Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Prosource, Inc. 32 162K
2: EX-3.1 Restated Certificate of Incorporation 8 33K
3: EX-3.2 Amended and Restated By-Laws of the Company 7 30K
4: EX-10.1 Amended and Restated Management Shareholder Agrmt. 24 95K
6: EX-10.13 Amendment No. 5 and Consent 9 30K
7: EX-10.14 Amendment No. 6 and Consent 7 26K
5: EX-10.2 Amended and Restated Director Shareholders Agrmt. 14 55K
8: EX-10.21 Credit Agreement 132 339K
9: EX-10.22 Revolving Note 3 12K
10: EX-10.23 Borrower Pledge Agreement 24 59K
11: EX-10.24 Parent Pledge Agreement 22 56K
12: EX-10.25 Parent Guaranty 13 38K
13: EX-10.26 Subsidiary Guaranty 10 33K
14: EX-10.27 Secured Credit Agreement 123 310K
15: EX-10.28 Purchase and Sale Agreement 39 127K
16: EX-10.29 Note 3 12K
17: EX-10.30 Swingline Note 3 12K
18: EX-10.34 Amended and Restated Employment Agreement 15 42K
19: EX-10.35 Amended and Restated Agreement 15 42K
20: EX-10.45 Termination Agreement 2 12K
21: EX-13.1 Portions of 1996 Annual Report to Stockholders 31± 159K
22: EX-21.1 Subsidiaries of the Company 1 8K
23: EX-27.1 Financial Data Schedule 1 11K
EX-13.1 — Portions of 1996 Annual Report to Stockholders
| EX-13.1 | 1st “Page” of 20 | TOC | ↑Top | Previous | Next | ↓Bottom | Just 1st |
|---|
Exhibit 13.1
PORTIONS OF 1996 ANNUAL REPORT TO STOCKHOLDERS
PROSOURCE, INC. (In millions, except per share and certain other data)
Selected Consolidated
Financial Data
[Enlarge/Download Table]
Fiscal Years Ended Six Months
-------------------------------------------------------------- Ended
DECEMBER 28, December 30, December 31, December 25, December 31,
1996 1995 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
(52 WEEKS) (52 Weeks) (53 Weeks) (52 Weeks) (26 Weeks)
Statement of Operations Data:
Net sales $ 4,125.0 $ 3,461.8 $ 1,598.1 $ 1,329.3 $ 618.4
Cost of sales 3,806.8 3,193.3 1,464.5 1,210.9 560.0
----------------------------------------------------------------------------
Gross profit 318.2 268.5 133.6 118.4 58.4
Operating expenses 301.3 255.2 131.0 114.2 51.7
Loss on impairment of
long-lived assets 15.7 -- -- -- --
Restructuring and contract
termination charges 28.5 0.7 -- -- --
----------------------------------------------------------------------------
(Loss) earnings from operations (27.3) 12.6 2.6 4.2 6.7
Interest expense, net 13.1 13.3 6.6 5.5 3.0
----------------------------------------------------------------------------
(Loss) earnings before income
taxes and extraordinary items (40.4) (0.7) (4.0) (1.3) 3.7
Income tax benefit (provision) 15.4 (0.1) 1.6 0.5 (1.5)
----------------------------------------------------------------------------
(Loss) earnings before
extraordinary items (25.0) (0.8) (2.4) (0.8) 2.2
Extraordinary gain (loss), net 0.6 (0.8) -- -- --
----------------------------------------------------------------------------
Net (loss) earnings $ (24.4) $ (1.6) $ (2.4) $ (0.8) $ 2.2
============================================================================
Per Share Data:
(Loss) earnings before extraordinary
items per share $ (4.29) $ (0.17) $ (0.99) $ (0.34) $ 0.97
Net (loss) earnings per share $ (4.19) $ (0.35) $ (0.99) $ (0.34) $ 0.97
Average outstanding shares used in
calculation (in thousands) 5,821 4,482 2,402 2,398 2,302
Balance Sheet Data (at end of period):
Working capital $ 85.5 $ 115.9 $ 41.6 $ 42.7 $ 39.5
Total assets 506.7 489.2 218.3 200.0 158.1
Total debt 113.1 163.2 65.6 68.5 61.1
Stockholders' equity 78.5 49.4 22.5 25.3 24.7
Other Data:
Net asset turnover 20.1X 18.3x 16.5x 13.6x 11.0x
Depreciation and amortization $ 10.9 $ 12.7 $ 8.0 $ 7.9 $ 3.4
Capital expenditures $ 20.0 $ 5.7 $ 1.4 $ 3.5 $ 1.9
Number of restaurants served
(at end of period) 14,641 14,562 6,752 5,113 4,184
8
PROSOURCE, INC.
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 Burger King Distribution
Services ("BKDS"), the "in-house" distributor for Burger King Corporation, which
serviced 4,150 Burger King restaurants. In the four and one-half years since the
acquisition, ProSource has, through a combination of acquisitions and internal
growth, become a leading distributor to chain restaurants, servicing
approximately 14,600 restaurants within 17 different restaurant chains. The
Company's acquisitions consisted of:
The acquisition in February 1993 of certain operating assets of McCabe's
Quality Foods, California, Inc., a regional systems distributor based in
California.
The acquisition in March 1993 of certain assets and the assumption of
certain liabilities of Valley Food Services, Inc., a regional systems
distributor based in Missouri.
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.
The acquisition in March 1995 of substantially all assets and the
assumption of certain liabilities of the National Accounting Division of
The Martin-Brower Company headquartered in Chicago, Illinois, a national
systems distributor operating eleven distribution centers located
throughout the United States and one center in Canada.
Primarily as a result of these acquisitions, the Company's net sales increased
from $1.3 billion in 1993 to $4.1 billion in 1996. 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.
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.
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 than quick service chain restaurants, 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.
The Company's fiscal year ends on the last Saturday in December. Consequently,
the Company will periodically have a 53 week fiscal year. 1995 and 1996 each
consisted of 52 weeks, while 1994 consisted of 53 weeks.
9
PROSOURCE, INC.
