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Filed pursuant to rule 424(b)(3)
Registration Number 333-51541
[AMERISERVE LOGO]
NEBCO EVANS HOLDING COMPANY
11 1/4% SENIOR REDEEMABLE EXCHANGEABLE
PREFERRED STOCK DUE 2008
------------------------
The 11 1/4% Senior Redeemable Exchangeable Preferred Stock due 2008 which
have been registered under the Securities Act (the "New Preferred Stock") were
issued in exchange for the 11 1/4% Senior Redeemable Exchangeable Preferred
Stock due 2008 (the "Old Preferred Stock") by Nebco Evans Holding Company
("NEHC"), a Delaware corporation. See "Description of Securities -- Description
of Preferred Stock."
Dividends on the New Preferred Stock will be cumulative at 11 1/4% per
annum from March 6, 1998 and will be payable quarterly on March 1, June 1,
September 1 and December 1 of each year, commencing June 1, 1998. Dividends may
be paid, at NEHC's option, either in cash or in additional shares of New
Preferred Stock. NEHC is required to redeem the New Preferred Stock on March 1,
2008 at a redemption price equal to the liquidation preference, plus accrued and
unpaid dividends to the redemption date. The New Preferred Stock will be
redeemable, at NEHC's option, in whole or in part, at any time on or after March
1, 2003, at the redemption prices set forth herein, plus accrued and unpaid
dividends to the date of redemption. In addition, at any time, NEHC may, at its
option, redeem in whole or in part, all outstanding shares of the New Preferred
Stock at a price per share of 109% of the liquidation preference thereof, plus
accrued and unpaid dividends to the redemption date, with the net cash proceeds
from one or more Public Equity Offerings. Upon the occurrence of a Change of
Control, NEHC will, subject to certain conditions, offer to purchase all of the
then outstanding shares of New Preferred Stock at a price equal to 101% of the
liquidation preference thereof, plus accrued and unpaid dividends to the
repurchase date.
The New Preferred Stock will be exchangeable on any scheduled dividend
payment date into 11 1/4% Subordinated Exchange Debentures due 2008 which will
have been registered under the Securities Act (the "Exchange Debentures"), in
whole but not in part, at the option of NEHC. If issued, the Exchange Debentures
will mature on March 1, 2008. On or after March 1, 2003, the Exchange Debentures
will be redeemable, in whole or in part, at the option of NEHC, at the
redemption prices set forth herein, plus accrued and unpaid interest to the
redemption date. In addition, at any time, NEHC may, at its option, redeem in
whole or in part, Exchange Debentures at 109% of their principal amount, plus
accrued and unpaid interest to the redemption date, with the net proceeds of one
or more Public Equity Offerings. Upon the occurrence of a Change of Control,
NEHC will, subject to certain conditions, offer to purchase all of the then
outstanding Exchange Debentures at a price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to the repurchase date.
The New Preferred Stock will, with respect to dividend rights and rights of
liquidation, winding-up and dissolution of NEHC, rank senior to all classes of
common stock of NEHC. The New Preferred Stock will rank at least pari passu with
any future issuances of preferred stock of NEHC. The Exchange Debentures will be
general unsecured obligations of NEHC, will rank subordinate in right of payment
to all Senior Debt of NEHC and will rank senior or pari passu in right of
payment to all existing and future subordinated indebtedness of NEHC. In
addition, the Exchange Debentures will be effectively subordinated to all
indebtedness, including trade payables, of NEHC's subsidiaries. As of December
27, 1997, on a pro forma basis, after giving effect to the Offering and the
ProSource Acquisition, the Exchange Debentures would have been subordinated to
$948.7 million of Senior Debt.
------------------------
SEE "RISK FACTORS," COMMENCING ON PAGE 10, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW
PREFERRED STOCK.
------------------------
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.
This Prospectus is to be used by Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") in connection with the offers and sales in market-making
transactions at negotiated prices related to prevailing market prices at the
time of sale. The Company does not intend to list the shares of New Preferred
Stock on any securities exchange or to seek admission thereof to trading in the
National Association of Securities Dealers Automated Quotation System. DLJ has
advised the Company that it intends to make a market in the New Preferred Stock;
however, it is not obligated to do so and any market-making may be discontinued
at any time. The Company will receive no portion of the proceeds of the sale of
shares of New Preferred Stock and will bear expenses incident to the
registration thereof.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
------------------------
THE DATE OF THIS PROSPECTUS IS JUNE 19, 1998.
