently consists of
Messrs. Schwartz, Melman and Johnson, was formed in July 1996. The Equity
Compensation Committee, which currently consists of Messrs. Carpenter and
Styles, was formed in September 1996. Prior to the formation of the Compensation
and Nominating Committee, compensation decisions were made and approved by the
Company's Board of Directors.
OPTION PLANS
Amended Management Option Plan (1995). The 1995 Option Plan provides for
the grant of "non-qualified stock options" ("NQSO's") to management employees of
the Company ("1995 Employee Participants") at the time that such employees
purchase Common Stock of the Company. Options granted under the 1995 Option Plan
have an exercise price equal to the price at which the 1995 Employee Participant
purchased such stock. Options are exercisable for shares of Class B Common
Stock. The 1995 Option Plan provides for it to be administered by the Board of
Directors of the Company or a committee thereof. Prior to the offering it was
administered by the Board of Directors, and following the offering it will be
administered by the Equity Compensation Committee. Options granted under the
1995 Option Plan are not transferrable or assignable.
Options vest according to the following schedule: ten percent at the end of
years 1995 through 1999, with the remaining 50% vesting at the end of such
five-year period. Options granted under the 1995 Option Plan remain exercisable
until December 31, 2000. In the event the Company merges, consolidates or sells
substantially all of its assets in a transaction in which the consideration is
principally other than common stock and results in Onex earning certain
specified rates of return on its initial purchase of Common Stock, then all
unexercised options under the 1995 Option Plan with respect to periods not yet
ended are deemed earned and exercised immediately prior to the date the
triggering transaction closes.
The 1995 Option Plan terminates on the earlier of (i) December 31, 2000 and
(ii) the sale of all of the Common Stock owned by Onex, the sale of all of the
issued and outstanding stock of the Company or the sale of all or substantially
all of the assets of a subsidiary of the Company.
Upon completion of the offering, options to purchase shares of Class
B Common Stock will be outstanding. No additional options will be granted under
the 1995 Option Plan.
1996 Stock Option Plan. Prior to the completion of the offering, the Board
of Directors and stockholders of the Company will approve the 1996 Stock Option
Plan (the "1996 Plan"). The Company has reserved
43
shares of Class B Common Stock for issuance upon exercise of options granted
under the 1996 Plan. The Company intends to grant options to purchase
shares of Class B Common Stock at an exercise price equal to the initial public
offering price immediately prior to the completion of the offering.
Pursuant to the 1996 Plan, executive officers and key employees of the
Company are eligible to receive awards of stock options. The 1996 Plan provides
for the award of NQSO's only. The 1996 Plan will be administered by the Equity
Compensation Committee (the "Committee"). Subject to the provisions of the 1996
Plan, the Committee will determine when and to whom awards will be granted, and
the number of shares covered by each award. The Committee may interpret the 1996
Option Plan and may at any time adopt such rules and regulations for the 1996
Plan as it deems advisable. In addition, the Committee may cancel or suspend
awards.
The exercise price for options granted under the 1996 Plan will be at least
100% of the fair market value of a share of Class B Common Stock on the date of
grant. Options will vest ratably on each of the first four anniversaries of the
date of grant. However, notwithstanding such vesting, no option will become
exercisable until the earlier of (i) the date on which the Market Value of the
Class B Common Stock is at least 25% greater than the exercise price of such
option and (ii) the eighth anniversary of the date of grant. "Market Value" of
the Class B Common Stock is determined by taking the average closing price of
the Class A Common Stock on the Nasdaq National Market or the principal
securities exchange on which the Common Stock is listed for any five consecutive
trading days. Subject to the foregoing, vested options may be exercised for a
period of up to 10 years from the date of grant.
The Committee may provide for the payment of the option price in cash, by
delivery of other Common Stock having a fair market value equal to the exercise
price, by a combination thereof or by such other manner as the Committee shall
determine, including a cashless exercise procedure.
The Board of Directors may at any time and from time to time suspend,
amend, modify or terminate the 1996 Plan; provided, however, that, to the extent
required by Rule 16b-3 promulgated under the Exchange Act or any other law,
regulation or stock exchange rule, no such change shall be effective without the
requisite approval of the Company's stockholders. In addition, no such change
may adversely affect any award previously granted, except with the written
consent of the grantee.
No options may be granted under the 1996 Plan after the tenth anniversary
of the approval of the 1996 Plan.
DEFINED CONTRIBUTION PLANS
401(k) Plan. The Company maintains the Associates' Savings Plan (the
"401(k) Plan"), a defined contribution retirement plan with a cash or deferral
arrangement as described in Section 401(k) of the Internal Revenue Code of 1986,
as amended (the "Code"). The 401(k) Plan is intended to be qualified under
Section 401(a) of the Code. All employees who are at least 21 years old, work at
least 1,000 hours a year and are not excluded by a bargaining agreement or
certain other exclusions are eligible to participate in the 401(k) Plan. The
401(k) Plan provides that each participant may make elective contributions from
1% to 15% of his or her compensation, subject to statutory limits. The Company
contributes to the 401(k) Plan fifty cents for every dollar contributed up to
the first 4% of an eligible employee's compensation. All contributions made by
participants are fully vested and are not subject to forfeiture. A participant
vests in any contributions made by the Company at a rate of 20% for each year of
service. Each participant's entire 401(k) account is distributed to the
participant or his or her beneficiary, without regard to vesting, upon
retirement, death, disability, or termination of employment with the Company
after the completion of five years of service. The trustee under the 401(k)
Plan, at the direction of each participant, invests the assets of the 401(k)
Plan in a number of investment options.
Money Purchase Plan. The Company maintains the Money Purchase Plan for
Former NAD Salaried Employees (the "Money Purchase Plan"), a defined
contribution retirement plan with a cash or deferral arrangement, as described
in Section 401(a) of the Code. All salaried employees of the Company who were
former salaried employees of Martin-Brower immediately preceding the acquisition
of NAD by the Company
44
and either participated in a defined contribution plan or have completed two
years of service with the Company are eligible to participate in the Money
Purchase Plan. As of December 30, 1995, 324 employees participated in the Money
Purchase Plan. All contributions are made by the Company. The Company
contributes an amount equal to 10% of each eligible employee's compensation,
subject to statutory limits. All contributions made by the Company are fully
vested with the participant and are not subject to forfeiture. Each
participant's account is distributed to such participant or the participant's
named beneficiary (or surviving spouse in the case of the death of a
participant) upon the termination of service with the Company, retirement,
disability or death of the participant, generally in the form of an annuity
purchased from the proceeds of the participant's account. A committee appointed
by the Company's Board of Directors, at the direction of each participant,
invests the assets of the Money Purchase Plan in a number of investment options.
PENSION PLANS
ProSource Distribution Services Salaried Defined Benefit Plan (the
"Salaried Pension Plan"), ProSource Distribution Services Hourly Defined Benefit
Plan (the "Hourly Pension Plan") and ProSource Distribution Services Pension
Plan for Former NAD Hourly Employees (the "NAD Pension Plan"; and together with
the Salaried Pension Plan and Hourly Pension Plan, each a "Pension Plan") are
tax-qualified benefit pension plans. The Salaried Pension Plan and Hourly
Pension Plan cover all of the Company's salaried and hourly employees,
respectively, who have been employed with the Company for at least one year,
subject to certain exceptions. The NAD Pension Plan covers (i) former NAD
employees who participated in the Martin-Brower pension plan and were employed
by the Company by September 30, 1995 and (ii) every other former NAD employee
who completes one year of service for the Company and is compensated on an
hourly or mileage basis. Each Pension Plan is funded through a tax-exempt trust
into which contributions are made as necessary based on actuarial funding
analysis. The Company's funding policy is to contribute an amount not less than
the minimum funding requirements under the Employee Retirement Income Security
Act of 1974, as amended or supplemented, nor more than the maximum deductible
amount for income tax purposes.
Each Pension Plan provides for the payment of benefits upon retirement,
early retirement, death, disability and termination of employment. All benefits
become fully vested after five years of service. Benefits under the Salaried
Pension Plan and NAD Pension Plan are determined under a formula based on a
participant's compensation and credited service. Benefits under the Hourly
Pension Plan are determined under a formula based solely on a participant's
credited service. Participants may elect from several optional forms of benefit
distribution.
SALARIED PENSION PLAN TABLE
[Download Table]
YEARS OF CREDITED SERVICE
FINAL AVERAGE -------------------------------------------------------
COMPENSATION (5 YEARS) 15 20 25 30 35
---------------------- ------- ------- ------- ------- -------
$125,000 $29,471 $39,295 $49,199 $58,943 $58,943
150,000 35,721 47,628 59,536 71,443 71,443
175,000 35,721 47,628 59,536 71,443 71,443
200,000 35,721 47,628 59,536 71,443 71,443
225,000 35,721 47,628 59,536 71,443 71,443
250,000 35,721 47,628 59,536 71,443 71,443
300,000 35,721 47,628 59,536 71,443 71,443
400,000 35,721 47,628 59,536 71,443 71,443
450,000 35,721 47,628 59,536 71,443 71,443
500,000 35,721 47,628 59,536 71,443 71,443
550,000 35,721 47,628 59,536 71,443 71,443
The Named Executive Officers have been credited with the following years of
service under the Salaried Pension Plan: David R. Parker -- four; Thomas C.
Highland -- eight; John E. Foley -- two; and Robert S.
45
Donaldson -- three. Daniel J. Adzia does not participate in the Salaried Pension
Plan. The Salaried Pension Plan defines "compensation" as cash remuneration to
an employee for services rendered, constituting an employee's salary, bonus,
commissions and contributions to any Company cafeteria plan or cash or deferred
arrangement made by the employee through pre-tax deductions, and credits
compensation only up to the limit of covered compensation under Section
401(a)(17) of the Code. The covered compensation, as determined under the
Salaried Benefit Plan, is, in the aggregate, not substantially different than
the amount reflected in the Annual Compensation column of the Summary
Compensation Table set forth above. The estimates of annual retirement benefits
reflected in the above table are based on payment in the form of a straight-life
annuity and are not subject to any deduction for Social Security or other offset
amounts.
Monthly normal retirement benefits under the Hourly Pension Plan are
determined by taking the product of the participant's years of credited service
(up to a maximum of 30 years) and $20. Monthly normal retirement benefits under
the NAD Pension Plan are equal to 1 3/4% of the participant's covered
compensation for each one-year period of credited service divided by 12.
46
CERTAIN TRANSACTIONS
SHAREHOLDERS AGREEMENTS
Management Shareholders Agreement. The following is a summary of certain
provisions of the Amended and Restated Management Shareholders Agreement, dated
as of May 31, 1995, among the Company, Onex and certain officers and employees
("Management Shareholders") of the Company (the "Management Shareholders
Agreement").
The Management Shareholders Agreement governs, among other things, the
manner and means by which Common Stock, or securities convertible into shares of
Common Stock, held by the Management Shareholders at any time may be
transferred. Pursuant to such Agreement, the transfer of shares of the Company's
Common Stock, including shares received upon the conversion of options, by
Management Shareholders is prohibited except (i) to immediate family members (or
to trusts for the exclusive benefit of the transferor or his immediate family
members), (ii) to other Management Shareholders or management employees of the
Company in cases of hardship or other unusual circumstances (with the approval
of the Company's Board of Directors), subject to a right of first refusal in
favor of the Company, or (iii) through the public markets, provided that such
sales do not occur within 180 days of any public offering of Common Stock, that
such sales do not exceed 5% of the sum of the Management Shareholder's shares
then held by him and the Management Shareholder's shares previously sold by him
during any 90-day period and that such sales do not exceed 50% of his shares in
the aggregate, including shares previously sold, without the prior approval of
the Board of Directors, subject to a right of first refusal in favor of the
Company. If the Management Shareholder's employment terminates for any reason,
pursuant to the Company's Restated Certificate of Incorporation, shares of Class
B Common Stock held by such Management Shareholder shall automatically convert
into Class A Common Stock, unless transferred to Onex or another Management
Shareholder. See "Description of Capital Stock."
The Management Shareholders Agreement provides the Management Shareholders
with the option to participate on a pro rata basis with Onex in sales of Common
Stock, and Onex with the right to compel participation of the Management
Shareholders in sales of Common Stock by Onex, subject, in each case, to certain
exceptions. In addition to the above-described provisions, the Management
Shareholders Agreement contains provisions granting the Management Shareholders
certain registration rights. See "Shares Available for Future Sale."
The Management Shareholders Agreement terminates if Onex ceases to hold in
the aggregate 20% of the outstanding voting capital stock of the Company or if
another person or group holds in the aggregate a greater percentage of the
outstanding voting capital stock of the Company than Onex.
Director Shareholders Agreement. The following is a summary of certain
provisions of the Director Shareholders Agreement, dated as of May 31, 1995,
among the Company, Onex and certain directors ("Director Holders") of the
Company (the "Director Shareholders Agreement").
The Director Shareholders Agreement governs, among other things, the manner
and means by which Common Stock, or securities convertible into shares of Common
Stock, held by the Director Holders at any time may be transferred. Pursuant to
such Agreement, the transfer of shares of the Common Stock, including shares
received upon the conversion of options, by Director Holders is prohibited
except (i) to immediate family members (or to trusts for the exclusive benefit
of the transferor or his immediate family members), or (ii) through the
facilities of any securities exchange, provided that such sales do not occur
within 180 days of any public offering of Common Stock.
The Director Shareholders Agreement provides the Director Holders with the
option to participate on a pro rata basis with Onex in sales of Common Stock,
and Onex with the right to compel participation of the Director Holders in sales
of the Common Stock by Onex, subject, in each case, to certain exceptions. In
addition to the above-described provisions, the Director Shareholders Agreement
contains provisions granting the Director Holders certain registration rights.
See "Shares Available for Future Sale."
47
The Director Shareholders Agreement terminates if Onex ceases to hold in
the aggregate 20% of the outstanding voting capital stock of the Company or if
another person or group holds in the aggregate a greater percentage of the
outstanding voting capital stock of the Company than Onex.
ONEX MANAGEMENT FEES
The Company paid Onex fees of $0.8 million, $0.8 million, $0.8 million and
$0.4 million for management services rendered in 1993, 1994, 1995 and the six
months ended June 29, 1996, respectively. Onex has agreed to relinquish its
right to receive such fee upon completion of the offering, in consideration for
which Onex will receive $4.0 million payable in Class B Common Stock valued at
the initial public offering price.
CERTAIN EQUITY OFFERINGS TO MANAGEMENT
In January 1996, the Company completed the sale of shares of
Common Stock in the aggregate to certain officers and management employees of
the Company at a purchase price of $ per share. In May 1995, the
Company completed the sale of shares of Common Stock in the aggregate
to certain directors, officers and management employees of the Company at a
purchase price of $ per share. During 1994, the Company sold
shares of Common Stock in the aggregate to certain officers and directors of the
Company at a purchase price of $ per share. During 1993, the Company
sold shares of Common Stock in the aggregate to certain directors,
officers and employees of the Company at a purchase price of $ per
share. Of these shares, Messrs. David R. Parker, Thomas Highland, Daniel J.
Adzia, William F. Evans, Dennis T. Andruskiewicz and John E. Foley, each an
executive officer of the Company, purchased in the aggregate , ,
, , and shares of Common Stock, respectively. In
connection therewith, the Company guaranteed the principal due under the loans
provided by certain lenders to finance the purchase price of the Common Stock.
The aggregate amount of such guarantees as of June 29, 1996 was $3.3 million.
Such shares of Common Stock were pledged to the Company as collateral for the
Company's guaranty. Pursuant to the Management Shareholders Agreement, the
Company may purchase such shares at a discount to the extent that a Management
Shareholder defaults on such indebtedness.
ONEX SUBORDINATED NOTES
In connection with the financing of the acquisition of BKDS, the Company
issued to Onex a 10% Convertible Subordinated Note due 2002 in the principal
amount of $2.5 million (the "BKDS Convertible Note"). In connection with the
acquisition of NAD, the Company issued to Onex a 12% Subordinated Note due 2005
in the principal amount of $15 million (the "12% Subordinated Note") and a
Convertible Subordinated Note due 2005 in the principal amount of $3.5 million
(the "NAD Convertible Note"). The NAD Convertible Note was, in part, repaid,
and, in part, converted into Common Stock in accordance with its terms and is no
longer outstanding. Onex intends to convert the BKDS Convertible Note into
Common Stock immediately prior to completion of the offering based on the stated
conversion price of $ per share. The 12% Subordinated Note will be
prepaid using the proceeds of the offering. See "Use of Proceeds."
48
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock before the offering and after giving
effect to the offering by (i) each person known to the Company to own
beneficially more than 5% of any class of the Company's outstanding Common
Stock, (ii) each director of the Company, (iii) each Named Executive Officer of
the Company, and (iv) all executive officers and directors of the Company, as a
group. All information with respect to beneficial ownership has been furnished
to the Company by the respective stockholders of the Company. Except as
otherwise indicated in the footnotes, each beneficial owner has the sole power
to vote and to dispose of all shares held by such holder. None of the Company's
stockholders are selling shares in the offering.