Management's
Discussion and
Analysis of Financial
Condition and Results
of Operations
RESULTS OF OPERATIONS
The following sets forth, for the periods indicated, the components of the
Company's consolidated statements of operations expressed as percentage of net
sales:
[Enlarge/Download Table]
Fiscal Years Ended
-----------------------------------------------------
DECEMBER 28, December 30, December 31,
1996 1995 1994
--------------------------------------------------------------------------------------------------------------------------
Net sales 100.00% 100.00% 100.00%
Cost of sales 92.29 92.24 91.64
-----------------------------------------------------
Gross profit 7.71 7.76 8.36
Operating expenses 7.30 7.37 8.20
Loss on impairment of long-lived assets 0.38 -- --
Restructuring and contract termination charges 0.69 0.02 --
-----------------------------------------------------
(Loss) earnings from operations (0.66) 0.37 0.16
Interest expense, net (0.32) (0.39) (0.41)
-----------------------------------------------------
Loss before income taxes and extraordinary items (0.98) (0.02) (0.25)
Income tax benefit 0.37 -- 0.10
-----------------------------------------------------
Loss before extraordinary items (0.61) (0.02) (0.15)
Extraordinary gain (loss), net 0.01 (0.02) --
-----------------------------------------------------
Net loss (0.60)% (0.04)% (0.15)%
=====================================================
YEAR ENDED DECEMBER 28, 1996 COMPARED TO YEAR ENDED DECEMBER 30, 1995
Net sales increased 19.2% to $4,125.0 million in 1996 from $3,461.8 million in
1995. The increase in net sales is primarily attributable to the acquisition of
NAD on March 31, 1995. Net sales, excluding the effect of the NAD acquisition,
increased to $1,916.1 million in 1996 from $1,791.2 million in 1995, a $124.9
million or 7.0% increase when compared to 1995. This 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.
Gross profit increased 18.5% to $318.2 million in 1996 compared to $268.5
million in 1995 primarily due to the increase in net sales. The gross profit
percentage decreased to 7.7% in 1996 from 7.8% in 1995 due primarily to the
inclusion for the entire year in 1996 of NAD sales which have a higher product
cost than other Company sales.
Operating expenses increased 18.1% to $301.3 million in 1996 from $255.2 million
in 1995 primarily due to the increase in net sales. As a percentage of net
sales, operating expenses declined to 7.3% in 1996 from 7.4% in 1995 due
primarily to the impact of the higher product cost per unit sold by NAD.
Losses from operations in 1996 were $27.3 million (as compared to earnings from
operations of $12.6 million in 1995), as a result of restructuring charges of
$10.9 million, contract termination charges of $17.6 million, and a loss on
impairment in value of long-lived assets of $15.7 million. The restructuring
charges and impairment losses are related to a plan to consolidate and integrate
the Company's corporate and network operations. 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 contract termination charges consist of $10.6 million of costs associated
with terminating the distribution agreement with ARCOP, the purchasing
cooperative for Arby's, and $7.0 million in costs associated with the
termination of various agreements in connection with the Company's initial
public offering in November 1996. 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 and $4.3 million on
furniture and equipment and leasehold improvements it intends to hold and use
through the completion of the plan 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 and contract
termination charges and impairment losses were $16.9 million in 1996 compared to
$13.3 million in 1995.
Net interest expense decreased to $13.1 million in 1996 from $13.3 million in
1995. Net interest expense as a percentage of net sales decreased 17.9%, from
.39% to .32% as a result of lower interest rates and improved net asset
turnover.
The income tax benefit in 1996 was $15.4 million compared to an income tax
provision of $0.1 million in 1995. The change in the tax benefit was
attributable to the Company's greater pre-tax loss in 1996. The 1995 provision
resulted from a pre-tax loss which, due to permanent differences arising from
the NAD acquisition, translated into a relatively small amount of taxable
income.
10
PROSOURCE, INC.
Management's
Discussion and
Analysis of Financial
Condition and Results
of Operations
The extraordinary items in both 1996 and 1995 relate to the early retirement of
debt. In 1996, the pay-off of subordinated debt with the proceeds from the
initial public offering resulted in a gain of $1.0 million, net of the related
tax provision of $0.4 million. In 1995, the debt refinancing associated with the
NAD acquisition resulted in the write-off of unamortized deferred debt issuance
costs of $1.3 million, net of the related tax benefit of $0.5 million.
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 4.9% from 0.41% to 0.39% as a result of lower interest rates and
higher net asset turnover.
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.
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 $21.3 million in 1996, compared to $50.0 million in 1995 and $0.9
million in 1994. 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.
Cash used for capital expenditures was $20.0 million in 1996, primarily for
equipment for the Company's cart delivery program ($6.6 million) and computer
systems upgrades ($9.5 million). The Company anticipates capital expenditures of
$20 to $30 million in 1997 in connection with the implementation of its new
distribution network, including the expansion of warehousing facilities to
accommodate expected growth, and for continued investment in computer systems.
The Company intends to finance such capital expenditures with cash provided from
operations, borrowings under its credit facilities and through operating leases.
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.
11
PROSOURCE, INC.
Management's
Discussion and
Analysis of Financial
Condition and Results
of Operations
On November 15, 1996 the Company completed an initial public offering of
3,400,000 shares of its Class A Common Stock. The net proceeds of the offering
of $43.2 million were primarily used to prepay $25.3 million in outstanding
indebtedness under subordinated notes payable and repay $16.6 million of
outstanding indebtedness under the Company's revolving credit facility. The
reduction of outstanding indebtedness with the proceeds of the offering will
result in a reduction of future interest expense.
On December 28, 1996, the Company obtained a commitment from a large financial
institution to refinance its existing credit facility with a $150 million
accounts receivable securitization facility and a $75 million inventory
revolving-credit facility. Both new credit facilities have five year terms. The
refinancing was completed in the first quarter of 1997. The interest rate on the
accounts receivable securitization facility will be at LIBOR plus 0.55 percent.
The interest rate on the inventory facility will be at LIBOR plus a range of
0.875 percent to 2 percent depending on certain financial ratio requirements.
The credit facilities are secured by liens on substantially all of the Company's
assets and contain various restrictions on, among other things, the Company's
ability to pay dividends and dispose of assets. The Company will record a pretax
extraordinary charge of approximately $10.0 million in the first quarter of 1997
to reflect prepayment penalties of approximately $3.0 million, write-off of
deferred financing costs of approximately $6.0 million and approximately $1.0
million in costs associated with termination of interest-rate protection
agreements.