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No dealer, salesperson or other person has been authorized to give
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by NEHC or DLJ. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any security
other than shares of New Preferred Stock offered hereby, nor does it constitute
an offer to sell or the solicitation of an offer to buy any shares of New
Preferred Stock to any person in any jurisdiction in which it is unlawful to
make such an offer or solicitation to such person. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that the information contained herein is correct as of any date
subsequent to the date hereof.
AVAILABLE INFORMATION
NEHC has filed with the Securities and Exchange Commission ("SEC") a
Registration Statement on Form S-4 under the Securities Act for the registration
of the New Preferred Stock offered hereby (the "Registration Statement"). 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 contained in exhibits and schedules to the Registration
Statement as permitted by the rules and regulations of the SEC. For further
information with respect to NEHC or the shares of New Preferred Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
and financial statement schedules thereto, which may be inspected without charge
at the public reference facility maintained by the SEC at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and copies of which may be obtained
from the SEC at prescribed rates. Statements made in this Prospectus concerning
the contents of any document referred to herein are not necessarily complete.
With respect to each such document filed with the SEC 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.
Upon the effectiveness of the Registration Statement, NEHC became subject
to the information requirements of the Securities Exchange Act of 1934 (the
"Exchange Act"), and in accordance therewith will file reports and other
information with the SEC. Such reports and other information filed by NEHC can
be inspected and copied at the public reference facilities of the SEC at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at the Website
(http://www.sec.gov.) maintained by the SEC, and the regional offices of the SEC
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, 14th Floor, Chicago, Illinois 60661.
Copies of such materials may be obtained from the Public Reference Section of
the SEC, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
its public reference facilities in New York, New York and Chicago, Illinois at
prescribed rates.
So long as NEHC is subject to the periodic reporting requirements of the
Exchange Act, it is required to furnish the information required to be filed
with the SEC to (i) State Street Bank and Trust Company as transfer agent
Certificate of Designations pursuant to which the shares of New Preferred Stock
have been issued and (ii) the holders of shares of New Preferred Stock. NEHC has
agreed that, even if they are not required under the Exchange Act to furnish
such information to the SEC, they will nonetheless continue to furnish
information that would be required to be furnished by NEHC by Section 13 of the
Exchange Act to the Trustees and the holders of shares of New Preferred Stock as
if they were subject to such periodic reporting requirements.
In addition, NEHC has agreed that for so long as any shares of New
Preferred Stock remain outstanding, they will make available to any prospective
purchaser of shares of New Preferred Stock or holder of shares of New Preferred
Stock in connection with any sale thereof, the information required by Rule
144A(d)(4) under the Securities Act.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
NEHC, 545 STEAMBOAT ROAD, GREENWICH, CONNECTICUT 06830, (203) 661-2500.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to and
should be read in conjunction with the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, all references in this Prospectus to the NEHC
business and pro forma data give effect to the transactions described below. An
index of certain defined terms used herein can be found on page 104. Unless the
context indicates or otherwise requires, references in this Prospectus to the
"Company" or "AmeriServe" are to AmeriServe Food Distribution, Inc., its
predecessors and its subsidiaries, and references to "NEHC" are to Nebco Evans
Holding Company, a Delaware corporation, and its subsidiaries.
NEHC
NEHC is a Delaware corporation and the parent company of AmeriServe, a
Delaware corporation, and Holberg Warehouse Properties, Inc., a Delaware
corporation ("HWPI"). AmeriServe accounts for substantially all of NEHC's assets
and NEHC conducts substantially all of its business through AmeriServe. HWPI's
sole operation consists of the ownership of two distribution centers occupied by
AmeriServe. AmeriServe operates in a single business segment, as described
below.
THE COMPANY
AmeriServe is North America's largest systems foodservice distributor
specializing in distribution to chain restaurants. The Company is the primary
supplier to its customers of 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, cleaning supplies
and equipment. The Company currently serves over 30 different restaurant chains
and over 25,500 restaurant locations in North America. The Company has had
long-standing relationships with such leading restaurant concepts as Pizza Hut,
Taco Bell, KFC, Wendy's, Burger King, Dairy Queen, Subway and Applebee's.
On July 11, 1997, the Company acquired (the "PFS Acquisition") the U.S. and
Canadian operations of PFS ("PFS"), a division of PepsiCo, Inc. ("PepsiCo"). PFS
distributed food products and supplies and restaurant equipment to franchised
and company-operated restaurants in the Pizza Hut, Taco Bell and KFC systems.