[Enlarge/Download Table]
SHARES OF CLASS B
COMMON STOCK SHARES OF CLASS B
BENEFICIALLY OWNED COMMON STOCK CLASS A AND B
PRIOR TO THE BENEFICIALLY OWNED COMBINED VOTING
OFFERING(1) AFTER THE OFFERING(1) POWER(2)
--------------------- --------------------- ---------------
NAME NUMBER PERCENTAGE NUMBER PERCENTAGE PERCENTAGE
---------------------------------------- ------ ---------- ------ ---------- ---------------
Onex.................................... % %
161 Bay Street
Toronto, Ontario
Canada
The Martin-Brower Company...............
1020 West 31st Street
Downers Grove, Illinois 60515
David R. Parker(3)......................
Thomas C. Highland(3)...................
Daniel J. Adzia(3)......................
Robert S. Donaldson(3)..................
John E. Foley(3)........................
Gerald W. Schwartz(4)...................
Anthony R. Melman(5)....................
Michael E. Treacy(3)....................
Michael Carpenter.......................
Anthony Munk(5).........................
C. Lee Johnson..........................
R. Geoffrey P. Styles...................
All directors and executive officers of
the Company as a Group (17 persons as
a group)..............................
---------------
* Less than 1%.
(1) Pursuant to the Recapitalization, prior to completion of the offering, the
Company's Common Stock will be converted into Class B Common Stock and all
of the Company's existing stockholders will receive shares of Class B Common
Stock in exchange for the shares of Common Stock currently held by them.
Each share of Class B Common Stock will be convertible into Class A Common
Stock on a one-to-one basis at any time at the option of the holder thereof
and in certain other circumstances. All information in the table gives
effect to the Recapitalization and assumes that no shares of Class B Common
Stock are converted into shares of Class A Common Stock. See "Description of
Capital Stock."
(2) The column entitled "Class A and Class B Combined Voting Power Percentage"
in the table shows the combined voting power of the votes attributable to
Class A Common Stock (each share of which is entitled to one vote) and Class
B Common Stock (each share of which is entitled to ten votes) of the holders
thereof.
(3) Includes shares of Common Stock which the directors and executive officers
have the right to acquire through the exercise of options within 60 days as
follows: David R. Parker -- ; Thomas C. Highland -- ;
Daniel J. Adzia -- ; Robert S. Donaldson -- ; John E.
Foley -- ; and Michael E. Treacy -- .
(4) Includes shares beneficially owned by Onex, with respect to which Mr.
Schwartz may be deemed to be the beneficial owner.
(5) Excludes shares in which Messrs. Melman and Munk have an indirect interest,
with respect to which Mr. Schwartz may be deemed to be the beneficial owner.
49
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of (i)
shares of Class A Common Stock, par value $0.01 per share, and shares
of Class B Common Stock, par value $0.01 per share, and (ii) shares of
Preferred Stock, par value $0.01 per share. Of the authorized shares of Class A
Common Stock, shares are being offered in the offering and
shares will be reserved for issuance upon conversion of Class B Common Stock
into Class A Common Stock. Of the authorized shares of Class B Common Stock,
will be held by the Company's existing stockholders, and
will be reserved for issuance upon exercise of options and warrants and
conversion of outstanding convertible indebtedness. No shares of preferred stock
will be issued and outstanding upon completion of the offering. A description of
the material terms and provisions of the Company's Restated Certificate of
Incorporation affecting the relative rights of the Class A Common Stock, the
Class B Common Stock and the Preferred Stock is set forth below. The following
description of the capital stock of the Company is intended as a summary only
and is qualified in its entirety by reference to the form of the Company's
Restated Certificate of Incorporation filed with the Registration Statement of
which this Prospectus forms a part and to Delaware corporate law.
COMMON STOCK
Voting Rights. Except for matters where applicable law requires the
approval of one or both classes of Common Stock voting as separate classes and
as otherwise described below, holders of Class A Common Stock and Class B Common
Stock vote as a single class on all matters submitted to a vote of the
stockholders, including the election of directors. Each share of Class A Common
Stock is entitled to one vote and each share of Class B Common Stock is entitled
to ten votes. Generally, all matters to be voted on by stockholders must be
approved by a majority (or, in the case of election of directors, by a
plurality) of the votes entitled to be cast by all shares of Class A Common
Stock and Class B Common Stock present in person or represented by proxy, voting
together as a single class. Under Delaware law, the affirmative vote of the
holders of a majority of the outstanding shares of Class A Common Stock would be
required to approve, among other matters, an adverse change in the powers,
preferences or special rights of the shares of Class A Common Stock.
Dividends. Holders of Class A Common Stock and Class B Common Stock will
share ratably in any dividend declared by the board of directors, subject to any
preferential rights of any outstanding Preferred Stock. Dividends consisting of
shares of Class A Common Stock and Class B Common Stock may be paid only as
follows: (i) shares of Class A Common Stock may be paid only to holders of
shares of Class A Common Stock, and shares of Class B Common Stock may be paid
only to holders of Class B Common Stock; and (ii) shares shall be paid
proportionally with respect to each outstanding share of Class A and Class B
Common Stock.
The Company may not subdivide or combine shares of either class of Common
Stock without at the same time proportionally subdividing or combining shares of
the other class.
Conversion. Each share of Class B Common Stock is convertible at the
option of the holder thereof into one share of Class A Common Stock. Any shares
of Class B Common Stock transferred to a person other than an existing holder of
Class B Common Stock or any affiliate thereof shall automatically convert into
shares of Class A Common Stock upon such disposition. In addition, in the event
that any employee of the Company holding Class B Common Stock ceases to be an
employee for any reason, the shares of Class B Common Stock held by such
employee shall automatically convert into shares of Class A Common Stock, unless
transferred to Onex or another employee stockholder.
Other Rights. In the event of any merger or consolidation of the Company
with or into another company that is not a subsidiary of the Company in
connection with which shares of Common Stock are converted into or exchangeable
for shares of stock, other securities or property (including cash), all holders
of Common
50
Stock, regardless of class, will be entitled to receive the same kind and amount
of shares of stock and other securities and property (including cash).
On liquidation, dissolution or winding up of the Company, after payment in
full of the amounts required to be paid to holders of Preferred Stock, if any,
all holders of Common Stock, regardless of class, are entitled to share ratably
in any assets available for distribution to holders of shares of Common Stock.
No shares of either class of Common Stock are subject to redemption or have
preemptive rights to purchase additional shares of Common Stock.
Upon completion of the offering, all the outstanding shares of Class A
Common Stock and Class B Common Stock will be legally issued, fully paid and
nonassessable.
PREFERRED STOCK
The Preferred Stock is issuable from time to time in one or more series and
with such designations and preferences for each series as shall be stated in the
resolutions providing for the designation and issue of each such series adopted
by the board of directors of the Company. The board of directors is authorized
by the Company's Restated Certificate of Incorporation to determine, among other
things, the voting, dividend, redemption, conversion and liquidation powers,
rights and preferences and the limitations thereon pertaining to such series.
The board of directors, without stockholder approval, may issue Preferred Stock
with voting and other rights that could adversely affect the voting power of the
holders of the Common Stock and could have certain anti-takeover effects. The
Company has no present plans to issue any shares of Preferred Stock. The ability
of the board of directors to issue Preferred Stock without stockholder approval
could have the effect of delaying, deferring or preventing a change in control
of the Company or the removal of existing management.
LIMITATION ON THE LIABILITY OF DIRECTORS
The Company's Restated Certificate of Incorporation provides that, to the
fullest extent permitted by the Delaware General Corporation Law (the "DGCL"),
directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breaches of their fiduciary duty of care
as a director. This provision, however, does not eliminate a director's
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases or (iv)
for any transactions from which the director derived an improper personal
benefit. In addition, this provision does not limit directors' liability under
federal securities laws.
DELAWARE LAW
Section 203 of the DGCL prohibits certain business combinations with
certain stockholders for a period of three years after they acquire 15% of the
outstanding voting stock of a corporation. The Company has expressly elected not
to be governed by Section 203 of the DGCL.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A and Class B Common Stock
is .
51
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of the offering, the Company will have shares of
Class A Common Stock issued and outstanding and shares of Class B
Common Stock issued and outstanding. All of the shares of Class A Common Stock
to be sold in the offering will be freely tradeable without restrictions or
further registration under the Securities Act, except for any shares purchased
by an "affiliate" of the Company (as that term is defined in Rule 144), which
will be subject to the resale limitations of Rule 144. The shares of
Class B Common Stock to be outstanding upon completion of the offering are
convertible into shares of Class A Common Stock on a one-to-one basis at the
option of the holder and in certain other circumstances. Shares of Class A
Common Stock issuable upon conversion of Class B Common Stock have not have been
registered under the Securities Act and may not be sold in the absence of an
effective registration statement under the Securities Act other than in
accordance with Rule 144 or another exemption from registration.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares of
Common Stock for at least two years, or a person who may be deemed an
"affiliate", is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of one percent of the total number of
shares of the class of stock being sold or the average weekly reported trading
volume of the class of stock being sold during the four calendar weeks preceding
such sale. A person who is not deemed an "affiliate" of the Company at any time
during the three months preceding a sale and who has beneficially owned shares
for at least three years is entitled to sell such shares under Rule 144 without
regard to the volume limitations described above. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly through the use
of one or more intermediaries controls, is controlled by, or is under common
control with, such issuer. The Securities and Exchange Commission (the
"Commission") has published a notice of proposed rulemaking which, if adopted as
proposed, would shorten the applicable holding periods to one and two years,
respectively (from the current two- and three-year periods described above). The
Company cannot predict whether such amendments will be adopted or the effect
thereof on the trading market for the Class A Common Stock. The foregoing
summary of Rule 144 is not intended to be a complete description thereof.
Certain directors, officers and management employees, holding an aggregate
of shares of Common Stock (the "Management Shares"), and
Martin-Brower, the holder of a warrant to purchase shares of Common
Stock (the "Martin-Brower Shares"), have certain rights to require the Company
to register sales of such shares under the Securities Act, subject to certain
restrictions. If, subsequent to the completion of the offering, the Company
proposes to register any of its securities under the Securities Act, such
holders are entitled to notice of such registration and to include their shares
in such registration with their expenses borne by the Company, subject to the
right of an underwriter participating in the offering to limit the number of
shares included in the registration by such holders. With regard to the
Management Shares, the Company is required only to register such shares on a pro
rata basis with shares registered on behalf of Onex.
The Company and each of the Company's existing stockholders have agreed,
among other things, not to sell or otherwise transfer any shares of Common Stock
for a period of 180 days after the date of this Prospectus. See "Underwriters."
Prior to the offering, there has been no market for the Class A Common
Stock and no prediction can be made as to the effect, if any, that market sales
of outstanding shares of Class A Common Stock, or the availability of such
shares for sale, will have on the market price of the Class A Common Stock
prevailing from time to time. Nevertheless, sales of substantial amounts of
Class A Common Stock in the public market, or the perception that such sales
could occur, could adversely affect prevailing market prices for the Class A
Common Stock offered in the offering.
52
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below have severally
agreed to purchase, and the Company has agreed to sell to them, severally, the
respective number of shares of Class A Common Stock set forth opposite the names
of such Underwriters below:
[Enlarge/Download Table]
NUMBER OF
NAME SHARES
-------------------------------------------------------------------------- ---------
Morgan Stanley & Co. Incorporated.........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................
Smith Barney Inc. ........................................................
-------
Total...........................................................
=======
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Class A Common Stock offered hereby (other
than those covered by the over-allotment option described below) if any such
shares are taken.
The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other Underwriters or to certain other dealers. After the
initial offering of the shares of Class A Common Stock, the offering price and
other selling terms may from time to time be varied by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
additional shares of Class A Common Stock at the public offering price
set forth on the cover page hereof, less underwriting discounts and commissions.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
Class A Common Stock offered hereby. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of Class A
Common Stock as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares of Class A Common Stock
offered by the Underwriters hereby.
The Underwriters have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
Application has been made to have the Class A Common Stock approved for
quotation on the Nasdaq National Market under the symbol "PSDS."
The Company and each of the Company's existing stockholders, have agreed
not to (i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (whether such shares or any such
securities are now owned by the undersigned or are hereafter acquired), or (ii)
enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (i) or
53
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise for a period of 180 days after the date of this
Prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated, as representative of the several Underwriters, provided that the
Company may issue shares upon the exercise of an option or warrant or the
conversion of a security outstanding on the date of this Prospectus of which the
Underwriters have been advised, during such 180-day period.
From time to time, certain of the Underwriters have provided, and continue
to provide, investment banking services to the Company and its affiliates. Mr.
Michael Carpenter, a director of the Company, serves as Executive Vice President
of Travelers Group, Inc. Smith Barney Inc., one of the Underwriters, is a
wholly-owned subsidiary of Travelers Group, Inc.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price has been determined by negotiations
between the Company and the Underwriters. Among the factors considered in
determining the initial public offering price were the future prospects of the
Company and its industry in general, sales, earnings and certain other financial
and operating information of the Company in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of the Company.
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby and
certain legal matters will be passed upon for the Company by Kaye, Scholer,
Fierman, Hays & Handler, LLP, New York, New York and for the Underwriters by
Davis Polk & Wardwell.
EXPERTS
The consolidated financial statements of ProSource, Inc., as of December
31, 1994 and December 30, 1995, and each of the years in the three-year period
ended December 30, 1995 (and related schedules), have been included herein and
in the registration statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The combined financial statements of the National Accounts Division (a
division of The Martin-Brower Company) as of July 1, 1994 and July 2, 1993 and
for the years then ended included in this Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, schedules and exhibits thereto, the
"Registration Statement") under the Securities Act with respect to the Class A
Common Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Class A Common Stock, reference is made to the
Registration Statement, which may be inspected, without charge, at the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its New York Regional Office, Seven World Trade
Center, 13th Floor, New York, New York 10048 and its Chicago Regional Office,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of all
or any portion of the Registration Statement may be obtained from the Public
Reference Section of the Commission,
54
upon payment of prescribed fees. In addition, the Commission maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's web site is http://www.sec.gov.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
55
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
[Enlarge/Download Table]
PAGE(S)
Independent Auditors' Report........................................................ F-2
ProSource, Inc. Consolidated Balance Sheets as of December 31, 1994, December 30,
1995 and June 29, 1996............................................................ F-3
ProSource, Inc. Consolidated Statements of Operations for the years ended
December 25, 1993, December 31, 1994, December 30, 1995 and the periods ended
July 1, 1995 and June 29, 1996.................................................... F-4
ProSource, Inc. Consolidated Statements of Stockholders' Equity for the years ended
December 25, 1993, December 31, 1994, December 30, 1995 and the period ended
June 29, 1996..................................................................... F-5
ProSource, Inc. Consolidated Statements of Cash Flows for the years ended
December 25, 1993, December 31, 1994, December 30, 1995 and the periods ended July
1, 1995 and June 29, 1996......................................................... F-6
ProSource, Inc. Notes to Consolidated Financial Statements.......................... F-7
National Accounts Division Unaudited Condensed Combined Balance Sheet as of
March 31, 1995.................................................................... F-21
National Accounts Division Unaudited Condensed Combined Statement of Income and
Changes in Divisional Equity for the thirty-nine weeks ended March 31, 1995....... F-22
National Accounts Division Unaudited Condensed Combined Statement of Cash Flows for
the thirty-nine weeks ended March 31, 1995........................................ F-23
National Accounts Division Notes to Unaudited Condensed Combined Financial
Statements........................................................................ F-24
Report of Independent Accountants................................................... F-26
National Accounts Division Combined Balance Sheets as of July 2, 1993 and July 1,
1994.............................................................................. F-27
National Accounts Division Combined Statements of Income and Changes in Divisional
Equity for the 52 weeks ended July 2, 1993 and July 1, 1994....................... F-28
National Accounts Division Combined Statements of Cash Flows for the 52 weeks ended
July 2, 1993 and July 1, 1994..................................................... F-29
National Accounts Division Notes to Combined Financial Statements................... F-30
Pro Source, Inc. Unaudited Pro Forma Condensed Consolidated Statements of Operations
for the year ended December 30, 1995.............................................. F-38
Pro Source, Inc. Unaudited Pro Forma Condensed Consolidated Statements of Operations
for the six months ended June 29, 1996............................................ F-39
Pro Source, Inc. Notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations........................................................................ F-40
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ProSource, Inc.:
We have audited the accompanying consolidated balance sheets of ProSource, Inc.
and subsidiaries as of December 31, 1994 and December 30, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 30, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ProSource, Inc. and
subsidiaries as of December 31, 1994 and December 30, 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 30, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Miami, Florida
February 1, 1996
F-2
PROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994, DECEMBER 30, 1995 AND JUNE 29, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
[Enlarge/Download Table]
1996
1994 1995 -----------
-------- -------- (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................... $ 1,151 $ 2,325 $ 2,750
Accounts receivable, net of allowance for doubtful
accounts of $2,911, $2,585 and $2,459 in 1994, 1995
and 1996, respectively............................... 122,668 230,089 218,986
Inventories............................................. 41,054 140,432 149,218
Deferred income taxes, net.............................. 1,393 4,298 11,118
Prepaid expenses and other current assets............... 5,765 10,736 12,079
-------- -------- --------
Total current assets............................ 172,031 387,880 394,151
Property and equipment, net............................... 29,166 52,507 41,372
Intangible assets, net.................................... 12,850 36,450 43,135
Deferred income taxes, net................................ 1,944 3,901 12,551
Other assets, principally deferred debt issuance costs,
less accumulated amortization of $1,065, $1,397 and
$2,329 in 1994, 1995 and 1996, respectively............. 2,338 8,435 10,795
-------- -------- --------
Total assets.................................... $218,329 $489,173 $ 502,004
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $115,527 $242,645 $ 249,395
Accrued liabilities..................................... 12,699 27,819 29,711
Current portion of long-term senior debt................ 2,183 1,500 1,500
-------- -------- --------
Total current liabilities....................... 130,409 271,964 280,606
Long-term senior debt, less current portion............... 59,838 132,011 143,094
Subordinated notes payable................................ -- 24,418 24,832
Convertible subordinated notes payable.................... 3,626 5,291 4,001
Other noncurrent liabilities.............................. 1,913 6,068 16,759
-------- -------- --------
Total liabilities............................... 195,786 439,752 469,292
-------- -------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value. Authorized 75,000 shares;
issued and outstanding 23,418 shares in 1994, 51,773
shares in 1995 and 53,023 shares in 1996............. 1 1 1
Additional paid-in-capital.............................. 23,526 51,889 53,140
Retained deficit........................................ (984) (2,540) (20,497)
Accumulated foreign currency translation adjustments.... -- 71 68
-------- -------- --------
Total stockholders' equity...................... 22,543 49,421 32,712
-------- -------- --------
Total liabilities and stockholders' equity...... $218,329 $489,173 $ 502,004
======== ======== ========
See accompanying notes to consolidated financial statements.