The Company believes that the combination of proceeds received from the initial
public offering, cash flow generated from operations and borrowings available
under its credit facilities are sufficient to satisfy its anticipated working
capital needs for at least 12 months. 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 is a holding company with no independent operations or assets other
than an investment in its operating subsidiaries and, as such, is dependent on
its operating subsidiaries to obtain cash flow. 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.
QUARTERLY RESULTS AND SEASONALITY
Set forth is summary information with respect to the Company's operations for
the most recent eight fiscal quarters. Historically, the restaurant and
foodservice business is seasonal with lower sales in the first calendar quarter.
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.
[Enlarge/Download Table]
FISCAL YEAR ENDED 1996
-----------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
---------------------------------------------------------------------------------------------------------
(IN MILLIONS)
NET SALES $ 968.7 $1,045.4 $1,053.5 $1,057.4
GROSS PROFIT 73.2 81.9 80.8 82.3
EARNINGS (LOSS) FROM OPERATIONS (26.9) 5.6 5.8 (11.8)
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEMS (19.2) 1.2 1.4 (8.4)
NET EARNINGS (LOSS) (19.2) 1.2 1.4 (7.8)
FISCAL YEAR ENDED 1995
-----------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER(a) 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 items (1.3) 0.1 (0.7) 1.1
Net earnings (loss) (2.1) 0.1 (0.7) 1.1
(a) Includes the acquisition of substantially all of assets and the assumption
of certain liabilities of NAD on March 31, 1995.
12
December 28, 1996 and December 30, 1995 PROSOURCE, INC.
(Dollars in thousands except per share and share amounts) Consolidated Balance
Sheets
[Enlarge/Download Table]
1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,763 $ 2,325
Accounts receivable, net of allowance for doubtful accounts of
$2,334 and $2,585 in 1996 and 1995, respectively 219,340 230,089
Inventories 144,040 140,432
Deferred income taxes, net 10,914 4,298
Prepaid expenses and other current assets 10,320 10,736
---------------------------
Total current assets 387,377 387,880
Property and equipment, net 49,637 52,507
Intangible assets, net 42,135 36,450
Deferred income taxes, net 16,100 3,901
Other assets 11,422 8,435
---------------------------
Total assets $ 506,671 $ 489,173
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 257,854 $ 242,645
Accrued liabilities 42,475 27,819
Current portion of long-term senior debt 1,500 1,500
---------------------------
Total current liabilities 301,829 271,964
Long-term senior debt, less current portion 111,084 132,011
Subordinated notes payable to Onex -- 19,791
Other subordinated notes payable 500 9,918
Other noncurrent liabilities 14,743 6,068
---------------------------
Total liabilities 428,156 439,752
---------------------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value. Authorized 10,000,000 shares; issued and
outstanding no shares in 1996 and 1995 -- --
Class A Common Stock,
$.01 par value. Authorized 50,000,000 shares;
issued and outstanding 3,400,000 shares in 1996 and no shares in 1995 34 --
Class B Common Stock,
$.01 par value. Authorized 10,000,000 shares;
issued and outstanding 5,963,856 shares in 1996 and 5,177,400 shares in 1995 60 52
Additional paid-in capital 105,256 51,838
Accumulated deficit (26,901) (2,540)
Accumulated foreign-currency translation adjustments 66 71
---------------------------
Total stockholders' equity 78,515 49,421
---------------------------
Total liabilities and stockholders' equity $ 506,671 $ 489,173
===========================
See accompanying notes to consolidated financial statements.
13
PROSOURCE, INC. For the years ended December 28, 1996,
Consolidated Statements of December 30, 1995 and December 31, 1994
Operations (Dollars in thousands except per share
and share amounts)
[Enlarge/Download Table]
1996 1995 1994
(52 WEEKS) (52 weeks) (53 weeks)
-----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 4,125,054 $ 3,461,837 $ 1,598,136
Cost of sales 3,806,811 3,193,270 1,464,545
-----------------------------------------------
Gross profit 318,243 268,567 133,591
Operating expenses, including management fees to Onex of $729,
$808 and $781 in fiscal years 1996, 1995 and 1994, respectively 301,295 255,216 131,023
Loss on impairment of long-lived assets 15,733 -- --
Restructuring and contract termination charges 28,466 711 --
-----------------------------------------------
(Loss) earnings from operations (27,251) 12,640 2,568
Interest expense, including interest to Onex of $1,888, $1,738 and
$255 in fiscal years 1996, 1995 and 1994, respectively (14,824) (14,678) (6,868)
Interest income 1,694 1,339 271
-----------------------------------------------
Loss before income taxes and extraordinary items (40,381) (699) (4,029)
Income tax benefit (provision) 15,410 (85) 1,647
-----------------------------------------------
Loss before extraordinary items (24,971) (784) (2,382)
Extraordinary items: Gain (loss) on early retirement of debt,
net of income tax (provision) benefit of $(397) and $502,
in fiscal years 1996 and 1995, respectively 610 (772) --
Net loss $ (24,361) $ (1,556) $ (2,382)
===============================================
Net loss per share:
Loss before extraordinary items $ (4.29) $ (0.17) $ (0.99)
===============================================
Net loss $ (4.19) $ (0.35) $ (0.99)
===============================================
Average outstanding shares used in calculation (in thousands) 5,821 4,482 2,402
===============================================
See accompanying notes to consolidated financial statements.
14
For the years ended December 28, 1996, PROSOURCE, INC.