These systems were spun-off by PepsiCo in October 1997 and are now operating as
TRICON Global Restaurants, Inc. ("Tricon"). In addition, in connection with the
PFS Acquisition, the Company entered into a distribution agreement (the
"Distribution Agreement") whereby it became the exclusive distributor of
selected products until July 11, 2002 to the approximately 9,800 Pizza Hut, Taco
Bell and KFC restaurants in the continental United States owned by Pizza Hut,
Inc., Taco Bell Corp., Kentucky Fried Chicken Corporation and Kentucky Fried
Chicken of California, Inc. (all subsidiaries of Tricon) and their subsidiaries
(the foregoing, collectively, the "Tricon Subsidiaries") and previously serviced
by PFS. In October 1997, AmeriServe also acquired PFS de Mexico, S.A. de C.V., a
regional systems distributor based in Mexico City, Mexico for approximately $8
million.
On July 11, 1997, in connection with the PFS Acquisition, the Company
issued and sold $500.0 million principal amount of its 10 1/8% Senior
Subordinated Notes due 2007 (the "Senior Subordinated Notes") pursuant to an
Indenture, dated as of July 11, 1997, by and among the Company, certain of the
Company's subsidiaries (the "Subsidiary Guarantors") and State Street Bank and
Trust Company, as trustee (the "Senior Subordinated Note Indenture"). The Senior
Subordinated Notes were sold pursuant to exemptions from, or in transactions not
subject to, the registration requirements of the Securities Act, and applicable
state securities laws. On December 12, 1997, the Company consummated an offer to
exchange the Senior Subordinated Notes for new Senior Subordinated Notes, which
are registered under the Securities Act with terms substantially identical to
the Senior Subordinated Notes.
Also on July 11, 1997, NEHC issued and sold $100.4 million in aggregate
principal amount at maturity of its 12 3/8% Senior Discount Notes due 2007 (the
"Senior Discount Notes") pursuant to an Indenture, dated as of July 11, 1997, by
and among NEHC and State Street Bank and Trust Company, as trustee (the "Senior
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Discount Note Indenture"). The Senior Discount Notes were sold pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act. On December 12, 1997, NEHC consummated an
offer to exchange the Senior Discount Notes for new Senior Discount Notes, which
are registered under the Securities Act, with terms substantially identical to
the Senior Discount Notes.
On October 15, 1997, AmeriServe issued and sold $350,000,000 in aggregate
principal amount of its 8 7/8% Senior Notes due 2006 (the "Senior Notes")
pursuant to an Indenture, dated October 15, 1997, by and among the Company, the
Subsidiary Guarantors and State Street Bank and Trust Company, as trustee (the
"Senior Note Indenture" and, together with the Senior Discount Note Indenture
and the Senior Subordinated Note Indenture, the "Indentures"). The Senior Notes
were sold pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act. On December 12, 1997,
AmeriServe consummated an offer to exchange the Senior Notes for new Senior
Notes, which are registered under the Securities Act, with terms substantially
identical to the Senior Notes.
For further information about financings by NEHC and AmeriServe in
connection with the PFS Acquisition and subsequently, see Notes 6 and 7 to the
historical financial statements of NEHC included elsewhere in this Prospectus.
On December 28, 1997, pursuant to an Agreement and Plan of Merger by and
among Nebraska AmeriServe, Nebraska AmeriServe's wholly owned subsidiary
AmeriServ Food Company, a Delaware corporation ("AmeriServ") and AmeriServ's
wholly owned subsidiary The Harry H. Post Company, a Colorado corporation
("Post"), Nebraska AmeriServe merged with and into AmeriServ and Post merged
with and into AmeriServ, in each case with AmeriServ as the surviving Delaware
corporation. In the mergers, AmeriServ changed its name to AmeriServe Food
Distribution, Inc. (the surviving corporation is referred to in this Prospectus
as "AmeriServe" or the "Company"). In the mergers, all of the outstanding equity
securities of AmeriServ and Post were cancelled, and all of the outstanding
equity securities of Nebraska AmeriServe were converted into substantially
identical securities of the Company. The Company effected the mergers to
rationalize its corporate organization and to reduce various compliance and
regulatory costs arising from having subsidiaries incorporated in various
jurisdictions and to move its jurisdiction of incorporation from Nebraska to
Delaware.