F-3
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 25, 1993,
DECEMBER 31, 1994, DECEMBER 30, 1995 AND THE
PERIODS ENDED JULY 1, 1995 AND JUNE 29, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
[Enlarge/Download Table]
1993 1994 1995 1995 1996
(52 WEEKS) (53 WEEKS) (52 WEEKS) (26 WEEKS) (26 WEEKS)
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Net sales............................ $1,329,347 $1,598,136 $3,461,837 $1,447,760 $2,014,074
Cost of sales........................ 1,210,942 1,464,545 3,193,270 1,332,939 1,859,000
---------- ---------- ---------- ---------- ----------
Gross profit............... 118,405 133,591 268,567 114,821 155,074
Operating expenses................... 114,204 131,023 255,216 110,692 149,758
Loss on impairment of long-lived
assets............................. -- -- -- -- 15,733
Restructuring charges................ -- -- 711 68 10,866
---------- ---------- ---------- ---------- ----------
Earnings (loss) from
operations............... 4,201 2,568 12,640 4,061 (21,283)
Interest expense..................... (5,766) (6,868) (14,678) (6,781) (8,152)
Interest income...................... 241 271 1,339 531 866
---------- ---------- ---------- ---------- ----------
Loss before income taxes
and extraordinary
charge................... (1,324) (4,029) (699) (2,189) (28,569)
Income tax (provision) benefit....... 497 1,647 (85) 965 10,612
---------- ---------- ---------- ---------- ----------
Loss before extraordinary charge... (827) (2,382) (784) (1,224) (17,957)
Extraordinary charge, net of income
tax benefit of $502 in 1995........ -- -- (772) (772) --
---------- ---------- ---------- ---------- ----------
Net loss................... $ (827) $ (2,382) $ (1,556) $ (1,996) $ (17,957)
========== ========== ========== ========== ==========
Net loss per common and common
equivalent share:
Loss before extraordinary charge... $ (35.21) $ (101.25) $ (17.69) $ (33.19) $ (339.34)
---------- ---------- ---------- ---------- ----------
Net loss........................... $ (35.21) $ (101.25) $ (35.10) $ (54.12) $ (339.34)
========== ========== ========== ========== ==========
Average outstanding common and common
equivalent shares.................. 23,490 23,525 44,331 36,881 52,917
========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 25, 1993,
DECEMBER 31, 1994, DECEMBER 30, 1995
AND THE PERIOD ENDED JUNE 29, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
[Enlarge/Download Table]
ACCUMULATED
ADDITIONAL RETAINED FOREIGN CURRENCY
COMMON PAID-IN EARNINGS TRANSLATION
STOCK CAPITAL (DEFICIT) ADJUSTMENTS TOTAL
------ ---------- --------- ---------------- --------
Balance, December 31, 1992................ $ 1 $ 22,499 $ 2,225 $ -- $ 24,725
Issuance of 1,256 shares................ -- 1,382 -- -- 1,382
Acquisition and retirement of 15
shares............................... -- (16) -- -- (16)
Net loss................................ -- -- (827) -- (827)
--- ------ ------- -- -------
Balance, December 25, 1993................ 1 23,865 1,398 -- 25,264
Issuance of 69 shares................... -- 76 -- -- 76
Acquisition and retirement of 392
shares............................... -- (415) -- -- (415)
Net loss................................ -- -- (2,382) -- (2,382)
--- ------ ------- -- -------
Balance, December 31, 1994................ 1 23,526 (984) -- 22,543
Issuance of 28,585 shares............... -- 28,585 -- -- 28,585
Acquisition and retirement of 230
shares............................... -- (222) -- -- (222)
Foreign currency translation
adjustments.......................... -- -- -- 71 71
Net loss................................ -- -- (1,556) -- (1,556)
--- ------ ------- -- -------
Balance, December 30, 1995................ 1 51,889 (2,540) 71 49,421
Issuance of 1,415 shares (unaudited).... -- 1,415 -- -- 1,415
Acquisition and retirement of 165 shares
(unaudited).......................... -- (164) -- -- (164)
Foreign currency translation adjustments
(unaudited).......................... -- -- -- (3) (3)
Net loss (unaudited).................... -- -- (17,957) -- (17,957)
--- ------ ------- -- -------
Balance at June 29, 1996 (unaudited)...... $ 1 $ 53,140 $ (20,497) $ 68 $ 32,712
=== ====== ======= == =======
See accompanying notes to consolidated financial statements.
F-5
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 25, 1993,
DECEMBER 31, 1994, DECEMBER 30, 1995 AND THE
PERIODS ENDED JULY 1, 1995 AND JUNE 29, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
[Enlarge/Download Table]
1993 1994 1995 1995 1996
(52 WEEKS) (53 WEEKS) (52 WEEKS) (26 WEEKS) (26 WEEKS)
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Cash flows from operating activities:
Net loss................................................. $ (827) $ (2,382) $ (1,556) $ (1,996) $(17,957)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and
equipment............................................ 5,047 4,868 9,163 4,415 3,444
Amortization of intangible assets and deferred debt
issuance costs....................................... 2,846 3,103 3,530 1,147 1,881
Bad debt expense....................................... 766 2,427 1,845 757 960
Write-off of deferred loan fees........................ -- -- 1,274 1,274 --
Loss on impairment of long-lived assets................ -- -- -- -- 15,733
Deferred income taxes (benefit)........................ 697 (1,391) (1,749) (1,581) (10,740)
Gain on sale of property and equipment................. (166) (325) (184) (13) --
Changes in operating assets and liabilities, net of
effects of companies purchased:
Decrease (increase) in accounts receivable........... (16,159) (25,150) (13,441) (7,965) 10,143
(Increase) decrease in inventories................... (6,255) 865 7,706 7,038 (8,786)
(Increase) decrease in prepaid expenses and other
current assets.................................... (3,719) 2,723 (4,321) (2,390) (4,093)
(Increase) decrease in other assets.................. (2,737) (802) 1,208 313 (12,966)
Increase in accounts payable......................... 29,116 18,450 45,423 1,662 6,750
Increase (decrease) in accrued liabilities........... 1,469 (104) 2,997 33,041 1,892
Increase (decrease) in other noncurrent
liabilities....................................... (1,102) (1,365) (1,898) 181 10,691
-------- -------- --------- --------- --------
Net cash provided by (used in) operating
activities........................................ 8,976 917 49,997 35,883 (3,048)
-------- -------- --------- --------- --------
Cash flows from investing activities:
Capital expenditures..................................... (3,518) (1,376) (5,683) (1,709) (7,982)
Proceeds from sale of property and equipment............. 615 445 362 67 --
Payment for purchase of net assets acquired.............. (13,202) (3,792) (170,279) (141,119) --
Proceeds from settlement of purchase price provisions.... -- 6,600 -- -- --
-------- -------- --------- --------- --------
Net cash (used in) provided by investing
activities...................................... (16,105) 1,877 (175,600) (142,761) (7,982)
-------- -------- --------- --------- --------
Cash flows from financing activities:
Repayments of long-term debt............................. (1,781) (32,247) (81,023) (16,221) (2,165)
Borrowings on long-term debt............................. 9,089 29,379 179,366 94,303 12,372
Proceeds from issuance of common stock................... 1,382 76 28,585 28,585 1,415
Payments to acquire and retire treasury stock............ (16) (415) (222) (212) (164)
-------- -------- --------- --------- --------
Net cash provided by (used in) financing
activities...................................... 8,674 (3,207) 126,706 106,455 11,458
-------- -------- --------- --------- --------
Effect of exchange rate changes on cash.................... -- -- 71 -- (3)
Net increase (decrease) in cash and cash
equivalents..................................... 1,545 (413) 1,174 (423) 425
Cash and cash equivalents at beginning of year............. 19 1,564 1,151 1,151 2,325
-------- -------- --------- --------- --------
Cash and cash equivalents at end of year................... $ 1,564 $ 1,151 $ 2,325 $ 728 $ 2,750
======== ======== ========= ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................... $ 5,569 $ 6,264 $ 12,332 $ 5,766 $ 8,410
======== ======== ========= ========= ========
Income taxes, net of refunds........................... $ 930 $ 279 $ 993 $ 30 $ 123
======== ======== ========= ========= ========
See accompanying notes to consolidated financial statements.
F-6
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995 AND JUNE 29, 1996
(INSOFAR AS THESE NOTES REFER TO THE PERIOD SUBSEQUENT
TO DECEMBER 30, 1995, THEY ARE UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ProSource, Inc. (the "Parent") is engaged in the foodservice distribution
business, specializing in limited-menu quick service and casual dining
restaurant customers, primarily operating in the United States. ProSource, Inc.
and subsidiaries (the "Company") distribute to approximately 14,450 restaurants
consisting primarily of Burger King, Arby's, Long John Silver's, Sonic,
Chick-fil-A, Wendy's, Red Lobster, Olive Garden, TGI Friday's, Chili's and TCBY
restaurant concepts.
The Parent operates through three subsidiaries, ProSource Services
Corporation ("PSC"), ProSource Distribution Services Limited ("ProSource
Canada") and BroMar Services, Inc. ("BroMar"). PSC commenced operations in July
1992. The consolidated financial statements include the results of the
operations of PSC from its inception and the results of operations of ProSource
Canada and BroMar (both of which were acquired by the Company as part of the
acquisition of the National Accounts Division ("NAD") of The Martin-Brower
Company ("Martin-Brower")) since the date of acquisition. The Company is a
subsidiary of Onex Corporation (collectively with its affiliates, "Onex"), a
company traded on the Toronto and Montreal stock exchanges.
The Company operates on a 52- to-53-week accounting year ending on the last
Saturday of each calendar year.
The following is a summary of the Company's significant accounting
policies:
(a) Interim Financial Information
The unaudited consolidated balance sheet as of June 29, 1996, and the
unaudited consolidated statements of operations and cash flows for the 26 weeks
ended July 1, 1995 and June 29, 1996 and the unaudited consolidated statement of
stockholders' equity for the 26 weeks ended June 29, 1996 include, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the Company's consolidated financial
position, results of operations and cash flows. Operating results for the 26
weeks ended June 29, 1996 are not necessarily indicative of the results that may
be expected for the fiscal year ending December 28, 1996.
(b) Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Operations of the companies and businesses acquired have
been included in the accompanying consolidated financial statements from their
respective dates of acquisition. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(c) Accounting Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Cash and Cash Equivalents
Cash and cash equivalents include commercial paper with original maturities
of three months or less, and cash on hand and on deposit at various financial
institutions.
(e) Inventories
Inventories are stated at the lower of cost or net realizable value. Cost
is determined using the weighted average cost method and the first-in, first-out
method. Cost of inventory using the weighted average cost method represents 100
percent, 100 percent, 32 percent and 37 percent of inventories in 1993, 1994,
1995 and 1996, respectively.
(f) Property and Equipment
Property and equipment are stated at cost. Leasehold improvements and
equipment under capital leases are amortized using the straight-line method over
the lesser of asset life or lease term. Depreciation is provided using the
straight-line method, based upon the following estimated useful lives:
[Download Table]
Buildings and improvements.................................... 15 to 40 years
Warehouse and transportation equipment........................ 3 to 10 years
Computer software............................................. 1 1/2 to 5
years
Leasehold improvements........................................ 3 to 7 years
Office equipment.............................................. 3 to 7 years
Costs of normal maintenance and repairs are charged to expense when
incurred. Replacements or betterments of properties are capitalized. When assets
are retired or otherwise disposed of, their cost and the applicable accumulated
depreciation and amortization are removed from the accounts, and the resulting
gain or loss is reflected in the consolidated statements of operations.
(g) Intangible Assets
Intangible assets are amortized using the straight-line method over the
following periods:
[Download Table]
Goodwill........................................................ 40 years
Distribution contracts.......................................... 3 to 7 years
Noncompete agreements........................................... 5 to 7 years
Customer lists.................................................. 12 years
Goodwill results from business acquisitions and principally consists of the
excess of the acquisition cost over the fair value of the net assets of
businesses acquired. At each balance sheet date, the Company evaluates the
realizability of goodwill based upon expectations of operating income for each
subsidiary having a material goodwill balance. The Company believes that no
material impairment of goodwill exists at December 30, 1995 and June 29, 1996.
(h) Deferred Debt Issuance Costs
Included in other assets are deferred debt issuance costs which are
amortized over the term of the related debt.
(i) Self-Insurance
The Company self-insures for certain levels under its workers'
compensation, auto liability and medical and dental insurance programs. Costs in
excess of retention limits are insured under various contracts with
F-8
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
insurance carriers. Estimated costs for workers' compensation claims for which
the Company is responsible are determined based on historical claims experience,
adjusted for current trends. The liability related to workers' compensation is
discounted to net present value using a risk-free treasury rate for maturities
that match the expected settlement periods. At December 31, 1994, December 30,
1995 and June 29, 1996, the estimated liabilities related to workers'
compensation were approximately $2.4 million, $4.1 million and $4.4 million,
respectively, net of a discount of approximately $0.7 million, $1.2 million and
$1.5 million, respectively. These estimated liabilities related to workers'
compensation are included in accrued liabilities in the accompanying
consolidated financial statements.
(j) Net Loss Per Common and Common Equivalent Share
Net loss per common and common equivalent share of common stock has been
computed using the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares used in the
calculation of net loss per common and common equivalent share represent vested
options to purchase shares granted under the Company's Employee Stock Purchase
Plan (calculated using the treasury stock method). The computation of fully
diluted net loss per common and common equivalent share was antidilutive in each
of the periods presented.
(k) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
Income taxes of interim periods are determined based on the Company's
estimate of its annual effective tax rate. The rate is revised, if necessary, as
of the end of each interim period during the fiscal year to reflect the
Company's best estimate of its annual effective tax rate.
(l) Interest Rate Protection Agreements
The differential to be paid or received under interest rate swap agreements
are accrued with the resulting net interest income or expense recorded as an
adjustment to interest expense on the underlying debt. Premiums paid for
interest rate collars are amortized to interest expense over the terms of the
agreement.
(m) Translation of Foreign Currency
The accounts of ProSource Canada are translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52. Translation
adjustments arising from differences in exchange rates from period to period are
included in accumulated foreign currency translation adjustments as a component
of stockholders' equity.
(n) Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 121
("SFAS 121"), which became effective on January 1, 1996, and requires long-lived
assets be reviewed for impairment (measured based on the fair value of assets).
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
compensation costs related to stock option plans and other forms of
F-9
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock based compensation plans as an alternative to the intrinsic value based
method of accounting defined under Accounting Principles Board Opinion No. 25.
Companies who do not elect the new method of accounting for 1996 will be
required to provide pro forma disclosures as if the fair value based method had
been applied. The Company will include the disclosures required by SFAS 123 in
the notes to future consolidated financial statements.
(o) Reclassifications
Certain amounts in the 1993, 1994 and 1995 consolidated financial
statements have been reclassified to conform to the 1996 consolidated financial
statements presentation.
(2) BUSINESS COMBINATIONS
(a) National Accounts Division of The Martin-Brower Company
On March 31, 1995, the Company completed the acquisition of substantially
all of the assets and the assumption of certain liabilities of NAD from
Martin-Brower. The total cost of the acquisition of $170 million was funded
through a borrowing of $116 million under the Company's revolving credit
facility, a $9 million note payable to Martin-Brower (net of a discount to
reflect a constant interest rate), $18.5 million in notes payable to Onex, and
the issuance of 26,500 shares of the Company's common stock valued at
approximately $26.5 million. The acquisition has been accounted for under the
purchase method of accounting. The accompanying consolidated financial
statements include the assets acquired of approximately $232 million and
liabilities assumed of approximately $87 million based on their estimated fair
values at the acquisition date. In addition, the Company incurred an
extraordinary charge relating to the write-off of approximately $0.8 million of
unamortized deferred debt issuance costs on debt repaid at the acquisition date.