December 30, 1995 and December 31, 1994 Consolidated
(Dollars in thousands except share amounts) Statements of
Stockholders' Equity
[Enlarge/Download Table]
Accumulated
foreign
Common Stock Additional Accumulated currency
------------------- paid-in earnings translation
Class A Class B capital (deficit) adjustments Total
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 25, 1993 $ -- $ 23 $ 23,843 $ 1,398 $ -- $ 25,264
Issuance of 6,900 Class B shares -- -- 76 -- -- 76
Acquisition and retirement of 39,200 Class B shares -- -- (415) -- -- (415)
Net loss -- -- -- (2,382) -- (2,382)
------------------------------------------------------------------------
Balance, December 31, 1994 -- 23 23,504 (984) -- 22,543
Issuance of 2,858,500 Class B shares -- 29 28,556 -- -- 28,585
Acquisition and retirement of 23,000 Class B shares -- -- (222) -- -- (222)
Foreign-currency translation adjustments -- -- -- -- 71 71
Net loss -- -- -- (1,556) -- (1,556)
------------------------------------------------------------------------
Balance, December 30, 1995 -- 52 51,838 (2,540) 71 49,421
Issuance of 3,400,000 Class A shares, net 34 -- 43,193 -- -- 43,227
Amendment to 1995 Option Plan -- -- 1,224 -- -- 1,224
Issuance of 285,714 Class B shares to Onex -- 3 3,997 -- -- 4,000
Conversion of subordinated notes payable
to Onex into 459,242 Class B shares -- 5 4,594 -- -- 4,599
Issuance of 61,500 Class B shares -- -- 615 -- -- 615
Acquisition and retirement of 20,000
Class B shares -- -- (205) -- -- (205)
Foreign-currency translation adjustments -- -- -- -- (5) (5)
Net loss -- -- -- (24,361) -- (24,361)
------------------------------------------------------------------------
Balance, December 28, 1996 $ 34 $ 60 $ 105,256 $ (26,901) $ 66 $ 78,515
========================================================================
See accompanying notes to consolidated financial statements.
15
PROSOURCE, INC. For the years ended
Consolidated December 28, 1996,
Statements of December 30, 1995 and December 31, 1994
Cash Flows (Dollars in thousands except share amounts)
[Enlarge/Download Table]
1996 1995 1994
(52 WEEKS) (52 weeks) (53 weeks)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (24,361) $ (1,556) $ (2,382)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 7,124 9,163 4,868
Amortization of intangible assets and deferred debt issuance costs 3,813 3,530 3,103
Bad debt expense 1,682 1,845 2,427
(Gain) loss on early retirement of debt (1,007) 1,274 --
Loss on impairment of long-lived assets 15,733 -- --
Deferred income taxes (benefit) (14,085) (1,749) (1,391)
Gain on sale of property and equipment (154) (184) (325)
Noncash contract termination charges 5,224 -- --
Changes in operating assets and liabilities, net of effects of companies
purchased:
Decrease (increase) in accounts receivable 9,067 (13,441) (25,150)
(Increase) decrease in inventories (3,608) 7,706 865
(Increase) decrease in prepaid expenses and other current assets (2,334) (4,321) 2,723
(Increase) decrease in other assets (14,467) 1,208 (802)
Increase in accounts payable 15,209 45,423 18,450
Increase (decrease) in accrued liabilities 14,775 2,997 (104)
(Increase) decrease in other noncurrent liabilities 8,675 (1,898) (1,365)
----------------------------------------
Net cash provided by operating activities 21,286 49,997 917
----------------------------------------
Cash flows from investing activities:
Capital expenditures (19,987) (5,683) (1,376)
Proceeds from sale of property and equipment 154 362 445
Payment for purchase of net assets acquired -- (170,279) (3,792)
Proceeds from settlement of purchase-price provisions -- -- 6,600
----------------------------------------
Net cash (used in) provided by investing activities (19,833) (175,600) 1,877
----------------------------------------
Cash flows from financing activities:
Repayments of long-term debt to Onex (15,000) (2,085) --
Repayments of long-term debt to others (30,269) (78,938) (32,247)
Borrowings on long-term debt to Onex -- 18,750 255
Borrowings on long-term debt to others -- 160,616 29,124
Proceeds from issuance of common stock to Onex 7,000 26,500 --
Proceeds from issuance of common stock to others 37,464 2,085 76
Payments to acquire and retire treasury stock (205) (222) (415)
----------------------------------------
Net cash provided by (used in) financing activities (1,010) 126,706 (3,207)
Effect of exchange-rate changes on cash (5) 71 --
Net increase (decrease) in cash and cash equivalents 438 1,174 (413)
Cash and cash equivalents at beginning of year 2,325 1,151 1,564
----------------------------------------
Cash and cash equivalents at end of year $ 2,763 $ 2,325 $ 1,151
========================================
Supplemental disclosures of cash paid during the year for:
Interest to Onex $ 2,927 $ 41 $ --
========================================
Interest to others $ 16,435 $ 12,291 $ 6,264
========================================
Income taxes, net of refunds $ -- $ 993 $ 279
========================================
See accompanying notes to consolidated financial statements.
16
PROSOURCE, INC.
Notes to Consolidated
Financial Statements
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ProSource, Inc. (the "Parent") is engaged in the food service distribution
business, specializing in quick-service and casual-dining restaurants, primarily
operating in the United States. ProSource, Inc. and subsidiaries (the "Company")
distribute to approximately 14,600 restaurants in such chains as Burger King,
Red Lobster, Olive Garden, Long John Silver's, TGI Friday's, Chick-Fil-A,
Chili's and Sonic.
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) 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.
(B) 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(C) 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.
(D) INVENTORIES
Inventories, consisting primarily of food items, 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 32 percent, 32 percent and 100 percent
of inventories in 1996, 1995 and 1994, respectively.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Leasehold improvements 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.
(F) 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
17
PROSOURCE, INC.
Notes to Consolidated
Financial Statements
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 28, 1996 and December 30,
1995.
(G) DEFERRED DEBT ISSUANCE COSTS
Included in other assets are deferred debt issuance costs which are amortized
over the term of the related debt.
(H) 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 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 matches
the expected settlement periods. At December 28, 1996 and December 30, 1995, the
estimated accrued liabilities related to workers' compensation were
approximately $5.9 million and $4.1 million, respectively, net of a discount of
approximately $1.6 million and $1.2 million, respectively. Effective October 15,
1996, the Company purchased primary coverage for its workers' compensation
insurance.
(I) NET LOSS PER COMMON AND COMMON-EQUIVALENT SHARE
Earnings-per-share has been computed using the weighted average number of common
and common equivalent shares outstanding during the period. Common-equivalent
shares (consisting of options and warrants) are excluded during periods of net
loss since they would be antidilutive. Shares and options issued within one year
prior to the filing of the Registration Statement relating to the initial public
offering (see note 10) have been treated as outstanding for all periods
presented, even where the impact of the incremental shares is antidilutive.
(J) 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.
(K) 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.