RECENT DEVELOPMENTS
On January 29, 1998, AmeriServe, Steamboat Acquisition Corp., a newly
formed Delaware corporation and wholly owned subsidiary of AmeriServe, and
ProSource, Inc., a Delaware corporation ("ProSource"), entered into an Agreement
and Plan of Merger (the "Merger Agreement") pursuant to which AmeriServe will
acquire all outstanding shares of ProSource (the "ProSource Acquisition") for
cash. ProSource provides foodservice distribution to restaurants in North
America. ProSource also provides purchasing and logistics services to the
foodservice market in North America. ProSource's 3,400 employees serve
approximately 12,700 restaurants, including Burger King, Chick-fil-A, Chili's,
Long John Silver's, Olive Garden, Red Lobster, Sonic, TCBY, TGI Friday's and
Wendy's, from a nationwide network of distribution centers and its Corporate
Support Center in Coral Gables, Florida. The ProSource Acquisition is subject to
the approval of ProSource's stockholders and certain other customary conditions.
In connection with the Merger Agreement, certain stockholders of ProSource have
entered into a voting agreement with AmeriServe pursuant to which such
stockholders have agreed to vote their shares in favor of the ProSource
Acquisition. Such shares are sufficient to assure the approval of the ProSource
Acquisition. ProSource and AmeriServe have been granted early termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
On March 6, 1998, NEHC consummated the Offering. Approximately $148 million
of the net proceeds of the Offering was used by NEHC to repurchase all of its
13 1/2% Senior Exchangeable Preferred Stock due 2009, 15% Junior Exchangeable
Preferred Stock due 2009, and Junior Non-Convertible Preferred Stock
(collectively, the "Existing Preferred Stock"). NEHC expects to use the
remaining net proceeds for general corporate purposes, including contributions
to the capital of AmeriServe.
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COMPETITIVE ADVANTAGES
The Company believes that it benefits from the following competitive
advantages:
- Market Leader with a Nationwide Presence. As a result of its national
presence, the Company believes that as a leading systems foodservice
distributor it is one of the few companies capable of effectively serving
large national accounts. The Company believes it has significant
advantages over smaller, regional foodservice distributors as a result of
its ability to: (i) derive significant economies of scale in operating and
distribution expenses; (ii) benefit from increased purchasing power; (iii)
make significant investments in advanced technology and equipment, which
enhance productivity and customer service; and (iv) provide superior
customer service on a national scale.
- Low Cost Structure. The Company believes that it is uniquely positioned
to provide distribution services to chain restaurants at attractive prices
while also providing superior customer service. A critical component of
the Company's ability to reduce costs is the Company's effective
management of its warehouse and distribution costs, primarily as a result
of: (i) utilizing fewer, larger distribution centers within each of its
geographic regions; and (ii) maximizing customer density within each
region it serves. Furthermore, the Company has made significant
investments in advanced distribution centers, transportation equipment and
information technology, which enable it to efficiently serve its
customers.
- Stable Customer Base. The Company services over 25,500 restaurant
locations within more than 30 different restaurant concepts. The Company
believes it has among the best relationships with its customers of any
systems foodservice distributor as evidenced by the length and stability
of such relationships. For example, as a result of its ability to provide
high quality service at attractive rates, the Company has developed
long-standing relationships with many of the leading restaurant concepts,
including Dairy Queen (customer for 46 years), Burger King (customer for
36 years), KFC (customer for 26 years), Wendy's (customer for 21 years),
Pizza Hut (customer for 20 years) and Taco Bell (customer for 18 years).
- Experienced Management Team. The Company's management team has extensive
experience in the systems foodservice distribution business and has
developed long-standing relationships with franchisees and senior
management of successful concepts. The top four senior executives of the
Company have an average of approximately 26 years of experience with the
Company. In addition, prior to the PFS Acquisition and the ProSource
Acquisition, the Company's management team has successfully integrated
five acquisitions since 1990, representing approximately $1.2 billion in
aggregate annual sales.
BUSINESS STRATEGY
The Company's objective is to continue to increase net sales and EBITDA by
implementing the following key elements of its business strategy:
- Continue to Pursue Internal and External Growth Opportunities. The
Company intends to continue to grow through the development of new
business from existing customers, the addition of new chains,
international expansion and selective acquisitions.
- Capitalize on the Benefits of the PFS and ProSource
Acquisitions. Management believes that combining the operations of
AmeriServe, PFS and ProSource will present significant opportunities to
eliminate duplicative costs and realign the Company's distribution center
network to capitalize effectively on economies of scale and the benefits
of higher customer density.
- Continue to Maximize Operating Leverage. As the largest systems
foodservice distributor in North America, the Company will continue to
pursue a low-cost operating strategy based primarily on achieving
economies of scale in the areas of warehousing, transportation, general
and administrative functions and management information systems.