On March 30, 1996, the Company revised its estimates of certain costs
related to the acquisition by $12 million. The effect of the revision increased
acquisition-related liabilities by $12 million, deferred tax assets by
approximately $4.4 million and goodwill by approximately $7.6 million.
(b) Malone Products, Inc.
On October 31, 1994, the Company acquired certain assets and assumed
certain liabilities of Malone Products, Inc. ("Malone"). The total cost of the
acquisition of $3.8 million was funded through a borrowing of $3.3 million under
the Company's revolving credit facility and $0.5 million of convertible
subordinated debt issued to Malone. The acquisition has been accounted for under
the purchase method of accounting. The accompanying consolidated financial
statements include the assets acquired of approximately $7 million and
liabilities assumed of approximately $6.6 million based on their estimated fair
values at the acquisition date.
(c) Valley Food Services, Inc.
On March 27, 1993, the Company completed the acquisition of certain assets
and the assumption of certain liabilities of Valley Food Services, Inc.
("Valley"). The total cost of the acquisition of $9.3 million was funded through
long-term senior debt. The acquisition has been accounted for under the purchase
method of accounting. The accompanying consolidated financial statements include
the assets acquired of approximately $12.4 million and liabilities assumed of
approximately $3.7 million based on their estimated fair values at the
acquisition date.
(d) McCabe's Quality Foods, California, Inc.
On February 27, 1993, the Company acquired certain operating assets of
McCabe's Quality Foods, California, Inc. at their estimated fair values for
approximately $3.9 million. This transaction was accounted for under the
purchase method of accounting and financed through PSC's existing credit
facility.
F-10
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) BKDS Acquisition
On June 30, 1992, the Company completed the acquisition of certain assets
and the assumption of certain liabilities of Burger King Distribution Services
("BKDS"), a division of Burger King Corporation ("BKC"). In 1994, the Company
and BKC settled certain purchase price provisions by BKC paying $6.6 million to
the Company. The payment has been accounted for as an adjustment of the original
purchase price by decreasing net deferred tax assets by $1.3 million,
acquisition-related distribution contracts by $3.2 million and goodwill by $2.1
million.
(3) RESTRUCTURING CHARGES AND IMPAIRMENT OF LONG-LIVED ASSETS
In conjunction with the NAD acquisition, the Company incurred restructuring
costs of approximately $0.7 million in 1995 primarily relating to costs incurred
to consolidate and integrate certain functions and operations. In 1996, as a
result of a study to analyze, among other things, ways to integrate the NAD
operations, improve customer service, reduce operating costs and increase
existing warehouse capacity, the Company adopted a plan to consolidate its
corporate and network operations. Through this plan, which is expected to take
three to five years to complete, the Company intends to consolidate and
integrate its existing distribution network of 34 centers into 23 centers. As a
result, in the first quarter of 1996, the Company accrued restructuring charges
and recorded a loss on impairment in value of long-lived assets of $10.9 million
and $15.7 million, respectively. The restructuring charges consist approximately
of $7.9 million in costs related to the termination of existing facility leases,
$1.2 million of costs to be incurred after operations cease in the closed
facilities and $1.8 million of other costs. As of June 29, 1996, the Company had
approximately $10.5 million of accrued unpaid restructuring charges. The loss on
impairment in value of long-lived assets consists of $7.3 million of land and
owned buildings which management plans to dispose of, $4.3 million of furniture
and equipment and leasehold improvements it plans to abandon and $4.1 million of
capitalized software costs which do not meet the long-term information
technology strategy of the Company.
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994, December 30, 1995 and June 29,
1996 consisted of the following (amounts in thousands):
[Download Table]
1994 1995 1996
------- ------- -----------
(UNAUDITED)
Land................................................ $ 3,873 $ 4,746 $ 3,624
Buildings and improvements.......................... 13,146 20,428 15,846
Warehouse and transportation equipment.............. 5,032 20,309 22,430
Computer software................................... 12,551 14,815 13,879
Leasehold improvements.............................. 3,959 6,672 3,414
Office equipment.................................... 2,048 6,046 6,132
------ ------ ------
40,609 73,016 65,325
Less accumulated depreciation and amortization...... 11,443 20,509 23,953
------ ------ ------
$29,166 $52,507 $41,372
====== ====== ======
F-11
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INTANGIBLE ASSETS
Intangible assets at December 31, 1994, December 30, 1995 and June 29, 1996
consisted of the following (amounts in thousands):
[Download Table]
1994 1995 1996
------- ------- -----------
(UNAUDITED)
Identifiable intangibles............................ $10,504 $10,785 $10,785
Goodwill............................................ 8,376 33,664 41,298
------ ------ ------
18,880 44,449 52,083
Less accumulated amortization....................... 6,030 7,999 8,948
------ ------ ------
$12,850 $36,450 $43,135
====== ====== ======
(6) LONG-TERM DEBT
(a) Long-Term Senior Debt
Long-term senior debt at December 31, 1994, December 30, 1995 and June 29,
1996 consisted of the following loan agreements with banks (amounts in
thousands):
[Download Table]
1994 1995 1996
------- -------- -----------
(UNAUDITED)
$210 million revolving credit facility, at prime
rate (8.25% at June 29, 1996) plus 0.50% or
Eurodollar rate plus 3% (2.75% at June 29, 1996),
due March 31, 2000............................... $ -- $104,636 $ 116,469
$15 million term loan facility, at prime rate plus
0.50% or Eurodollar rate plus 3% (2.75% at June
29, 1996), payable in quarterly installments each
of $0.38 million commencing on July 1, 1995 and
through March 31, 2000........................... -- 13,875 13,125
$15 million term loan facility, at prime rate plus
0.50% or Eurodollar rate plus 3% (2.75% at June
29, 1996), due March 31, 2000.................... -- 15,000 15,000
$86 million revolving credit facility, at prime
rate plus 0.75% or Eurodollar rate plus 2.75%,
due June 30, 1997................................ 35,774 -- --
$15 million term loan facility, at prime rate plus
0.75% or Eurodollar rate plus 2.75%, payable in
varying amounts and maturities through June 30,
1997............................................. 13,400 -- --
$12 million revolving credit facility, at prime
rate plus 1.50%, due September 30, 1997.......... 12,497 -- --
$0.35 million term loan facility, at prime rate
plus 1.50%, payable quarterly through September
30, 1997......................................... 350 -- --
------- -------- --------
Total long-term senior debt........................ 62,021 133,511 144,594
Less current portion............................... 2,183 1,500 1,500
------- -------- --------
Long-term senior debt, less current portion........ $59,838 $132,011 $ 143,094
======= ======== ========
On March 31, 1995, in conjunction with the acquisition of NAD, the Company
entered into a new $240 million Loan and Security Agreement (the "Loan
Agreement") with a group of banks that extends through
F-12
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 2000. Such agreement provides for a revolving credit facility of up to
$210 million and term loans aggregating $30 million. This agreement replaced all
existing senior debt which was due to expire in September 1997.
The Loan Agreement requires PSC, ProSource Canada and BroMar (the
"Borrowers"), to meet specific affirmative and negative covenants which include,
among other requirements, limitations on the acquisition and disposition of
assets, prohibition of borrowings other than under the Loan Agreement,
restrictions on dividend payments and compliance with certain financial
covenants. The Loan Agreement is collateralized by substantially all of the
Borrowers' assets, and the pledge by the Parent of all of the issued and
outstanding stock of the Borrowers and other collateral rights. In addition, the
Parent has guaranteed payment of all amounts due under the Loan Agreement.
Borrowings under the Loan Agreement are limited to a borrowing base as
defined in the agreement. At December 30, 1995 and June 29, 1996, the Company
had approximately $82 million and $73 million, respectively, available under the
revolving credit facility. The Loan Agreement also provides for a commitment fee
of 0.50 percent per annum of the daily unused revolving credit facility, as
defined in the agreement.
In 1994, PSC entered into two interest rate swap agreements, having
notional principal amounts of approximately $10.7 million and $20 million, that
mature in 1997 and 1999, respectively. Under these agreements, PSC makes fixed
rate payments and receives floating rate payments in return. In 1995, PSC
entered into two interest rate collar transactions having notional principal
amounts of approximately $25 million and $20 million, maturing in 1998. The
counterparties to these agreements are large financial institutions. These
interest rate protection agreements were entered into to reduce the Company's
exposure to interest rate volatility and are not used for trading purposes. At
December 30, 1995 and June 29, 1996, the total fair value of these agreements
was an unrealized loss of approximately $2.2 million and $.9 million,
respectively, based on quoted market prices as provided by the financial
institutions which are the counterparties to the interest rate protection
agreements.
Long-term senior debt at December 30, 1995 and June 29, 1996, is due as
follows (amounts in thousands):
[Download Table]
1995 1996
-------- -----------
(UNAUDITED)
1996 (through December 28, 1996)............................. $ 1,500 $ 750
1997......................................................... 1,500 1,500
1998......................................................... 1,500 1,500
1999......................................................... 1,500 1,500
2000......................................................... 127,511 139,344
-------- --------
$133,511 $ 144,594
======== ========
The interest rate on the Company's long-term senior debt is reset every
month to reflect current market rates.
(b) Subordinated Notes Payable
Subordinated Notes Payable consist of two agreements at December 30, 1995
and June 29, 1996. A $15 million, 12 percent, subordinated note is payable to
Onex, with interest payable annually beginning March 31, 1996, and the principal
payable in full on April 1, 2005. A $10 million subordinated note is payable to
Martin-Brower. Interest on this note is payable semiannually, beginning
September 30, 1998, with rates ranging from zero percent to 13 percent.
Principal is payable in full on March 31, 2002. This note has been discounted in
the accompanying consolidated financial statements to reflect a constant
interest rate through its maturity. Both notes are unsecured obligations of the
Company and are subordinate to all long-term senior debt.
F-13
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Convertible Subordinated Notes Payable
Convertible Subordinated Notes Payable consist of three agreements at
December 30, 1995 and two agreements at June 29, 1996. A $2.5 million
convertible subordinated note, plus accrued interest of $0.9 million at December
30, 1995 and $1 million at June 29, 1996, is payable to Onex, with interest at
10 percent compounded annually and due, together with the principal, on July 1,
2002. Onex may convert both principal and accrued interest on the note into
shares of the Company's common stock at any time at a conversion price of $1,000
per share.
A $3.5 million convertible subordinated note was payable to Onex, with
interest at prime rate (8.5 percent at December 30, 1995), compounded annually
and due, together with the principal, on April 1, 2005. During the year ended
December 30, 1995, the Company paid $2.1 million of such note to Onex resulting
in an outstanding balance of $1.4 million at December 30, 1995. On February 1,
1996, Onex converted $0.8 million of the note into 800 shares of the Company's
common stock and the remaining balance on the note of approximately $0.6 million
plus accrued interest was paid to Onex.
A $0.5 million convertible subordinated note (the "MPI Note") is payable to
Malone Products, Inc. Interest at 8 percent on the MPI Note is payable annually
and the principal of the MPI Note is payable in full on November 1, 1999. The
holders of the MPI Note may convert the principal of the MPI Note into shares of
the Company's common stock at any time at a conversion price of $2,000 per
share.
These notes are unsecured obligations of the Company and are subordinate to
all long-term senior debt.
The carrying value of long-term debt approximates fair value at December
30, 1995 and June 29, 1996.
(7) LEASES
The Company leases facilities, vehicles and other equipment under long-term
operating leases with varying terms, the majority of which contain renewal
and/or purchase options. Certain transportation equipment leases call for
contingent rental payments based upon total miles. As of December 30, 1995 and
June 29, 1996, aggregate future minimum lease payments under noncancelable
operating leases were as follows (amounts in thousands):
[Download Table]
1995 1996
------- -----------
(UNAUDITED)
1996 (through December 28, 1996).............................. $24,861 $ 15,725
1997.......................................................... 20,937 25,906
1998.......................................................... 17,887 22,558
1999.......................................................... 13,163 17,549
2000.......................................................... 9,039 12,218
All years thereafter.......................................... 11,295 19,396
------ ------
Total future minimum lease payments................. $97,182 $ 113,352
====== ======
Rent expense, including contingent rental expense, was approximately $7.8
million, $13.4 million and $30.6 million during the years ended December 25,
1993, December 31, 1994 and December 30, 1995, respectively, and $19.4 million
for the period ended June 29, 1996.
F-14
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES
The income tax benefit (provision) before extraordinary charge, net of a
tax benefit of $0.5 million, for the years ended December 25, 1993, December 31,
1994 and December 30, 1995 consisted of the following (amounts in thousands):
[Download Table]
1993 1994 1995
------- ------ -------
Current taxes:
Federal.............................................. $ 986 $ 256 $(1,236)
State................................................ 99 -- (408)
----- ----- -----
Total current................................ 1,085 256 (1,644)
----- ----- -----
Deferred taxes, excluding other components:
Federal.............................................. (553) 582 1,126
State................................................ (144) 236 264
----- ----- -----
Total deferred taxes, excluding other
components................................. (697) 818 1,390
----- ----- -----
Other:
Alternative minimum tax credit carryforwards......... 19 64 666
Utilization of operating loss carryforwards.......... 90 509 (497)
----- ----- -----
Total other.................................. 109 573 169
----- ----- -----
$ 497 $1,647 $ (85)
===== ===== =====
The following table accounts for the difference between the actual tax
benefit and the amounts obtained by applying the statutory U.S. federal income
tax rate of 34 percent to the loss before income taxes for the years ended
December 25, 1993, December 31, 1994 and December 30, 1995 (amounts in
thousands):
[Download Table]
1993 1994 1995
---- ------ -----
Tax benefit computed at statutory rate..................... $450 $1,370 $ 237
Increases in taxes due to:
State income taxes (net of federal tax benefit).......... (16) 198 (118)
Goodwill amortization.................................... (56) (61) (76)
Miscellaneous............................................ 119 140 (128)
---- ----- ----
Actual tax benefit (provision) before extraordinary charge,
net of tax benefit of $502............................... $497 $1,647 $ (85)
==== ===== ====
Except for the effects of the reversal of net deductible temporary
differences, the Company is not aware of any factors which would cause any
significant differences between taxable income and pre-tax book income in future
years.
F-15
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1994 and December 30, 1995 are presented below (amounts in thousands):
[Download Table]
1994 1995
------- -------
Deferred tax assets:
Acquisition related expenses................................... $ 1,094 $ 2,873
Accounts receivable, principally due to allowance for
doubtful accounts........................................... 1,664 1,046
Property, plant and equipment, principally due to differences
in depreciation............................................. 486 831
Inventories.................................................... 189 462
Self-insurance reserves........................................ 492 2,609
Rent expenses, principally due to differences in operating
lease expenditures.......................................... 248 323
Alternative minimum tax credit carryforwards................... 84 901
Benefit of net operating loss carryforwards.................... 497 --
Other accrued expenses......................................... 385 1,096
----- ------
Total deferred tax assets.............................. 5,139 10,141
Less valuation allowance....................................... -- --
----- ------
Total deferred tax assets, net.............................. $ 5,139 $10,141
===== ======
Deferred tax liabilities:
Computer software.............................................. $(1,068) $ (842)
Prepaid expenses............................................... (264) (167)
Acquisition related liabilities................................ (349) (771)
Other.......................................................... (121) (162)
----- ------
Total deferred tax liabilities......................... (1,802) (1,942)
----- ------
Net deferred tax assets................................ $ 3,337 $ 8,199
===== ======
The net change in deferred tax assets for the year ended December 30, 1995,
included $3.1 million recorded as a result of the acquisition reserves
established in connection with the acquisition of NAD.
During the period ended June 29, 1996, the net change in deferred tax
assets included $4.4 million recorded as a result of the increase in the
acquisition reserves in connection with the acquisition of NAD. Additionally, a
deferred tax benefit of $11 million was recorded which consisted primarily of
future deductible temporary differences attributable to the SFAS 121 adjustments
and the accrual of restructuring reserves during the period ended June 29, 1996.
In order to fully realize the net deferred tax assets at December 30, 1995
and June 29, 1996, the Company will need to generate future taxable income of
approximately $18.5 million and $56.1 million, respectively. Management believes
that it is more likely than not that the existing net deductible temporary
differences will reverse during periods in which the Company will generate such
taxable income. The Company anticipates that increases in taxable income will
result primarily from (i) future projected revenue growth through the addition
of new restaurant chains and the expansion of existing restaurant chains, (ii) a
reduction in interest expense due to a reduction in its indebtedness, (iii) cost
savings through its corporate and network consolidation plan and (iv) other cost
reduction initiatives.
At December 31, 1994, December 30, 1995 and June 29, 1996, other current
assets included income taxes receivable of approximately $1.3 million, $1.4
million and $1.6 million, respectively, which consisted primarily of
overpayments of tax liabilities and pending carryback refund claims.
F-16
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 29, 1996, the Company had a net operating loss carryforward ("NOL")
of approximately $7.2 million. Management believes that it is more likely than
not that the Company will realize the benefit of the NOL's existing at June 29,
1996 before they expire in 2011.
United States income tax returns for fiscal years 1992 and 1993 are
currently under examination by the Internal Revenue Service. Assessments, if
any, are not expected to have a material adverse effect on the consolidated
financial position or results of operations of the Company as of December 30,
1995 and June 29, 1996.