(L) TRANSLATION OF FOREIGN CURRENCY
The translation of the accounts of ProSource Canada into U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the date of the balance sheet and for revenue and expense accounts using an
average exchange rate during the period. 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.
(M) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which became effective on January 1, 1996, and
requires long-lived assets be reviewed for impairment (measured based on the
fair value of assets).
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," establishes a fair-value-based method of
accounting for compensation costs related to stock-option plans and other forms
of stock-based compensation plans as an alternative to the intrinsic value-based
method of accounting defined under Accounting Principles Board ("APB") Opinion
No. 25. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the disclosure provisions of SFAS 123.
(N) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value because of their short-term maturities. The carrying
amounts reported for long-term senior debt approximate fair value because it is
a variable-rate instrument that reprices monthly.
18
PROSOURCE, INC.
Notes to Consolidated
Financial Statements
(O) RECLASSIFICATIONS
Certain amounts in the 1994 and 1995 consolidated financial statements have been
reclassified to conform to the 1996 consolidated financial statements
presentation.
(2) BUSINESS COMBINATIONS
(A) NAD
On March 31, 1995, the Company completed the acquisition of substantially all
assets and the assumption of certain liabilities of NAD. 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, consisting primarily of accounts receivable and inventories, and
liabilities assumed of approximately $87 million, consisting primarily of trade
accounts payable, based on their estimated fair values at the acquisition date.
As a result of this transaction, the Company recorded total costs in excess of
fair value of net assets acquired of approximately $25 million. 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 of Malone resulted in the
recognition of $3.4 million of costs in excess of fair value of net assets
acquired. 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, consisting primarily of accounts
receivable and inventories, and liabilities assumed of approximately $6.6
million, consisting primarily of trade accounts payable, based on their
estimated fair values at the acquisition date.
(C) BURGER KING DISTRIBUTION SERVICES
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 and
integrate its corporate and network operations. Through this plan, which was
approved by its board of directors, the Company specifically identified all
significant actions, consisting of the closing of 19 distribution facilities
currently leased and 11 distribution facilities currently owned. The Company has
begun activities to integrate these facilities, including communications to its
employees and its customers, and expects to complete the plan in stages through
the year 2000. As a result, in the first quarter of 1996, the Company accrued
restructuring charges of $10.9 million. The restructuring charges consist
approximately of $7.9 million in costs related to the termination of the
existing facility leases, $1.2 million in costs to be incurred after operations
cease in the closed facilities, and $1.8 million in other costs. During 1996,
the Company paid and charged $1.3 million in costs related to termination of
existing facilities and $1.5 million of other costs. As of December 28, 1996,
the Company had approximately $8.1 million of accrued unpaid restructuring
charges.
The significant change brought about by the plan to integrate and consolidate
the existing distribution network impaired the value of long-lived assets to be
held and used until the plan is completed. As a result, in conjunction with the
recording of the restructuring reserves in the first quarter of 1996, the
Company recognized a loss on impairment in value of long-lived assets. The loss
consists of $7.3 million of land and owned buildings, $4.3 million of furniture
and equipment and leasehold improvements management plans to hold and use
through the completion of the plan, and
19
PROSOURCE, INC.
Notes to Consolidated
Financial Statements
$4.1 million of capitalized software costs which do not meet the long-term
information-technology strategy of the Company. The Company measured the amount
of the loss by comparing fair value of the land and the owned building
(determined by independent appraisals and updated with current comparisons to
similar assets) to capitalized cost. The carrying value of furniture and
equipment and capitalized software costs was written down to net realizable
value since it is being replaced.
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 28, 1996 and December 30, 1995 consisted of
the following (amounts in thousands):
[Enlarge/Download Table]
1996 1995
------------------------------------------------------------------------------------------------------------------------------------
Land $ 3,636 $ 4,746
Buildings and improvements 16,104 20,428
Warehouse and transportation equipment 26,286 20,309
Computer software 19,062 14,815
Leasehold improvements 3,565 6,672
Office equipment 8,478 6,046
---------------------------
77,131 73,016
Less accumulated depreciation and amortization 27,494 20,509
---------------------------
$ 49,637 $ 52,507
===========================
(5) INTANGIBLE ASSETS
Intangible assets at December 28, 1996 and December 30, 1995 consisted of the
following (amounts in thousands):
[Enlarge/Download Table]
1996 1995
------------------------------------------------------------------------------------------------------------------------------------
Identifiable intangibles $ 10,785 $ 10,785
Goodwill 41,298 33,664
---------------------------
52,083 44,449
Less accumulated amortization 9,948 7,999
---------------------------
$ 42,135 $ 36,450
===========================
(6) LONG-TERM DEBT
(A) LONG-TERM SENIOR DEBT
Long-term senior debt at December 28, 1996 and December 30, 1995 consisted of
the following loan agreements with banks (amounts in thousands):
[Enlarge/Download Table]
1996 1995
------------------------------------------------------------------------------------------------------------------------------------
$210 million revolving credit facility, due March 31, 2000 $ 84,834 $104,636
$15 million term-loan facility, payable in quarterly installments each of
$0.38 million commencing on July 1, 1995 and through March 31, 2000 12,750 13,875
$15 million term-loan facility, due March 31, 2000 15,000 15,000
---------------------------
Total long-term senior debt 112,584 133,511
Less current portion 1,500 1,500
---------------------------
Long-term senior debt, less current portion $111,084 $132,011
===========================
On March 31, 1995, in conjunction with the acquisition of NAD, the Company
entered into a $240 million Loan and Security Agreement (the "Loan Agreement")
with a group of banks that extends through March 31, 2000. Such agreement
provides for a revolving credit facility of up to $210 million and term loans
aggregating $30 million. The interest rate on the Company's long-term senior
debt is reset every month to reflect current market rates. The effective rate
during 1996 and 1995 was 8.7 percent. This rate reflects the effect of
interest-rate protection agreements.
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, 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.
20
PROSOURCE, INC.
Notes to Consolidated
Financial Statements
Borrowings under the Loan Agreement are limited to a borrowing base as defined
in the agreement. At December 28, 1996, the Company had approximately $90.3
million available under the revolving-credit facility. The Loan Agreement also
provides for a commitment fee of 0.5 percent per annum of the daily unused
revolving-credit facility, as defined in the agreement.