(9) EMPLOYEE BENEFIT PLANS
(a) Defined Benefit Pension Plans
The Company has three noncontributory defined benefit pension plans
covering substantially all of its salaried and hourly employees excluding those
employees covered by multi-employer pension plans under collective bargaining
agreements. The pension benefits are based on years of service and participants'
compensation. The Company's funding policy is to contribute an amount not less
than the ERISA minimum funding requirement nor more than the maximum amount that
can be deducted for income tax purposes. The following table sets forth the
plans' funded status and the amounts recognized in the Company's consolidated
balance sheets at December 25, 1993, December 31, 1994 and December 30, 1995
(amounts in thousands).
[Download Table]
1993 1994 1995
------- ------- -------
Actuarial present value of benefit obligations:
Vested benefit obligation............................. $ (490) $(1,530) $(4,795)
======= ======= =======
Accumulated benefit obligation........................ $(1,044) $(1,928) $(5,582)
======= ======= =======
Projected benefit obligation for service recorded to
date................................................ $(1,626) $(2,300) $(7,143)
Plan assets at fair value............................. 351 1,347 6,103
------- ------- -------
Projected benefit obligation in excess of plan
assets.............................................. (1,275) (953) (1,040)
Unrecognized amortization............................. 247 5 --
Unrecognized net gain................................. -- -- (390)
------- ------- -------
Unfunded accrued liability included in other
noncurrent liabilities.............................. $(1,028) $ (948) $(1,430)
======= ======= =======
Approximately 88 percent of plan assets are invested in equity mutual
funds.
Net pension cost for 1993, 1994 and 1995 included the following components
(amounts in thousands):
[Download Table]
1993 1994 1995
---- ---- ----
Service cost -- benefits earned during the period............. $632 $781 $883
Interest cost on projected benefit obligation................. 58 136 404
Actual return on plan assets.................................. (7) (57) (663)
Net amortization and deferral................................. -- 10 301
---- ---- -----
Net pension cost.............................................. $683 $870 $925
==== ==== =====
F-17
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension costs under the Company's defined benefit pension plans are
actuarially computed on an annual basis. Actuarial assumptions used in
accounting for the defined benefit pension plans as of December 25, 1993,
December 31, 1994 and December 30, 1995 were:
[Download Table]
1993 1994 1995
---- ---- ----
Discount rates................................................. 7.25% 8.25% 7.25%
Rates of increase in compensation levels....................... 4.00% 4.00% 4.00%
Expected long-term rate of return on assets.................... 8.50% 8.50% 8.50%
The Company's pension expense for contributions to the various
multi-employer pension plans under collective bargaining agreements was
approximately $0.1 million, $0.1 million, $0.9 million and $0.6 million for the
years ended December 25, 1993, December 31, 1994, December 30, 1995 and the
period ended June 29, 1996.
(b) Defined Contribution Plans
The Company sponsors various defined contribution plans which cover
substantially all full-time and part-time, salaried and hourly employees.
Depending on the plan, eligible employees may contribute up to 10, 12.5 or 15
percent of base compensation, and the Company matches 50 percent of the first 4
percent or 100 percent of the first 2.5 percent of eligible compensation.
Effective January 1, 1996, all of these plans were combined into one plan (the
"Associates' Savings Plan"). The Company also has a Money Purchase Plan which
covers those former NAD salaried employees not covered by a defined benefit
plan. Under this plan, the Company contributes 10 percent of eligible salary.
The amount of contribution expenses incurred by the Company for these plans were
approximately $0.7 million, $0.7 million, $2.2 million and $1.4 million for the
years ended December 25, 1993, December 31, 1994, December 30, 1995 and the
period ended June 29, 1996, respectively.
(c) Supplemental Executive Retirement Plan
The Company plans to adopt a supplemental executive retirement plan in 1996
to cover certain key executives of the Company. Accrued pension costs of
approximately $0.1 million related to this plan were recorded at December 30,
1995.
(10) STOCKHOLDERS' EQUITY
Under the ProSource, Inc. Employee Stock Purchase Plan (the "Stock Plan"),
at June 30, 1992 officers and key employees of the Company ("Management
Employees") purchased 4,081 shares of common stock at $1,000 per share. During
1993 and 1994, 1,256 and 69 shares of common stock were purchased by Management
Employees at $1,100 per share, respectively. During 1995, in connection with the
NAD acquisition, certain Management Employees purchased 2,085 shares of common
stock at $1,000 per share. In connection with the purchases of common stock,
each Management Employee entered into a Management Shareholders Agreement with
the Company and Onex.
The ProSource, Inc. Management Option Plan (1995) (the "1995 Option Plan")
was amended in conjunction with the acquisition of NAD. The 1995 Option Plan
provides certain Management Employees with options to purchase one-half the
number of shares of common stock purchased under the Employee Stock Purchase
Plan at the same price per share paid by such stockholder.
F-18
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of outstanding stock options as of December 25, 1993, December
31, 1994, December 30, 1995 and June 29, 1996 is as follows:
[Enlarge/Download Table]
1996
OPTION PRICE 1993 1994 1995 -----------
-------------- ------- ------- ------- (UNAUDITED)
Outstanding, beginning of
year..................... $1,000 - 1,100 2,040.5 2,536.5 2,374.5 3,277.0
Granted.................... 1,000 - 1,100 503.5 34.5 1,017.5 307.5
Exercised.................. 1,000 - 1,100 -- -- -- --
Canceled................... 1,000 - 1,100 (7.5) (196.5) (115.0) (82.5)
-------------- -------- -------- -------- --------
Outstanding, end of year... $1,000 - 1,100 2,536.5 2,374.5 3,277.0 3,502.0
============== ======== ======== ======== ========
Exercisable................ 102 93 415 437
======== ======== ======== ========
In conjunction with the acquisition of NAD, the Company issued warrants to
Martin-Brower. At December 30, 1995 and June 29, 1996, the warrants were
exercisable for 2,834 shares of common stock at $1,235 per share during the
period commencing on April 1, 1997 and through March 31, 2000, and upon
consummation of certain transactions.
(11) COMMITMENTS AND GUARANTEES
The Company has guaranteed the principal due on certain loans obtained by
its officers and employees in connection with the purchase of common stock under
the Stock Plan. At December 30, 1995 and June 29, 1996, such guarantees amounted
to approximately $2.9 million and $3.3 million, respectively.
At December 30, 1995 and June 29, 1996, the Company was also obligated for
$19 million and $18 million, respectively, in letters of credit issued on behalf
of the Company primarily as a guarantee of payment for obligations arising from
workers' compensation claims. At December 30, 1995 and June 29, 1996, the
Company had $6 million and $7 million, respectively, available in unused letters
of credit.
(12) LITIGATION
The Company and its subsidiaries are parties to various legal actions
arising in the ordinary course of business. Management believes that the outcome
of such cases will not have a material adverse effect on the consolidated
results of operations or financial position of the Company.
(13) CONCENTRATIONS OF CREDIT RISK
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. BKC-owned and
franchisee-owned Burger King restaurants collectively accounted for 94 percent,
90 percent, 45 percent and 40 percent of the Company's sales in fiscal years
1993, 1994, 1995 and during the period ended June 29, 1996, respectively. Sales
to BKC-owned restaurants represented approximately 17 percent, 13 percent, 5
percent and 4 percent of sales for the years ended December 25, 1993, December
31, 1994, December 30, 1995 and the period ended June 29, 1996, respectively.
Amounts due from BKC at December 31, 1994, December 30, 1995 and June 29, 1996
were $6 million, $4.7 million and $7.1 million, respectively.
In addition, sales to Darden Restaurants, Inc. (owner of Olive Garden and
Red Lobster restaurants) accounted for 18 percent and 22 percent of Company
sales in fiscal year 1995 and during the period ended June 29, 1996,
respectively. Amounts due from Darden Restaurants, Inc. at December 30, 1995 and
June 29, 1996, were approximately $51.8 million and $39.1 million, respectively.
Sales to franchisor-owned and franchisee-owned Arby's restaurants accounted for
10 percent of Company sales in fiscal year 1995 and during the period ended June
29, 1996, respectively.
F-19
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) RELATED-PARTY TRANSACTION
Onex provides management services to the Company for an annual fee. Amounts
incurred for such services were approximately $0.8 million, $0.8 million, $0.8
million and $0.4 million in fiscal years 1993, 1994, 1995 and during the period
ended June 29, 1996, respectively.
(15) SUBSEQUENT EVENT
In September 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission with respect to an initial public offering.
The net proceeds of the offering will be used to repay certain indebtedness of
the Company.
F-20
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
UNAUDITED CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
(UNAUDITED)
ASSETS
Current assets:
Cash........................................................................... $ 698
Accounts receivable, less allowance for doubtful accounts of $1,893............ 96,034
Inventories.................................................................... 106,444
Prepaid expenses............................................................... 3,791
--------
Total current assets................................................... 206,967
Property, plant and equipment, net............................................... 29,133
Other assets..................................................................... 43
--------
$ 236,143
========
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable and accrued liabilities....................................... $ 95,898
Overdrafts..................................................................... 21,317
Current portion of long-term debt.............................................. 2,711
--------
Total current liabilities.............................................. 119,926
Long-term debt, less current portion............................................. 514
--------
120,440
--------
Divisional equity................................................................ 115,637
Cumulative translation adjustment................................................ 66
--------
115,703
--------
Commitments and contingent liabilities........................................... --
$ 236,143
========
See accompanying notes to unaudited condensed combined financial statements.
F-21
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
UNAUDITED CONDENSED COMBINED STATEMENT OF INCOME
AND CHANGES IN DIVISIONAL EQUITY
FOR THE THIRTY-NINE WEEKS ENDED MARCH 31, 1995
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
(UNAUDITED)
Net sales...................................................................... $1,608,923
Other income................................................................... 1,081
----------
1,610,004
----------
Costs and expenses:
Cost of goods sold........................................................... 1,501,894
Selling, general and administrative.......................................... 106,996
Interest..................................................................... 1,350
----------
1,610,240
----------
Loss before income tax benefit................................................. (236)
Income tax benefit............................................................. 359
----------
Net income..................................................................... 123
Divisional equity at:
Beginning of period.......................................................... 37,327
Dividends paid............................................................... (2,750)
Advances from Parent......................................................... 80,937
----------
End of period................................................................ $ 115,637
==========
See accompanying notes to unaudited condensed combined financial statements.
F-22
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
UNAUDITED CONDENSED COMBINED STATEMENT OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED MARCH 31, 1995
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
(UNAUDITED)
Cash flows from operating activities:
Net income..................................................................... $ 123
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization............................................... 4,630
Change in assets and liabilities:
Accounts receivable....................................................... (32,159)
Inventories............................................................... (15,991)
Prepaid expenses.......................................................... (1,891)
Overdrafts................................................................ (20,763)
Accounts payable and accrued liabilities.................................. (4,321)
Other..................................................................... (10)
--------
Net cash used in operating activities.................................. (70,382)
--------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment............................ 1,132
Additions to property, plant and equipment..................................... (4,167)
--------
Net cash used in investing activities.................................. (3,035)
--------
Cash flows from financing activities:
Proceeds from (repayments of) borrowing, net................................... (4,353)
Borrowings from parent......................................................... 80,937
Dividends paid................................................................. (2,750)
--------
Net cash provided by financing activities.............................. 73,834
Effect of exchange rate changes on cash.......................................... 2
Net increase in cash................................................... 419
Cash at:
Beginning of period............................................................ 279
--------
End of period.................................................................. $ 698
========
See accompanying notes to unaudited condensed combined financial statements.
F-23
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 -- BASIS OF PRESENTATION:
The unaudited condensed combined balance sheet as of March 31, 1995, and
the unaudited condensed combined statements of income and changes in divisional
equity and cash flows for the 39 weeks ended March 31, 1995 include, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the Company's combined financial
position, results of operations, and cash flows. Operating results for the 39
weeks ended March 31, 1995 are not necessarily indicative of the results that
may be expected for the fiscal year ending July 1, 1995. These statements should
be read in conjunction with the combined financial statements and notes thereto
for the fiscal year ended July 1, 1994.
The unaudited condensed combined financial statements include the accounts
of (a) the National Accounts Division, a division of The Martin-Brower Company
(the "Company"), (b) NAD Distribution Systems, a division of Martin-Brower of
Canada, Ltd., a wholly owned subsidiary of the Company, and (c) BroMar Services,
Inc., a wholly owned subsidiary of the Company, collectively the "Division". The
Company is wholly owned by Dalgety, Inc. (the "Parent") and ultimately wholly
owned by Dalgety PLC, a company traded on the London and Australian stock
exchanges. All significant intradivisional transactions have been eliminated.
NOTE 2 -- RELATED PARTY TRANSACTIONS:
The Company has provided the Division with certain legal, treasury, audit,
insurance, facility, human resource management, regulatory and administrative
services. Charges for these services to the Division are based on allocations of
the Company's actual direct and indirect costs using varying allocation bases
(payroll, headcount, floor space, etc.) designed to estimate the actual cost
incurred by the Company to render these services to the Division. However, there
can be no assurance that these allocations would approximate the costs incurred
if the Division had operated as an independent stand-alone entity. The
allocation process is consistent with the methodology used by the Company to
allocate the cost of similar service to its other division. The allocated cost
of these services was $7,778 for the period ended March 31, 1995 and is
reflected in the combined statement of income.
The Parent at the end of the fiscal year usually charges the Company for
interest and certain services, paid for by the Parent on behalf of the Company,
which is then allocated to the Division. No amounts have been allocated to the
Division for the period ended March 31, 1995.
The divisional equity account varies according to the working capital
requirements of the Division. The Division is charged interest on that portion
of the equity account deemed to represent advances from the Parent. Total
interest expense of $1,005 relating to such advances is included in the combined
statement of income for the period ended March 31, 1995. This interest is based
on interest rates incurred by the Parent.
NOTE 3 -- ACCOUNTS RECEIVABLE:
The Company has an agreement with two financial institutions to sell, on an
ongoing basis and with limited recourse, up to $50,000 of selected trade
accounts receivable. Recourse is limited principally to the substitution of
"eligible" receivables for "ineligible" receivables as defined in the agreement.
As of March 31, 1995, none of the sold receivables were allocated to the
Division by management.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES:
As of March 31, 1995, the Company had open letters of credit, some of which
secured guarantees to third parties, net of amounts reported as liabilities or
lease commitments, aggregating $13,369 available for the
F-24
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Division and the Company's other operations. Commitment fees to banks associated
with open letters of credit vary from 3/8% to 5/8%.
The Division has various claims and legal proceedings outstanding. In the
opinion of management, the ultimate outcome of outstanding litigation and claims
will not have a material adverse effect on the financial position of the
Division.
NOTE 5 -- SUBSEQUENT EVENT:
On March 31, 1995, the Company sold substantially all of the assets and
certain liabilities of the Division to ProSource, Inc. in accordance with the
provisions within the Agreement for the Purchase and Sale of the National
Accounts Division of The Martin-Brower Company and Martin-Brower of Canada, Ltd.
(the "Purchase Agreement") dated November 10, 1994. The net book value of the
net assets sold was approximately $151,000 as of March 31, 1995.
F-25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of The Martin-Brower Company
We have audited the accompanying combined balance sheets of the National
Accounts Division of The Martin-Brower Company as of July 2, 1993 and July 1,
1994 and the related combined statements of income and changes in divisional
equity and of cash flows for the 52 week periods then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements audited by us present fairly,
in all material respects, the financial position of the National Accounts
Division at July 2, 1993 and July 1, 1994, and the results of its operations and
its cash flows for the 52 week periods then ended, in conformity with generally
accepted accounting principles in the United States of America.
As explained in Notes 1 and 3, the National Accounts Division is a division of
The Martin-Brower Company and has extensive transactions with related parties.
PRICE WATERHOUSE LLP
Chicago, Illinois
December 9, 1994
F-26
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
JULY 2, 1993 JULY 1, 1994
------------ ------------
ASSETS
Current assets:
Cash............................................................... $ 251 $ 279
Accounts receivables, less allowance for doubtful accounts of
$1,655 and $1,276, respectively................................. 47,584 63,875
Inventories........................................................ 80,962 90,453
Prepaid expenses................................................... 1,504 1,900
-------- --------
Total current assets....................................... 130,301 156,507
Property, plant and equipment, net (Note 5).......................... 31,191 30,730
Other assets......................................................... 236 29
-------- --------
$161,728 $187,266
======== ========
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable................................................... $ 73,015 $ 86,286
Accrued liabilities................................................ 12,121 13,933
Overdrafts......................................................... 34,294 42,080
Current portion of long-term debt (Note 6)......................... 710 6,932
-------- --------
Total current liabilities.................................. 120,140 149,231
Long-term debt, less current portion (Note 6)........................ 4,953 646
-------- --------
125,093 149,877
-------- --------
Divisional equity.................................................... 36,604 37,327
Cumulative translation adjustment.................................... 31 62
-------- --------
36,635 37,389
-------- --------
Commitments and contingent liabilities (Note 10)..................... -- --
$161,728 $187,266
======== ========
See accompanying notes to combined financial statements.