Borrowings under the Loan Agreement at December 28, 1996, are due as follows
(amounts in thousands):
[Download Table]
1997 $ 1,500
1998 1,500
1999 1,500
2000 108,084
2001 --
--------
$112,584
========
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 made fixed-rate
payments and received 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 were large financial institutions. These interest-rate
protection agreements were entered into to reduce the Company's exposure to
interest-rate volatility and were not used for trading purposes.
On December 28, 1996, the Company obtained a commitment from a large financial
institution to refinance its existing credit facility with a $150 million
accounts receivable securitization facility and a $75 million inventory
revolving-credit facility. Both new credit facilities have five year terms. The
refinancing is expected to be completed in the first quarter of 1997. The
interest rate on the accounts receivable securitization facility will be at
LIBOR plus .55 percent. The interest rate on the inventory facility will be at
LIBOR plus a range of .875 percent to 2 percent depending on certain financial
ratio requirements. The credit facilities are secured by liens on substantially
all of the Company's assets and contain various restrictions on, among other
things, the Company's ability to pay dividends and dispose of assets. The
Company will record a pretax extraordinary charge of approximately $10.0 million
in the first quarter of 1997 to reflect prepayment penalties of approximately
$3.0 million, write-off of deferred financing costs of approximately $6.0
million and approximately $1.0 million in costs associated with termination of
interest-rate protection agreements.
(B) SUBORDINATED NOTES PAYABLE TO ONEX
Subordinated notes payable to Onex consisted of three agreements at December 30,
1995. All three agreements were canceled during 1996 as described in the
following paragraphs:
A $15 million, 12 percent, subordinated note payable to Onex, with interest
payable annually beginning March 31, 1996 and the principal payable in full on
April 1, 2005, was prepaid on November 15, 1996 with proceeds from the Company's
initial public offering of Class A Common Stock. The Company paid to Onex $16.1
million including accrued interest of $1.1 million.
A $2.5 million convertible subordinated note, plus accrued interest of $0.9
million at December 30, 1995, payable to Onex, with interest at 10 percent
compounded annually and due, together with the principal, on July 1, 2002, was
canceled on November 15, 1996. In connection with the Company's initial public
offering of Class A Common Stock, Onex converted this note including accrued
interest of $1.3 million into 379,242 shares of Class B Common Stock.
A $3.5 million convertible subordinated note was issued in 1995 to Onex with
interest at prime rate, 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 80,000 shares of the Company's Class B
Common Stock and the remaining balance on the note of approximately $0.6 million
plus accrued interest was paid to Onex.
(C) OTHER SUBORDINATED NOTES PAYABLE
Other subordinated notes payable consisted of one agreement at December 28, 1996
and two agreements at December 30, 1995. A $10 million subordinated note, with
rates ranging from zero to 13 percent, was payable to Martin-Brower at December
30, 1995. This note had been discounted in 1995 to reflect a constant interest
rate through its maturity on March 31, 2002. On November 21, 1996, in connection
with the Company's initial public offering of Class A Common Stock, the Company
repaid this note to Martin-Bower. The $1.0 million gain on the early retirement
of this note, reflecting the difference between the carrying value of the note
and the repayment amount of $9.2 million, was recorded as an extraordinary item
in the accompanying consolidated financial statements.
21
PROSOURCE, INC.
Notes to Consolidated
Financial Statements
A $0.5 million convertible unsecured 8 percent subordinated note is payable to
Malone Products, Inc. on November 1, 1999. The holders may convert the principal
into shares of the Company's Class A Common Stock at any time prior to maturity
at a conversion price of $20 per share.
The carrying value of long-term debt approximates fair value at December 28,
1996 and December 30, 1995.
(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. At December 28, 1996,
aggregate future minimum lease payments under noncancellable operating leases
were as follows (amounts in thousands):
[Download Table]
1997 $ 28,665
1998 25,681
1999 20,690
2000 15,069
2001 11,383
All years thereafter 26,046
--------
Total future minimum lease payments $127,534
========
Rent expense, including contingent rental expense, was approximately $39.3
million, $30.6 million and $13.4 million during the years ended December 28,
1996, December 30, 1995 and December 31, 1994, respectively.
(8) INCOME TAXES
The income tax benefit (provision) before extraordinary items for the years
ended December 28, 1996, December 30, 1995 and December 31, 1994, respectively,
consisted of the following (amounts in thousands):
[Enlarge/Download Table]
1996 1995 1994
------------------------------------------------------------------------------------------------------------------------------------
Current taxes:
Federal $ 937 $ (1,236) $ 256
State (9) (408) --
---------------------------------------------
Total current taxes 928 (1,644) 256
---------------------------------------------
Deferred taxes, excluding other components:
Federal 11,449 1,126 582
State 3,217 264 236
---------------------------------------------
Total deferred taxes, excluding other components 14,666 1,390 818
---------------------------------------------
Other:
Alternative minimum tax-credit carryforwards (184) 666 64
Utilization of operating-loss carryforwards -- (497) 509
---------------------------------------------
Total other (184) 169 573
---------------------------------------------
$ 15,410 $ (85) $ 1,647
=============================================
The following table accounts for the difference between the actual tax benefit
(provision) and the amounts obtained by applying the statutory U.S. federal
income tax rate of 34 percent to the loss before income taxes and extraordinary
items for the years ended December 28, 1996, December 30, 1995 and December 31,
1994 (amounts in thousands):
[Enlarge/Download Table]
1996 1995 1994
------------------------------------------------------------------------------------------------------------------------------------
Tax benefit computed at statutory rate $ 13,730 $ 237 $ 1,370
Increases (decreases) in tax benefit due to:
State income tax benefit (net of federal taxes) 2,117 (118) 198
Goodwill amortization
(136) (76) (61)
Miscellaneous (301) (128) 140
---------------------------------------------
Actual tax benefit (provision) before extraordinary items $ 15,410 $ (85) $ 1,647
=============================================
Except for the effects of the reversal of net deductible temporary differences,
as well as permanent differences described above, the Company is not aware of
any factors which would cause any significant differences between taxable income
and pretax book income in future years.
22
PROSOURCE, INC.