F-27
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
COMBINED STATEMENTS OF INCOME AND CHANGES IN DIVISIONAL EQUITY
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
52 WEEKS ENDED
-----------------------------
JULY 2, 1993 JULY 1, 1994
------------ ------------
Net sales........................................................... $ 1,881,326 $ 2,029,055
Other income........................................................ 314 307
---------- ----------
1,881,640 2,029,362
---------- ----------
Costs and expenses:
Cost of goods sold................................................ 1,749,679 1,889,355
Selling, general and administrative............................... 122,508 132,357
Interest.......................................................... 1,424 2,982
---------- ----------
1,873,611 2,024,694
---------- ----------
Income before provision for income taxes............................ 8,029 4,668
Provision for income taxes.......................................... 3,169 1,818
---------- ----------
Net income.......................................................... 4,860 2,850
Divisional equity at:
Beginning of year................................................. 44,271 36,604
Dividends paid.................................................... -- (2,844)
Advances from (payments to) Dalgety, Inc.......................... (12,527) 717
---------- ----------
End of year....................................................... $ 36,604 $ 37,327
========== ==========
See accompanying notes to combined financial statements.
F-28
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
52 WEEKS ENDED
-----------------------------
JULY 2, 1993 JULY 1, 1994
------------ ------------
Cash flows from operating activities:
Net income......................................................... $ 4,860 $ 2,850
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 5,843 6,026
Loss (gain) on sale of property, plant and equipment............... (120) 169
Change in assets and liabilities:
Accounts receivable............................................. 10,136 (16,291)
Inventories..................................................... (5,215) (9,491)
Prepaid expenses................................................ (649) (396)
Accounts payable................................................ (7,663) 13,271
Accrued liabilities............................................. 1,449 1,812
Overdrafts...................................................... 14,823 7,786
Other........................................................... 1,239 632
-------- --------
Net cash provided by operating activities............................ 24,703 6,368
-------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment................ 1,033 231
Additions to property, plant equipment............................. (8,504) (5,965)
-------- --------
Net cash used in investing activities................................ (7,471) (5,734)
-------- --------
Cash flow from financing activities:
Payment of capital lease obligations............................... (1,173) (551)
Proceeds from (repayments of) borrowings, net...................... (3,476) 2,072
Change in divisional equity........................................ (12,527) (2,127)
-------- --------
Net cash used by financing activities.............................. (17,176) (606)
-------- --------
Net increase in cash................................................. 56 28
Cash at:
Beginning of year.................................................. 195 251
-------- --------
End of year........................................................ $ 251 $ 279
======== ========
See accompanying notes to combined financial statements.
F-29
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 -- BASIS OF PRESENTATION, OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Basis of Presentation
The combined financial statements include the accounts of (a) the National
Accounts Division, a division of The Martin-Brower Company (the "Company"), (b)
NAD Distribution Systems, a division of Martin-Brower of Canada, Ltd., a wholly
owned subsidiary of the Company, and (c) BroMar Services, Inc., a wholly owned
subsidiary of the Company, collectively the "Division". The Company is wholly
owned by Dalgety, Inc. (the "Parent") and ultimately wholly owned by Dalgety
PLC, a company traded on the London and Australian stock exchanges. All
significant intradivisional transactions have been eliminated.
On November 10, 1994, the Company entered into a definitive agreement (the
"Purchase Agreement") to sell the Division to ProSource, Inc. ("ProSource"), a
subsidiary of Onex Corporation, a company traded on the Toronto and Montreal
stock exchanges. (See Note 12.)
The accompanying financial statements reflect the "carve-out" financial
position, results of operations and cash flows of the Division for the periods
presented. Certain general and administrative expenses incurred by the Company
have been allocated to the Division on bases described in Note 3 which, in the
opinion of management, are reasonable. However, such expenses are not
necessarily indicative of and it is not practicable for management to estimate,
the nature and level of expenses which might have been incurred had the Division
been operating as a separate company.
The financial information included herein does not necessarily reflect what
the financial position and results of operations of the Division would have been
had it operated as a stand-alone entity during the periods covered, and may not
be indicative of future operations or financial position.
The Company and the Division will have rights and obligations as negotiated
in connection with, or as reflected in, the Purchase Agreement which has been
executed between the Company and ProSource. Certain other rights and obligations
may arise as a result of a proposed service agreement between the Company and
ProSource. (See Note 12.)
Operations
The Division is a distributor of food and paper products to quick service
and specialty restaurant chains. One customer accounted for a 40 percent and 37
percent of the Division's combined sales in fiscal 1994 and 1993, respectively.
The Division's operations in Canada had sales and loss before taxes for
fiscal 1994 of $43,475 and $(35), respectively ($51,652 and $(113) for fiscal
1993). Net Canadian assets (liabilities) at July 2, 1993 and July 1, 1994 were
$(168) and $1,915, respectively, including net property, plant and equipment of
$267 and $176 in 1993 and 1994, respectively.
Significant Accounting Policies
A summary of significant accounting policies follows:
A. Fiscal Year: The Division's fiscal year consists of 52 or 53 weeks
ending on the Friday closest to June 30. Results for 1993 are for the 52 weeks
ended July 2, 1993 and for 1994 are for the 52 weeks ended July 1, 1994.
F-30
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
B. Translation of Foreign Currency: The accounts of the Division's
Canadian operations are translated into U.S. dollars in accordance with
Statement of Financial Accounting Standards (FAS) No. 52 as follows:
[Download Table]
Assets and liabilities Year end exchange rates
Revenues and expenses Average monthly exchange rates
Translation gains and losses are included in the cumulative translation
adjustment component of divisional equity.
C. Inventories: Inventories, consisting of product for resale, are stated
at the lower of cost or market, cost being determined generally using the
last-in, first out (LIFO) method. Inventories would have been higher by
approximately $2,739 at July 2, 1993 and $1,757 at July 1, 1994 if the first-in,
first out (FIFO) method had been used. The Division's inventories are included
with the other inventories of the Company in a single LIFO pool. The calculation
of the effects of LIFO on the Division is based on the relative proportions of
inventory on a FIFO basis for the Company's operations at June 30, 1992, July 2,
1993 and July 1, 1994, respectively.
D. Property, Plant and Equipment: Property additions, major renewals and
betterments are included in asset accounts at cost. Interest charges incurred
during the period required to construct major properties are capitalized as part
of the project cost and amortized over the life of the asset. Certain corporate
assets of the Company have been allocated to the Division on various bases
which, in the opinion of management, are reasonable.
Depreciation is computed generally using the straight line method over the
estimated useful lives of the assets, ranging from 3 to 40 years. Amortization
of leasehold improvements and equipment under capital leases is computed using
the straight line method generally over the shorter of the useful lives or the
remaining lease terms.
E. Income Taxes: Provision has been made for income taxes in accordance
with FAS No. 109, "Accounting for Income Taxes." FAS 109 requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The Division's operations have been included with the Parent in a U.S.
consolidated federal income tax return. The Division's Canadian operations have
been included in Martin-Brower of Canada, Ltd.'s Canadian income tax return. For
financial reporting purposes, amounts provided for income taxes are determined
as if the Division were to file separate U.S. and Canadian income tax returns
and the U.S. federal and state and Canadian federal and provincial current and
deferred income tax balances are settled through the divisional equity account.
Differences resulting from the separate return method of allocating taxes are
reflected in the consolidated financial statements of the Parent. (See Note 7).
F. Medical Benefits for Retired Employees: The provisions of FAS 106,
"Employer's Accounting for Post-retirement Benefits Other than Pensions" have
not yet been adopted and the Division accounts for such costs on a cash basis.
(See Note 11).
G. Revenue Recognition: Distribution revenue is recognized upon receipt of
product by the customer.
F-31
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during fiscal 1993 and 1994 for external interest expense was
$820 and $651, respectively. Capital lease obligations of $308 and $394 were
incurred in fiscal 1993 and 1994, respectively, primarily for transportation and
computer equipment.
NOTE 3 -- RELATED PARTY TRANSACTIONS:
The Company has provided the Division with certain legal, treasury, audit,
insurance, facility, human resource management, regulatory and administrative
services. Charges for these services to the Division are based on allocations of
the Company's actual direct and indirect costs using varying allocation bases
(payroll, headcount, floor space, etc.) designed to estimate the actual cost
incurred by the Company to render these services to the Division. However, there
can be no assurance that these allocations would approximate the costs incurred
if the Division had operated as an independent stand-alone entity. The
allocation process is consistent with the methodology used by the Company to
allocate the cost of similar services to its other division. The allocated cost
of these services were $9,415 and $10,433 for fiscal 1993 and 1994,
respectively, and are reflected in the combined statements of income.
In fiscal 1994, the Parent charged the Company for interest and certain
services, paid for by the Parent on behalf of the Company in fiscal 1993 and
1994, $2,629 of which was allocated to the Division.
The divisional equity account varies according to the working capital
requirements of the Division. The Division is charged interest on that portion
of the equity account deemed to represent advances from the Parent. Total
interests expense of $786 and $869 relating to such advances are included in the
combined statements of income for fiscal 1993 and 1994, respectively. This
interest is based on interest rates incurred by the Parent.
NOTE 4 -- ACCOUNTS RECEIVABLE:
The Company has an agreement with two financial institutions to sell, on an
ongoing basis and with limited recourse, up to $75,000 of selected trade
accounts receivable. Recourse is limited principally to the substitution of
"eligible" receivables for "ineligible" receivables as defined in the agreement.
As of July 2, 1993 and July 1, 1994, $30,000 of the sold receivables were
allocated to the Division by management. Under accounting principles generally
accepted in the United States of America, these receivables are not included in
the Division's balance sheet.
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
[Enlarge/Download Table]
JULY 2, 1993 JULY 1, 1994
------------ ------------
Land and land improvements................................... $ 1,907 $ 1,909
Buildings.................................................... 11,782 10,372
Leasehold improvements....................................... 6,847 7,280
Transportation equipment..................................... 4,323 4,247
Machinery and other equipment................................ 35,392 41,332
-------- --------
60,251 65,140
Less -- Accumulated depreciation and amortization............ (29,060) (34,410)
-------- --------
$ 31,191 $ 30,730
======== ========
F-32
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Depreciation expense, including amortization of assets held under
capitalized leases, was $5,843 and $6,026 in fiscal 1993 and 1994, respectively.
Certain property, plant and equipment is pledged, at July 2, 1993 and July
1, 1994, as security for long-term debt (see Notes 6 and 8).
NOTE 6 -- DEBT:
Long-term debt consists of the following:
[Enlarge/Download Table]
JULY 2, 1993 JULY 1, 1994
------------ ------------
Capital lease obligations with interest rates ranging from 6% to 8%,
due through 1998................................................... $1,215 $ 1,058
Industrial development revenue bonds, with a fixed interest rate of
9.55%, due December 1, 1994, secured by certain land, buildings and
equipment with a net book value of approximately $3,584 at July 2,
1993 and $2,980 at July 1, 1994 (the Company settled this liability
before the due date)............................................... 4,200 4,200
Bank borrowings, with interest at a variable rate of approximately
8.25%, due through 1994, guaranteed by Dalgety PLC................. 248 2,320
------ -------
5,663 7,578
Less -- current portion.............................................. (710) (6,932)
------ -------
$4,953 $ 646
====== =======
The carrying value of the Division's debt at July 2, 1993 and July 1, 1994
approximates fair value.
The aggregate annual principal installments of outstanding long-term debt
(exclusive of capital lease obligations reported in Note 8) scheduled for
payment during fiscal year ending June 30, 1995 are $6,520.
At July 1, 1994 the Company shares with its Parent a bank line of credit of
$20,000, of which $10,000 is available in U.S. funds and is available for the
Division and the Company's other operations. This line of credit is guaranteed
by Dalgety PLC. At July 1, 1994, $2,320 was outstanding and related to the
Division.
NOTE 7 -- INCOME TAXES:
Amounts provided are summarized as follows:
[Enlarge/Download Table]
52 WEEKS ENDED
-----------------------------
JULY 2, 1993 JULY 1, 1994
------------ ------------
Current:
Federal.................................................... $2,392 $1,383
State...................................................... 529 234
Foreign.................................................... (54) (15)
------ ------
Current income tax expense................................... 2,867 1,602
Deferred:
Federal.................................................... 265 197
State...................................................... 37 19
------ ------
Total income tax expense..................................... $3,169 $1,818
====== ======
F-33
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Principal temporary differences between book and taxable income for the
above fiscal years consist of bad debt expense, fixed asset depreciation and
gain or loss on disposition, employee benefits, state income tax and other
expense accruals.
The effective income tax rate for fiscal 1993 (39.4%) and 1994 (38.9%) is
different from the federal statutory rate (34.5% and 35% respectively) as a
result of the following: state income taxes (4.6% and 3.5%, respectively) and
other significant items, including foreign operations, certain tax credits and
nondeductible meals and entertainment.
NOTE 8 -- LEASES:
The Division leases a portion of its transportation and other equipment and
several of its warehouses and office facilities. Leases of transportation
equipment generally expire over the next five years and are accounted for as
either capital or operating depending upon the lease terms. Certain
transportation equipment leases call for contingent rental payments based upon
mileage traveled. Most leases of facilities and other equipment are classified
as operating leases and are for various periods extending through fiscal 2007.
Future minimum lease payments under capital leases and operating leases
(with initial terms of one year or more) as of July 1, 1994 are as follows:
[Enlarge/Download Table]
YEAR ENDING ON THE FRIDAY CAPITAL OPERATING
CLOSEST TO JUNE 30: LEASES LEASES
----------------------------------------------------------------- ------- ---------
1995............................................................. $ 484 $11,782
1996............................................................. 358 10,090
1997............................................................. 273 6,443
1998............................................................. 42 5,016
1999............................................................. -- 4,458
Thereafter....................................................... -- 3,057
------ -------
Total minimum lease payments..................................... 1,157 $40,846
Less -- Amount representing interest............................. (99)
------
Present value of net minimum lease payments...................... $ 1,058
======
Minimum lease payments and contingent payments (based on usage) for capital
leases were as follows:
[Enlarge/Download Table]
52 WEEKS ENDED
-----------------------------
JULY 2, 1993 JULY 1, 1994
------------ ------------
Minimum rentals.............................................. $551 $695
Contingent rental (based on usage)........................... 118 141
---- ----
$669 $836
==== ====
Total rental expense for all operating leases were as follows:
[Enlarge/Download Table]
52 WEEKS ENDED
-----------------------------
JULY 2, 1993 JULY 1, 1994
------------ ------------
Minimum rentals.............................................. $ 14,040 $ 15,000
Contingent rental (based on usage)........................... 2,995 3,045
------- -------
Rental expense............................................... $ 17,035 $ 18,045
======= =======
F-34
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The Division's property held under capital leases, included with owned
property in the combined balance sheet, consists of:
[Enlarge/Download Table]
JULY 2, 1993 JULY 1, 1994
------------ ------------
Transportation equipment..................................... $ 506 $ 577
Machinery and other equipment................................ 1,369 1,130
------ ------
1,875 1,707
Less -- Accumulated depreciation............................. (710) (686)
------ ------
$1,165 $1,021
====== ======
NOTE 9 -- EMPLOYEE BENEFIT PLANS:
The Division provides retirement benefits for substantially all of its
employees through various Company-administered defined benefit and defined
contribution plans and plans administered under collective bargaining
agreements. Pension expense for the Division in fiscal 1993 and 1994 totalled
$2,670 and $3,039, respectively.
Defined Benefit Plan
The Company sponsors a non-contributory defined benefit pension plan for
hourly paid employees not covered by a collective bargaining agreement. Benefits
under the plan are based on participants' compensation over their entire years
of service. The Company's funding policy is to contribute annually the maximum
amount that can be deducted for federal income tax purposes.
Net periodic pension cost for the Division included the following
components:
[Enlarge/Download Table]
52 WEEKS ENDED
-------------------
JULY 2, JULY 1,
1993 1994
------- -------
Service cost -- benefits earned during the period................... $ 298 $ 392
Interest cost on projected benefit obligation....................... 200 236
Actual return on assets............................................. (141) (60)
Amortization of excess of plan assets over projected benefit
obligations, over 15 years from July 1985......................... (39) (39)
Amortization of prior service cost.................................. -- 22
Amortization of loss................................................ 31 40
Asset loss deferral................................................. (67) (129)
---- ----
Net periodic pension cost........................................... $ 282 $ 462
==== ====
Actuarial assumptions used for the Company's defined benefit pension plan
for both fiscal years were:
[Download Table]
1993 1994
---- ----
Discount rate......................................................... 8.5% 7.5%
Rate of increase in compensation levels............................... 6.0% 3.5%
Expected long-term rate of return on plan assets...................... 9.0% 8.0%
F-35
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The following table sets forth the funded status and the amounts recognized
in the Division's combined balance sheet for its portion of the Company's
defined benefit pension plan:
[Enlarge/Download Table]
JULY 2, JULY 1,
1993 1994
------- -------
Actuarial present value of benefit obligations:
Accumulated benefit obligation including vested benefits of
$1,664 and $2,394 in 1993 and 1994, respectively............... $(1,919) $(2,776)
Projected benefit obligation..................................... $(2,841) $(3,674)
Plan assets at fair value (primarily listed stocks and government
obligations)................................................... 2,444 2,552
----- -----
Projected benefit obligation greater than plan assets............ (397) (1,122)
Unrecognized net loss............................................ 769 937
Unrecognized prior service cost.................................. -- 306
Unrecognized excess of plan assets at fair value over projected
benefit obligation at July 1, 1985, being recognized over 15
years.......................................................... (271) (231)
----- -----
(Accrued) prepaid pension cost included in other assets.......... $ 101 $ (110)
===== =====
Defined contribution plans
The Company sponsors a 401(k) plan for salaried employees and hourly
employees who participate in the Company's defined benefit pension plan. The
plan includes optional employee participation levels of up to 10% of eligible
earnings, subject to IRS limitations, with matching employer contributions of up
to 2% of eligible earnings. The employer contribution costs recognized by the
Division during fiscal 1993 and 1994 amounted to $387 and $429, respectively.