Notes to Consolidated
Financial Statements
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at December 28, 1996 and
December 30, 1995 are presented below (amounts in thousands):
[Enlarge/Download Table]
1996 1995
------------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Acquisition-related expenses $ 3,567 $ 2,873
Accounts receivable, principally due to allowance for doubtful accounts 1,222 1,046
Property, plant and equipment, principally due to differences in depreciation 1,935 831
Self-insurance reserves 3,493 2,609
Impairment of long-lived assets 4,036 --
Restructuring and contract-termination charges 8,121 --
Benefit of federal and state net operating-loss carryforwards 5,797 --
Other 2,025 2,782
---------------------------
Total deferred tax assets 30,196 10,141
Less valuation allowance -- --
---------------------------
Total deferred tax assets, net $ 30,196 $ 10,141
===========================
Deferred tax liabilities:
Computer software $ (1,811) $ (842)
Acquisition-related liabilities (803) (771)
Other (568) (329)
---------------------------
Total deferred tax liabilities (3,182) (1,942)
---------------------------
Net deferred tax assets $ 27,014 $ 8,199
===========================
The net change in deferred tax assets for the year ended December 28, 1996
included $4.7 million recorded as a result of the increase in the acquisition
reserves established in connection with the acquisition of NAD.
In order to fully realize the net deferred tax assets at December 28, 1996, the
Company will need to generate future taxable income of approximately $79
million. 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 and planned debt refinancing, (iii) cost savings
through its corporate and network consolidation plan and (iv) other
cost-reduction initiatives. At December 28, 1996, the deferred tax assets
include net operating loss carryforward ("NOL") of approximately $13 million.
Management believes that it is more likely than not that the Company will
realize the benefit of the NOL's existing at December 28, 1996 before they begin
to expire in 2009.
At December 28, 1996 and December 30, 1995, other current assets included income
taxes receivable of approximately $1.5 million and $1.4 million, respectively,
which consisted primarily of overpayments of tax liabilities and pending
carryback refund claims. 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 28, 1996.
(9) EMPLOYEE BENEFIT PLANS
(A) DEFINED-CONTRIBUTION PLANS
The Company sponsors a defined-contribution plan ("Associates' Savings Plan")
which covers substantially all employees. Eligible employees may contribute up
to 15 percent of base compensation, and the Company matches 50 percent of the
first 4 percent of eligible compensation. The Company also has a Money Purchase
Plan which covered those former NAD salaried employees not covered by a
defined-benefit plan. Under this plan, the Company contributed 10 percent of
eligible salary. The amount of contribution expenses incurred by the Company for
these plans were approximately $2.7 million, $2.2 million and $0.7 million for
the years ended December 28, 1996, December 30, 1995 and December 31, 1994,
respectively.
On January 1, 1997, the Associates' Savings Plan was renamed the ProSource
Retirement Advantage Plan and the benefits were changed to the following: (i)
Company contributions of 2 percent, (ii) additional Company matching of 50
percent of the first 6 percent contributed by the employee and (iii) vesting of
Company contributions after four years of service. The Money Purchase Plan was
terminated effective December 1996.
23
PROSOURCE, INC.
Notes to Consolidated
Financial Statements
(B) DEFINED-BENEFIT PENSION PLANS
In conjunction with the changes to the Associates' Savings Plan, effective
February 15, 1997 the Company terminated all three noncontributory
defined-benefit pension plans covering substantially all employees except those
covered by multiemployer pension plans under collective-bargaining agreements.
No further benefits will be accrued for these plans after 1996. The Company will
settle all pension obligations related to these terminated plans in 1997 through
(a) the purchase of annuities, (b) lump-sum payments, or (c) the transfer of
plan benefits into the ProSource Retirement Advantage Plan, at the participant's
discretion. The financial effects of this curtailment and settlement are not
expected to have a material adverse effect on the Company's financial condition.
The accrued liability as of December 28, 1996 is adequate to cover the unfunded
termination liability of these three pension plans.
Pension costs of approximately $1.1 million, $0.9 million and $0.9 million
reflected in the consolidated statements of operations for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994, respectively, were
determined based on actuarial studies. The Company's pension expense for
contributions to the various multiemployer pension plans under
collective-bargaining agreements was approximately $1.2 million, $0.9 million
and $0.1 million for the years ended December 28, 1996, December 30, 1995 and
December 31, 1994, respectively.
(10) STOCKHOLDERS' EQUITY
Under the ProSource, Inc. Employee Stock Purchase Plan (the "Stock Plan"),
officers and key employees of the Company ("Management Employees") purchased a
total of 408,100 shares of common stock at $10 per share in 1992, 132,500 shares
of common stock at $11 per share in 1993 and 1994, and 270,000 shares of common
stock at $10 per share in 1995 and 1996. 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 November 1996 to provide for unvested options to vest at a rate of 10
percent per year through December 31, 1999, when all remaining options will
vest. The 1995 Option Plan provided certain Management Employees with options to
purchase one-half the number of shares of Class B Common Stock purchased under
the Employee Stock Purchase Plan at the same price per share paid by such
stockholder (either $10 or $11). Options granted under the 1995 Option Plan
shall remain exercisable until December 31, 2000. No additional options will be
granted under the 1995 Option Plan. The Company recorded a pretax charge in 1996
of $1.2 million reflecting the difference between the market price of the
Company's Class A common stock on the date of amendment and the exercise price
of such options.
Under the 1996 Stock Option Plan (the "1996 Option Plan"), the Company may grant
options to its employees for up to 550,000 shares of Class B common stock. In
November 1996, the Company granted options to purchase 358,000 shares of Class B
common stock at $14 per share which was the market value of the Company's Class
A common stock on the date of grant. Options under the 1996 Option Plan vest
ratably over four years from the date of grant. However, not withstanding 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. Subject to the provisions of the 1996 Option Plan, vested options may be
exercised for a period of up to 10 years from the date of grant.
A summary of the status of the Company's two option plans for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994 is as follows:
[Enlarge/Download Table]
WEIGHTED Weighted Weighted
AVERAGE Average Average
1996 EXERCISE 1995 Exercise 1994 Exercise
SHARES PRICE Shares Price Shares Price
------------------------------------------------------------------------------------------------------------------------------------
Options outstanding- beginning 327,700 $ 10.16 237,450 $ 10.22 253,650 $ 10.00
Options granted 388,750 13.69 101,750 10.00 3,450 11.00
Options exercised (125) 10.00 -- -- -- --
Options canceled (9,875) 10.00 (11,500) 10.00 (19,650) 10.11
-----------------------------------------------------------------------------------------
Options outstanding - ending 706,450 $ 12.10 327,700 $ 10.16 237,450 $ 10.22
=========================================================================================
Options exercisable - year-end 78,401 $ 10.13 41,500 $ 10.12 9,300 $ 10.00
=========================================================================================
24
PROSOURCE, INC.
Notes to Consolidated
Financial Statements
The following table summarizes information about stock options outstanding at
December 28, 1996:
[Enlarge/Download Table]
Options Outstanding Options Exercisable
------------------------------------------------------------------------------- --------------------------------
Weighted Avg.
Exercise Number Remaining Weighted Avg. Number Weighted Avg.
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------------------------------------------------------------------- --------------------------------
$ 10.00 296,950 4 years $ 10.00 68,101 $ 10.00
11.00 51,500 4 years 11.00 10,300 11.00
14.00 358,000 10 years 14.00 - 14.00
------------------------------------------------------------------------------- --------------------------------
Totals 706,450 7 years $ 12.10 78,401 $ 10.13
=============================================================================== ================================
In connection with the disclosure requirements under FASB Statement No. 123, the
Company estimated the fair value of each option granted during 1996 and 1995 at
$7.34 and $8.27, respectively using the Black-Scholes option-pricing model. The
following weighted-average assumptions were used for grants in 1996 and 1995,
respectively: no expected dividend yield for both years (as the Company has not
paid any cash dividends since its inception and does not anticipate paying
dividends in the foreseeable future); expected volatility of 33 percent for both
years; risk-free interest rates of 6.2% and 6.3%; and expected lives of seven
and eight years.
The impact on the Company's net loss and loss per share for 1996 and 1995 of
applying the fair-value-based method of accounting in accordance with FASB
Statement No. 123 is not material to the consolidated financial statements of
the Company.
In conjunction with the acquisition of NAD, the Company issued warrants to
Martin-Brower. At December 28, 1996 and December 30, 1995, the warrants were
exercisable for 283,425 shares of Class B Common Stock at $12.35 per share
during the period commencing on April 1, 1997 and through March 31, 2000, and
upon consummation of certain transactions.
In November 1996, the Company changed its capital structure to 10,000,000
authorized shares of $0.01 par-value Preferred Stock, 50,000,000 authorized
shares of $0.01 par-value Class A Common Stock and 10,000,000 authorized shares
of $0.01 par-value Class B Common Stock. Each share of Class A Common Stock is
entitled to one vote per share and each share of Class B Common Stock is
entitled to ten votes. In addition, each share of Class B Common Stock is
convertible at the option of the holder thereof and automatically upon certain
events into one share of Class A Common Stock.
In November 1996, the Company's board of directors declared a 100-to-1 stock
split. The Company's additional paid-in capital account and the Class B Common
Stock account have been restated to retroactively reflect the stock split.
On November 15, 1996, the Company completed the issuance of 3,400,000 shares of
Class A Common Stock (at a price of $14 per share) through an initial public
offering, resulting in net proceeds to the Company of approximately $43.2
million, after deducting underwriting discounts and commissions, and other
offering costs of approximately $4.4 million. The net proceeds of the offering
were used: (i) to prepay $15 million in outstanding principal and $1.1 million
in accrued interest under the subordinated note payable to Onex; (ii) to prepay,
at a discount, $10 million in outstanding principal and $0.1 million in accrued
interest under the subordinated note payable to Martin-Brower for a total
payment of $9.2 million and (iii) to repay $16.6 million of outstanding
indebtedness under the Company's revolving-credit facility, after deducting a
$1.3 million payment concurrent with the offering for the termination of a
consulting agreement between the Company and certain former owners of an
acquired company. Also in connection with the initial public offering, the
Company incurred a noncash charge of $4 million resulting from the issuance to
Onex of 285,714 shares of Class B Common Stock valued at the initial
public-offering price in exchange for the agreement of Onex to relinquish its
rights to receive an annual fee, previously paid in cash, for management
services rendered to the Company.
(11) CONTINGENCIES 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 28, 1996, such guarantees amounted to approximately $3.3
million. At December 28, 1996, the Company was also obligated for $17.6 million
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
28, 1996, the Company had $7.4 million available in unused letters of credit.
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 the financial position of the Company.
25
PROSOURCE, INC.
Notes to Consolidated
Financial Statements
(12) 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 41 percent ,
45 percent and 90 percent of the Company's sales in fiscal years 1996, 1995 and
1994, respectively. Sales to BKC-owned restaurants represented approximately 5
percent, 5 percent and 13 percent of sales for each of the aforementioned years.
Amounts due from BKC at December 28, 1996 and December 30, 1995 were $5.5
million and $4.7 million, respectively.
In addition, sales to Darden Restaurants, Inc. (owner of Red Lobster and Olive
Garden restaurants) accounted for 20 percent and 18 percent of the Company's
sales in fiscal year 1996 and fiscal year 1995, respectively. Amounts due from
Darden Restaurants, Inc. at December 28, 1996 and December 30, 1995, were
approximately $41.1 million and $51.8 million, respectively. Sales to
franchisor-owned and franchisee-owned Arby's restaurants accounted for 10
percent of Company sales in fiscal year 1996 and fiscal year 1995.
The Company will discontinue its distribution services to Arby's restaurants
effective April 1, 1997. In connection therewith, as of December 28, 1996, the
Company accrued approximately $10.6 million of costs associated with terminating
this agreement, including anticipated costs for severance and termination of
leases.
26
| EX-13.1 | Last “Page” of 20 | TOC | 1st | Previous | Next | ↓Bottom | Just 20th |
|---|
PROSOURCE, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
ProSource, Inc.:
We have audited the accompanying consolidated balance sheets of
ProSource, Inc. and subsidiaries as of December 28, 1996 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
28,1996. 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 28, 1996 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 28, 1996, in conformity with generally
accepted accounting principles.
As discussed in note 1(m) to the consolidated financial statements, the
company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
in fiscal 1996.
KPMG PEAT MARWICK LLP
Miami, Florida
February 12, 1997
Dates Referenced Herein and Documents Incorporated by Reference
↑Top
Filing Submission 0000950123-97-002704 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Wed., May 1, 4:54:58.1am ET 