The Company also sponsors a money purchase plan for salaried employees
under which the Company makes contributions of 10% of eligible salary, with full
vesting, after two years of service. The Division's costs of these plans for
fiscal 1993 and 1994 amounted to $1,201 and $1,272, respectively.
Multi-employer pension plan
The Company contributes to various multi-employer pension plans under
collective bargaining agreements. The Company's share of liabilities for
unfunded benefits associated with these plans is not determinable. The
Division's pension expense for contributions to these plans was approximately
$800 and $876 in fiscal 1993 and 1994, respectively.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES:
At July 1, 1994, the Company had open letters of credit, some of which
secured guarantees to third parties, net of amounts reported as liabilities or
lease commitments (reported in Note 8), aggregating $25,823 available for the
Division and the Company's other operations. Commitment fees to banks associated
with open letters of credit vary from 3/8% to 5/8%.
The Division has various claims and legal proceedings outstanding. In the
opinion of management, the ultimate outcome of outstanding litigation and claims
will not have a material adverse effect on the financial position or results of
operations or cash flows of the Division.
F-36
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 11 -- MEDICAL BENEFITS FOR RETIRED EMPLOYEES:
The Company has a post-retirement medical benefit plan that covers certain
employees who had met age and length of service requirements as of December 1,
1987. In fiscal 1993 and 1994, the Division paid medical claims expense of $59
and $24, respectively, for retired employees.
FAS 106, "Employers' Accounting for Post-retirement Benefits Other than
Pensions," would require the Division to begin accruing medical benefits for
retired employees by fiscal 1996. Furthermore, implementation of the standard
would require the recognition of a "transition obligation" (as defined in that
standard) based on the aggregate amount that would have been accrued in prior
years had the new standard been in effect for those years. That standard,
however, permits the Division to recognize the entire "transition obligation" in
the year of adoption or to amortize it over a period of years.
The Division estimates that the transition obligation approximates $482 as
of July 1, 1994. The Division has decided neither the timing nor method of
adoption of FAS 106.
NOTE 12 -- SUBSEQUENT EVENT:
On November 10, 1994, the Company signed the Purchase Agreement to sell
substantially all of the assets of the Division to ProSource for approximately
$140,000 and the assumption of the trade payables, subject to certain closing
conditions. The final net value to ProSource will vary depending on various
closing and post-closing adjustments, and retained liabilities.
The Company will retain all assets defined as "Excluded Assets", consisting
principally of cash and cash equivalents, certain insurance deposits, prepaid
items and refundable excise taxes as of the closing date. Liabilities to be
retained by the Company include primarily pre-closing federal and state income
taxes, post-retirement medical and life insurance benefits and other pre-closing
employee benefit obligations, pre-closing product liabilities,
incurred-but-not-reported medical and dental liabilities, workers' compensation
liabilities, vehicle accident liabilities, environmental liabilities and certain
other liabilities as specified in the Purchase Agreement.
The Company intends to enter into a service agreement with ProSource to
cover transition services to be provided by both parties after the closing. The
extent of the services provided and the rates to be charged have not been agreed
upon. Upon the planned service agreement, the Company would provide to ProSource
certain personnel and salary administration, accounting and treasury assistance,
print shop services and record storage space. ProSource would provide the
Company certain office space, computer processing, accounting and recordkeeping
services. Charges for the services to be rendered by the parties would be
determined on various bases including monthly fees, hourly rates and charges per
square foot. The services would be provided for periods up to one year, except
for recordkeeping which would continue for a period of seven years.
F-37
PROSOURCE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 1995
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
PRO FORMA PRO FORMA,
ADJUSTMENTS AS ADJUSTED
FOR THE FOR THE PRO FORMA
ACQUISITION ACQUISITION ADJUSTMENTS
OF OF FOR THE PRO FORMA,
HISTORICAL NAD NAD OFFERING AS ADJUSTED
---------- -------------- -------------- ----------- -----------
Net sales.......................... $3,461,837 $531,606(A) $3,993,443 $ -- $ 3,993,443
Cost of sales...................... 3,193,270 496,156(A) 3,689,426 -- 3,689,426
---------- -------- ---------- ------- ----------
Gross profit..................... 268,567 35,450 304,017 -- 304,017
Operating expenses................. 255,216 35,726(A) 290,942 -- 290,942
Restructuring charges.............. 711 -- 711 -- 711
---------- -------- ---------- ------- ----------
Earnings from operations......... 12,640 (276) 12,364 -- 12,364
Interest expense................... (14,678) (2,738)(B) (17,416) 4,925(C) (12,491)
Interest income.................... 1,339 69 1,408 -- 1,408
---------- -------- ---------- ------- ----------
Earnings (loss) before income
taxes and extraordinary
charge........................ (699) (2,945) (3,644) 4,925 1,281
Income tax (provision) benefit..... (85) 1,131(D) 1,046 (1,941)(D) (895)
---------- -------- ---------- ------- ----------
Earnings (loss) before
extraordinary charge.......... (784) (1,814) (2,598) 2,984 386
Extraordinary charge, net of income
tax benefit of $502.............. (772) -- (772) -- (772)
---------- -------- ---------- ------- ----------
Net earnings (loss).............. $ (1,556) $ (1,814) $ (3,370) $ 2,984 $ (386)
========== ======== ========== ======= ==========
See accompanying notes to unaudited pro forma condensed consolidated financial
information.
F-38
PROSOURCE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 29, 1996
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
PRO FORMA
ADJUSTMENTS
FOR THE PRO FORMA,
HISTORICAL OFFERING AS ADJUSTED
---------- ----------- -----------
Net sales.............................................. $2,014,074 $ -- $ 2,014,074
Cost of sales.......................................... 1,859,000 -- 1,859,000
---------- ------- ----------
Gross profit......................................... 155,074 -- 155,074
Operating expenses..................................... 149,758 -- 149,758
Loss on impairment of long-lived assets................ 15,733 -- 15,733
Restructuring charges.................................. 10,866 -- 10,866
---------- ------- ----------
Loss from operations................................. (21,283) -- (21,283)
Interest expense....................................... (8,152) 2,395(E) (5,757)
Interest income........................................ 866 -- 866
---------- ------- ----------
Loss before income tax benefit....................... (28,569) 2,395 (26,174)
Income tax benefit..................................... 10,612 (1,048)(D) 9,564
---------- ------- ----------
Net earnings (loss).................................. $ (17,957) $ 1,347 $ (16,610)
========== ======= ==========
See accompanying notes to unaudited pro forma condensed consolidated financial
information.
F-39
PROSOURCE, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
A. Adjustment reflects the results of operations of the National Accounts
Division ("NAD") of The Martin-Brower Company for the three months ended
March 31, 1995 as if the acquisition were consummated on January 1, 1995 as
follows:
[Download Table]
Net sales......................................................... $531,606
Cost of sales..................................................... 496,156
Operating expenses................................................ 35,139
Operating expenses also include an additional three months of amortization
of goodwill and deferred loan fees in the amount of $587.
B. Adjustment reflects additional interest expense of $2,738 to finance the
acquisition and operations of NAD for three months as if the acquisition
were consummated on January 1, 1995. For purposes of this pro forma
calculation, the Company applied the average interest rate on debt used to
finance the acquisition to the assumed incremental outstanding debt balance
associated with the acquisition.
C. Adjustment represents the decrease in interest expense of $4,925 for the
year ended December 30, 1995, assuming the net proceeds of the offering were
utilized to prepay, on January 1, 1995, the balances outstanding under the
following debt instruments as follows:
[Enlarge/Download Table]
PRINCIPAL 1995 INTEREST
REPAYMENTS SAVINGS
---------- -------------
$15 million subordinated note payable to Onex, at 12%........ $ 15,000 $ 1,800
$10 million subordinated note payable to Martin-Brower,
discounted at 9%........................................... 8,826 794
Revolving credit facility, at 9.60%.......................... 21,674 2,081
------- ------
$ 45,500 $ 4,675
======= ======
The adjustment also assumes that the $2.5 million convertible subordinated
note payable to Onex (which Onex intends to convert in connection with the
offering), plus accrued interest, was converted into shares of the Company's
common stock on January 1, 1995, resulting in interest savings of $250.
D. Adjustments reflect the estimated income tax effect of various pro forma
adjustments at 39%, which represents the Company's approximate marginal tax
rate.
E. Adjustment represents the decrease in interest expense of $2,395 for the six
months ended June 29, 1996, assuming the net proceeds of the offering were
utilized to reduce, on January 1, 1996, the balances outstanding under the
various debt instruments as follows:
[Download Table]
SIX MONTHS
ENDED
JUNE 1996
PRINCIPAL INTEREST
REPAYMENTS SAVINGS
---------- ----------
$15 million subordinated note payable to Onex, at 12%........ $ 15,000 $ 900
$10 million subordinated note payable to Martin-Brower,
discounted at 9%........................................... 9,418 415
Revolving credit facility, at 9.06%.......................... 21,082 955
------- ------
$ 45,500 $2,270
======= ======
The adjustment also assumes that the $2.5 million convertible subordinated
note payable to Onex (which Onex intends to convert in connection with the
offering), plus accrued interest, was converted into shares of the Company's
common stock on January 1, 1996, resulting in interest savings of $125.
F-40
[PROSOURCE LOGO]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated (except for the Securities and
Exchange Commission registration fee, the National Association of Securities
Dealers, Inc. filing fee and The Nasdaq National Market filing fee) fees and
expenses (other than underwriting discounts and commissions) in connection with
the offering described in this registration statement:
[Download Table]
Securities and Exchange Commission registration fee.................... $19,827.59
National Association of Securities Dealers, Inc. filing fee............ $ 6,250.00
The Nasdaq National Market filing fee.................................. *
Transfer Agent and Registrar fees...................................... *
Blue Sky filing and counsel fees and expenses.......................... *
Printing and engraving costs........................................... *
Legal fees and expenses................................................ *
Accounting fees and expenses........................................... *
Miscellaneous.......................................................... *
Total........................................................ *
---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As authorized by Section 102(b)(7) of the Delaware General Corporation Law,
Article 9 of the Company's Restated Certificate of Incorporation provides that
directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breaches of their fiduciary duty of care
as a director, except that such provision does not limit or eliminate the
liability of any director (i) for any breach of the director's duty of loyalty
to the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or knowing violation of law, (iii) in
respect of certain unlawful dividend payments or stock redemptions or
repurchases or (iv) for any transactions from which the director derived an
improper personal benefit. In addition, this provision does not limit directors'
liability under federal securities laws.
Section 145 of the Delaware Law provides, in summary, that directors and
officers of Delaware corporations are entitled, under certain circumstances, to
be indemnified against all expenses and liabilities (including attorney's fees)
incurred by them as a result of suits brought against them in their capacity as
a director or officer, if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, if they had no
reasonable cause to believe their conduct was unlawful; provided, that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the Company,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, they are fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Any such indemnification may be made by the Company only as authorized
in each specific case upon a determination by the stockholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct. Article 8 of the Company's Restated Certificate
of Incorporation entitles officers and directors of the Company to
indemnification to the fullest extent permitted by Section 145 of the Delaware
Law, as the same may be supplemented from time to time.
Reference is also made to the Company's Restated Certificate of
Incorporation, filed as Exhibit 3.1 hereto.
II-1
Reference is also made to Section 7 of the Underwriting Agreement contained
in Exhibit 1.1 hereto, which provides certain indemnification rights to the
directors and officers of the Company in connection with the offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 30, 1993, the Company has not issued or sold any securities not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
except as follows:
(a) During 1993, the Company sold shares of Common Stock in the
aggregate to certain directors, officers and management employees of the
Company at a purchase price equal to $ per share.
(b) During 1994, the Company sold shares of Common Stock in the
aggregate to certain officers and management employees of the Company at a
purchase price equal to $ per share.
(c) On November 1, 1994, in connection with the acquisition of certain
assets and the assumption of certain liabilities of Malone Products, Inc.
("Malone") and as partial consideration therefor, the Company issued a
Subordinated Convertible Note in the principal amount of $0.5 million to
Malone (the "Malone Subordinated Note"). The Malone Subordinated Note is
convertible, in whole or in part, at any time into shares of Common Stock
at a conversion price equal to $ per share, subject to adjustment.
(d) On March 31, 1995, in connection with the acquisition of
substantially all of the assets and the assumption of certain liabilities
of the National Accounts Division of The Martin-Brower Company
("Martin-Brower") and as partial consideration therefor, the Company
issued:
(i) a Stock Subscription Warrant to Martin-Brower for the purchase
of shares of Common Stock at an exercise price of $ per share,
which was assigned a nominal value for purposes of such transaction;
(ii) a Subordinated Note Due March 31, 2002 in the principal amount
of $10 million to Martin-Brower;
(iii) a 12% Subordinated Note Due April 1, 2005 in the principal
amount of $15 million to Onex; and
(iv) a Convertible Subordinated Note Due April 1, 2005 in the
principal amount of $3.5 million to Onex (the "NAD Convertible Note").
The NAD Convertible Note was, in part, repaid and, in part, converted
into Common Stock in accordance with its terms and is no longer
outstanding.
(e) In May 1995, the Company completed the sale of shares of
Common Stock in the aggregate to certain directors, officers and management
employees of the Company at a purchase price equal to $ per share.
(f) In January 1996, the Company completed the sale of shares
of Common Stock in the aggregate to certain officers and management
employees of the Company at a purchase price equal to $ per share.
The issuances and sales of the securities listed above were exempt from
registration under the Securities Act by virtue of Section 4(2) thereof and
Regulation D promulgated thereunder as transactions not involving a public
offering.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
[Enlarge/Download Table]
EXHIBIT
NUMBER EXHIBIT
-------- ----------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement(1)
3.1 Form of Restated Certificate of Incorporation of the Company(1)
3.2 Form of Amended and Restated By-Laws of the Company(1)
4.1 Form of Certificate for Class A Common Stock(1)
5.1 Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP(1)
10.1 Amended and Restated Management Shareholders Agreement, dated May 31, 1995, among
ProSource, Inc., Onex DHC LLC and the individuals party thereto from time to
time(1)
10.2 Amended and Restated Director Shareholders Agreement, dated as of May 31, 1995,
among ProSource, Inc., Onex DHC LLC and the individuals party thereto from time to
time(1)
10.3 Stock Subscription Warrant, dated March 31, 1995, issued by ProSource, Inc. in
favor of The Martin-Brower Company to subscribe for shares of Common
Stock
10.4 Agreement, dated November 10, 1994, for the Purchase and Sale of the National
Accounts Division of The Martin-Brower Company and Martin-Brower of Canada, Ltd.,
among ProSource, Inc., The Martin-Brower Company and Martin-Brower of Canada, Ltd.
10.5 Purchase Agreement Amendment, dated February 24, 1995, among The Martin-Brower
Company, Martin-Brower of Canada, Ltd. and ProSource, Inc.
10.6 Second Purchase Agreement Amendment, dated February 28, 1995, among The
Martin-Brower Company, Martin-Brower of Canada, Ltd. and ProSource, Inc.
10.7 Third Purchase Agreement Amendment, dated March 31, 1995, among The Martin-Brower
Company, Martin-Brower of Canada, Ltd. and ProSource, Inc.
10.8 Loan and Security Agreement, dated as of March 31, 1995, among ProSource Services
Corporation, BroMar Services, Inc., ProSource Distribution Services Limited, the
Financial Institutions party thereto and NationsBank of Georgia, N.A., The First
National Bank of Boston and Shawmut Capital Corporation, as Co-Agents, and
NationsBank of Georgia, N.A., as Administrative Agent
10.9 Amendment No. 1, dated as of December 29, 1995, to Loan and Security Agreement,
among ProSource Services Corporation, BroMar Services, Inc., ProSource
Distribution Services Limited, the Financial Institutions party thereto and
NationsBank of Georgia, N.A., The First National Bank of Boston and Shawmut
Capital Corporation, as Co-Agents, and NationsBank of Georgia, N.A., as
Administrative Agent
10.10 Amendment No. 2 and Waiver, dated as of March 28, 1996, to Loan and Security
Agreement, among ProSource Services Corporation, BroMar Services, Inc., ProSource
Distribution Services Limited, the Financial Institutions party thereto and
NationsBank, N.A. (South), The First National Bank of Boston and Fleet Capital
Corporation, as Co-Agents, and NationsBank, N.A. (South), as Administrative Agent
10.11 Pledge Agreement, made as of March 31, 1995, by ProSource, Inc. in favor of
NationsBank of Georgia, N.A., as Administrative Agent
10.12 Pledge Agreement, made as of March 31, 1995, by ProSource Services Corporation in
favor of NationsBank of Georgia, N.A., as Administrative Agent
10.13 Subordination Agreement, dated as of March 31, 1995, made by ProSource Services
Corporation and Onex Corporation in favor of NationsBank of Georgia, N.A., as
Administrative Agent
10.14 Unconditional Guaranty, made as of March 31, 1995, by ProSource, Inc. in favor of
NationsBank of Georgia, N.A., as Administrative Agent
II-3
[Enlarge/Download Table]
EXHIBIT
NUMBER EXHIBIT
-------- ----------------------------------------------------------------------------------
10.15 Subordinated Note, dated March 31, 1995, executed by ProSource, Inc. and payable
to the order of The Martin-Brower Company in the original principal amount of
$10,000,000
10.16 Subordinated Note, dated March 31, 1995, executed by ProSource Services
Corporation and payable to the order of Onex Ohio Holdings, Inc. in the original
principal amount of $15,000,000
10.17 Form of Distribution Agreement, dated as of June 30, 1992, between Burger King
Corporation and ProSource Services Corporation
10.18 Form of Amendment Agreement, dated as of June 30, 1992, between Burger King
Corporation and ProSource Services Corporation
10.19 Addendum to Forms of Distribution Agreement and Amendment Agreement
10.20 Amended and Restated Employment Agreement, dated as of July 1, 1992, between
ProSource Services Corporation and David R. Parker(1)
10.21 Amended and Restated Employment Agreement, dated July 1, 1992, between ProSource
Services Corporation and Thomas C. Highland(1)
10.22 Employment Agreement, dated as of April 1, 1995, between ProSource Services
Corporation and Daniel Adzia
10.23 Employment Agreement, dated July 1, 1992, between ProSource Services Corporation
and Paul A. Garcia de Quevedo
10.24 Employment Agreement, dated as of July 1, 1995, between ProSource Services
Corporation and Dennis Andruskiewicz
10.25 Employment Agreement, dated April 1, 1994, between ProSource Services Corporation
and John E. Foley
10.26 Amended Management Option Plan (1995)(1)
10.27 1996 Stock Option Plan(1)
10.28 Truck Lease and Service Agreement, dated as of January 1, 1993, between Ryder
Truck Rental, Inc. and ProSource Services Corporation (1)
21.1 Subsidiaries of the Company
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Price Waterhouse LLP
23.3 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in Exhibit
5.1)(1)
24.1 Powers of Attorney (included on signature page)
27.1 Financial Data Schedule
---------------
(1) To be filed by amendment.
(b) Consolidated Financial Statements Schedules
Schedule I -- Condensed Financial Information of Registrant
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
(1) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any
II-4
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(2) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Coral Gables, State of Florida on September 5, 1996.
PROSOURCE, INC.
By: /s/ DAVID R. PARKER
........................................
David R. Parker
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-1 has been signed by the following persons
in the capacities and on the dates indicated. Each person whose signature
appears below hereby authorizes each of David R. Parker, Thomas C. Highland,
William F. Evans and Paul A. Garcia de Quevedo, as attorney-in-fact, to sign and
file on his or her behalf, individually and in each capacity stated below, any
pre-effective or post-effective amendment hereto or any registration statement
relating to the offering covered hereby filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended.
[Enlarge/Download Table]
SIGNATURE TITLE DATE
---------------------------------------- -------------------------------- -------------------
/s/ DAVID R. PARKER Chairman of the Board of September 5, 1996
...................................... Directors (principal executive
David R. Parker officer)
/s/ THOMAS C. HIGHLAND President, Chief Executive September 5, 1996
...................................... Officer and Director
Thomas C. Highland
/s/ DANIEL J. ADZIA Vice-Chairman, Chief Marketing September 5, 1996
...................................... Officer and Director
Daniel J. Adzia
/s/ WILLIAM F. EVANS Executive Vice President, Chief September 5, 1996
...................................... Financial Officer
William F. Evans (principal financial officer)
/s/ MARCELINO ITURREY Vice President, Controller September 5, 1996
...................................... (principal accounting officer)
Marcelino Iturrey
/s/ GERALD W. SCHWARTZ Director September 5, 1996
......................................
Gerald W. Schwartz
/s/ ANTHONY R. MELMAN Director September 5, 1996
......................................
Anthony R. Melman
II-6
[Enlarge/Download Table]
SIGNATURE TITLE DATE
---------------------------------------- -------------------------------- -------------------
/s/ MICHAEL E. TREACY Director September 5, 1996
......................................
Michael E. Treacy
/s/ MICHAEL CARPENTER Director September 5, 1996
......................................
Michael Carpenter
/s/ ANTHONY MUNK Director September 5, 1996
......................................
Anthony Munk
/s/ C. LEE JOHNSON Director September 5, 1996
......................................
C. Lee Johnson
/s/ R. GEOFFREY P. STYLES Director September 5, 1996
......................................
R. Geoffrey P. Styles
II-7
PROSOURCE, INC. (PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET INFORMATION
DECEMBER 31, 1994 AND DECEMBER 30, 1995
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
1994 1995
------- -------
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 1,118 $ 939
Due from subsidiaries.................................................. -- 96
Other current assets................................................... 58 --
------- -------
Total current assets........................................... 1,176 1,035
Investment in subsidiaries............................................... 28,160 58,935
Deferred income taxes.................................................... 291 394
------- -------
Total assets................................................... $29,627 $60,364
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued liabilities.................................................... $ 10 $ 110
------- -------
Total current liabilities........................................... 10 110
Subordinated notes payable............................................... -- 9,418
Convertible subordinated notes payable................................... -- 1,415
Due to subsidiaries...................................................... 7,074 --
------- -------
Total liabilities.............................................. 7,084 10,943
------- -------
Commitments and contingencies
Stockholders' equity:
Common Stock........................................................... 1 1
Additional paid-in-capital............................................. 23,526 51,889
Retained deficit....................................................... (984) (2,540)
Accumulated foreign currency translation adjustments................... -- 71
------- -------
Total stockholders' equity..................................... 22,543 49,421
------- -------
Total liabilities and stockholders' equity..................... $29,627 $60,364
======= =======
See accompanying notes to condensed financial information.
S-1
PROSOURCE, INC. (PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT) INFORMATION
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 31, 1994 AND DECEMBER 30, 1995
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
1993 1994 1995
---------- ---------- ----------
(52 WEEKS) (53 WEEKS) (52 WEEKS)
Revenues.................................................. $ -- $ -- $ --
Expenses.................................................. -- -- 3
Interest expense.......................................... (413) (571) (729)
Interest income........................................... 27 55 53
Equity in losses of subsidiaries.......................... (938) (3,513) (1,294)
------- ------- -------
Loss before income taxes................................ (1,324) (4,029) (1,973)
Income tax benefit........................................ 497 1,647 417
------- ------- -------
Net loss................................................ (827) (2,382) (1,556)
Retained earnings (deficit), beginning of year............ 2,225 1,398 (984)
------- ------- -------
Retained earnings (deficit), end of year.................. $ 1,398 $ (984) $ (2,540)
======= ======= =======
See accompanying notes to condensed financial information.
S-2
PROSOURCE, INC. (PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOW INFORMATION
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 31, 1994 AND DECEMBER 30, 1995
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
1993 1994 1995
---------- ---------- ----------
(52 WEEKS) (53 WEEKS) (52 WEEKS)
Cash flows from operating activities:
Net loss................................................ $ (827) $ (2,382) $ (1,556)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Undistributed losses of subsidiaries................. 441 2,062 914
Dividends received from subsidiaries................. -- 561 7,208
Deferred income taxes................................ (98) (193) (103)
Amortization of note discount........................ -- -- 592
Changes in operating assets and liabilities:
(Increase) decrease in other current assets........ (54) (4) 58
Increase in accrued liabilities.................... -- 10 100
------- ------- --------
Net cash provided by (used in) operating
activities.................................... (538) 54 7,213
------- ------- --------
Cash flows from investing activities:
Capital contributions to subsidiaries................... (6,497) (2) (38,826)
Advances to/from subsidiaries........................... 7,059 15 (7,170)
------- ------- --------
Net cash provided by (used in) investing
activities.................................... 562 13 (45,996)
------- ------- --------
Cash flows from financing activities:
Issuance of long-term debt.............................. -- -- 12,326
Repayments of long-term debt............................ -- -- (2,085)
Proceeds from issuance of common stock.................. 1,382 76 28,585
Payments to acquire and retire treasury stock........... (16) (415) (222)
------- ------- --------
Net cash provided by (used in) financing
activities.................................... 1,366 (339) 38,604
------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................... 1,390 (272) (179)
Cash and cash equivalents, beginning of year.............. -- 1,390 1,118
------- ------- --------
Cash and cash equivalents, end of year.................... $ 1,390 $ 1,118 $ 939
======= ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................... $ -- $ -- $ 41
======= ======= ========
Income taxes, net of refunds....................... $ 14 $ 4 $ 1
======= ======= ========
See accompanying notes to condensed financial information.
S-3
PROSOURCE, INC. (PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
DECEMBER 30, 1995
(DOLLARS IN THOUSANDS)
(1) BASIS OF PRESENTATION
The accompanying condensed financial information should be read in
conjunction with the ProSource, Inc. Consolidated Financial Statements.
Capitalized terms are as defined in the ProSource, Inc. Consolidated Financial
Statements.
(2) LONG-TERM DEBT
Total debt of the Registrant (Parent only) consists of two agreements at
December 30, 1995. A $10 million subordinated note is payable to The
Martin-Brower Company. Interest on this note is payable semiannually, with rates
ranging from zero to 13 percent, beginning March 31, 1998. The principal is
payable in full on March 31, 2002. This note has been discounted to reflect a
constant interest rate of 9 percent through its maturity.
A $3.5 million convertible subordinated note was payable to Onex, with
interest at prime rate (8.5 percent at December 30, 1995), compounded annually
and due, together with the principal, on April 1, 2005. During the year ended
December 30, 1995, the Parent paid $2.1 million of such note to Onex resulting
in an outstanding balance of $1.4 million at December 30, 1995. On February 1,
1996, Onex converted $0.8 million of the note into 800 shares of the Parent's
common stock and the remaining balance on the note of approximately $0.6 million
plus accrued interest was paid to Onex.
The subsidiaries' Loan and Security Agreements include certain restrictive
covenants which, among other things, limit the flow of funds to the Parent.
Substantially all of the subsidiaries' assets are pledged to secure the
revolving credit facility and term loans, as well as a pledge by the Parent of
all of the issued and outstanding common stock of the subsidiaries. In addition,
the Parent has guaranteed payment of all amounts due under the revolving credit
facility and term loan. See Note 6 of the Notes to Consolidated Financial
Statements for further discussion of the restrictions contained in this loan
agreement.
(3) SUBSEQUENT EVENT
In September 1996, the Parent filed a Registration Statement with the
Securities and Exchange Commission with respect to an initial public offering.
The net proceeds of the offering will be used to repay certain indebtedness of
the Parent and its subsidiaries.
S-4
PROSOURCE, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 31, 1994 AND DECEMBER 30, 1995
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
ALLOWANCE FOR DOUBTFUL ACCOUNTS
BALANCE, December 31, 1992....................................................... $ 1,818
Additions charged to costs and expenses....................................... 766
Recoveries.................................................................... --
Write-offs.................................................................... (56)
-----
BALANCE, December 25, 1993....................................................... 2,528
Additions charged to costs and expenses....................................... 2,427
Recoveries.................................................................... 190
Write-offs.................................................................... (2,234)
-----
BALANCE, December 31, 1994....................................................... 2,911
Acquired allowance of NAD..................................................... 1,893
Additions charged to costs and expenses....................................... 1,845
Recoveries.................................................................... 153
Write-offs.................................................................... (4,217)
-----
BALANCE, December 30, 1995....................................................... $ 2,585
=====
S-5
EXHIBIT INDEX
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SEQUENTIAL
EXHIBIT PAGE
NUMBER NUMBER
-------- ----------
1.1 Form of Underwriting Agreement(1)........................................
3.1 Form of Restated Certificate of Incorporation of the Company(1)..........
3.2 Form of Amended and Restated By-Laws of the Company(1)...................
4.1 Form of Certificate for Class A Common Stock(1)..........................
5.1 Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP(1)................
10.1 Amended and Restated Management Shareholders Agreement, dated May 31,
1995, among ProSource, Inc., Onex DHC LLC and the individuals party
thereto from time to time(1).............................................
10.2 Amended and Restated Director Shareholders Agreement, dated as of May 31,
1995, among ProSource, Inc., Onex DHC LLC and the individuals party
thereto from time to time(1).............................................
10.3 Stock Subscription Warrant, dated March 31, 1995, issued by ProSource,
Inc. in favor of The Martin-Brower Company to subscribe for
shares of Common Stock...................................................
10.4 Agreement, dated November 10, 1994, for the Purchase and Sale of the
National Accounts Division of The Martin-Brower Company and Martin-Brower
of Canada, Ltd., among ProSource, Inc., The Martin-Brower Company and
Martin-Brower of Canada, Ltd.............................................
10.5 Purchase Agreement Amendment, dated February 24, 1995, among The Martin-
Brower Company, Martin-Brower of Canada, Ltd. and ProSource, Inc.........
10.6 Second Purchase Agreement Amendment, dated February 28, 1995, among The
Martin-Brower Company, Martin-Brower of Canada, Ltd. and ProSource,
Inc......................................................................
10.7 Third Purchase Agreement Amendment, dated March 31, 1995, among The
Martin-Brower Company, Martin-Brower of Canada, Ltd. and ProSource,
Inc......................................................................
10.8 Loan and Security Agreement, dated as of March 31, 1995, among ProSource
Services Corporation, BroMar Services, Inc., ProSource Distribution
Services Limited, the Financial Institutions party thereto and
NationsBank of Georgia, N.A., The First National Bank of Boston and
Shawmut Capital Corporation, as Co-Agents, and NationsBank of Georgia,
N.A., as Administrative Agent............................................
10.9 Amendment No. 1, dated as of December 29, 1995, to Loan and Security
Agreement, among ProSource Services Corporation, BroMar Services, Inc.,
ProSource Distribution Services Limited, the Financial Institutions party
thereto and NationsBank of Georgia, N.A., The First National Bank of
Boston and Shawmut Capital Corporation, as Co-Agents, and NationsBank of
Georgia, N.A., as Administrative Agent...................................
10.10 Amendment No. 2 and Waiver, dated as of March 28, 1996, to Loan and
Security Agreement, among ProSource Services Corporation, BroMar
Services, Inc., ProSource Distribution Services Limited, the Financial
Institutions party thereto and NationsBank, N.A. (South), The First
National Bank of Boston and Fleet Capital Corporation, as Co-Agents, and
NationsBank, N.A. (South), as Administrative Agent.......................
10.11 Pledge Agreement, made as of March 31, 1995, by ProSource, Inc. in favor
of NationsBank of Georgia, N.A., as Administrative Agent.................
10.12 Pledge Agreement, made as of March 31, 1995, by ProSource Services
Corporation in favor of NationsBank of Georgia, N.A., as Administrative
Agent....................................................................
[Enlarge/Download Table]
SEQUENTIAL
EXHIBIT PAGE
NUMBER NUMBER
-------- ----------
10.13 Subordination Agreement, dated as of March 31, 1995, made by ProSource
Services Corporation and Onex Corporation in favor of NationsBank of
Georgia, N.A., as Administrative Agent...................................
10.14 Unconditional Guaranty, made as of March 31, 1995, by ProSource, Inc. in
favor of NationsBank of Georgia, N.A., as Administrative Agent...........
10.15 Subordinated Note, dated March 31, 1995, executed by ProSource, Inc. and
payable to the order of The Martin-Brower Company in the original
principal amount of $10,000,000..........................................
10.16 Subordinated Note, dated March 31, 1995, executed by ProSource Services
Corporation and payable to the order of Onex Ohio Holdings, Inc. in the
original principal amount of $15,000,000.................................
10.17 Form of Distribution Agreement, dated as of June 30, 1992, between Burger
King Corporation and ProSource Services Corporation......................
10.18 Form of Amendment Agreement, dated as of June 30, 1992, between Burger
King Corporation and ProSource Services Corporation......................
10.19 Addendum to Forms of Distribution Agreement and Amendment Agreement......
10.20 Amended and Restated Employment Agreement, dated as of July 1, 1992,
between ProSource Services Corporation and David R. Parker(1)............
10.21 Amended and Restated Employment Agreement, dated July 1, 1992, between
ProSource Services Corporation and Thomas C. Highland(1).................
10.22 Employment Agreement, dated as of April 1, 1995, between ProSource
Services Corporation and Daniel Adzia....................................
10.23 Employment Agreement, dated July 1, 1992, between ProSource Services
Corporation and Paul A. Garcia de Quevedo................................
10.24 Employment Agreement, dated as of July 1, 1995, between ProSource
Services Corporation and Dennis Andruskiewicz............................
10.25 Employment Agreement, dated April 1, 1994, between ProSource Services
Corporation and John E. Foley............................................
10.26 Amended Management Option Plan (1995)(1).................................
10.27 1996 Stock Option Plan(1)................................................
10.28 Truck Lease and Service Agreement, dated as of January 1, 1993, between
Ryder Truck Rental, Inc. and ProSource Services Corporation (1)..........
21.1 Subsidiaries of the Company..............................................
23.1 Consent of KPMG Peat Marwick LLP.........................................
23.2 Consent of Price Waterhouse LLP..........................................
23.3 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in
Exhibit 5.1)(1)..........................................................
24.1 Powers of Attorney (included on signature page)..........................
27.1 Financial Data Schedule..................................................
---------------
(1) To be filed by amendment.
Dates Referenced Herein and Documents Incorporated by Reference
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