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- Continue to Provide Superior Customer Service. The Company believes it
enjoys a reputation for providing consistent, high quality service based
on its customer focus, its commitment to service excellence and the depth
of its management team.
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NEHC's principal executive offices are located at 545 Steamboat Road,
Greenwich, Connecticut 06830 and its telephone number is (203) 661-2500.
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SUMMARY OF TERMS OF PREFERRED STOCK
The form and terms of the New Preferred Stock are the same as the form and
terms of the Old Preferred Stock (which they will replace) except that (i) the
shares of New Preferred Stock have been registered under the Securities Act,
and, therefore, will not bear legends restricting the transfer thereof and (ii)
the holders of the shares of New Preferred Stock generally will not be entitled
to further registration rights under the Registration Rights Agreement, which
rights generally will be satisfied when the Exchange Offer is consummated. The
New Preferred Stock will evidence the same interest as the Old Preferred Stock
and will be entitled to the benefits of the Certificate of Designations. See
"Description of Securities -- Description of Preferred Stock."
Securities Offered......... 2,500,000 shares of Preferred Stock.
Liquidation Preference..... $100 per share, plus accrued and unpaid dividends.
Dividends.................. Dividends on the Preferred Stock will be cumulative
at a rate of 11 1/4% per annum per share from March
6, 1998 (the "Issue Date") and will be payable
quarterly on March 1, June 1, September 1 and
December 1 of each year, commencing June 1, 1998,
whether or not declared by the board of directors
of NEHC. Dividends may be paid, at NEHC's option,
on any Dividend Payment Date either in cash or in
additional shares of Preferred Stock (and, at
NEHC's option, payment of cash in lieu of
fractional shares) having an aggregate liquidation
preference equal to the amount of such dividends.
Dividend Payment Dates..... March 1, June 1, September 1 and December 1,
commencing June 1, 1998.
Optional Redemption........ The Preferred Stock will be redeemable, at NEHC's
option, in whole or in part, at any time on or
after March 1, 2003, at the redemption prices set
forth herein, plus accrued and unpaid dividends to
the date of redemption. In addition, at any time,
NEHC may, at its option, redeem in whole or in
part, the Preferred Stock at 109% of the
liquidation preference thereof, plus accrued and
unpaid dividends to the redemption date, with the
net cash proceeds from one or more Public Equity
Offerings; provided that any such redemption occurs
within 45 days following the closing of such Public
Equity Offerings.
Mandatory Redemption....... NEHC is required, subject to certain conditions, to
redeem all of the shares of Preferred Stock
outstanding on March 1, 2008, at a redemption price
equal to 100% of the liquidation preference
thereof, plus, without duplication, accrued and
unpaid dividends to the date of redemption, subject
to the legal availability of funds therefor. There
can be no assurance, however, that NEHC will have
sufficient funds with which to redeem the Preferred
Stock.
Voting..................... The Preferred Stock will be nonvoting, except as
otherwise required by law and except in certain
circumstances described herein, including amending
certain rights of the holders of the Preferred
Stock. In addition, if NEHC: (i) fails to pay
dividends in respect of three or more quarterly
dividend periods (whether or not consecutive) in
the aggregate; (ii) fails to make a mandatory
redemption; or (iii) fails to comply with certain
covenants, holders of a majority of the outstanding
shares of Preferred Stock, with the holders of
shares of any Parity Securities (as defined),
issued after the Issue Date, upon which like voting
rights have been conferred and are then
exercisable, voting as a single class, will be
entitled to elect the lesser of two directors or
that number of directors constituting at least 25%
of NEHC's board of directors.
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Exchange Provisions........ The Preferred Stock will be exchangeable into the
Exchange Debentures (in whole but not in part), at
NEHC's option, subject to certain conditions, on
any scheduled Dividend Payment Date.
Ranking.................... The Preferred Stock will, with respect to dividend
rights and rights of liquidation, winding-up and
dissolution of NEHC, rank senior to all classes of
common stock of NEHC. The Preferred Stock will rank
at least pari passu with any future issuances of
preferred stock.
Change of Control.......... Upon the occurrence of a Change of Control, NEHC
will, subject to certain conditions, offer to
purchase all of the then outstanding shares of
Preferred Stock at 101% of the aggregate
liquidation preference thereof, plus accrued and
unpaid dividends, if any, to the repurchase date.
There can be no assurance, however, that NEHC will
have sufficient funds with which to purchase the
Preferred Stock at that time, and certain
provisions of NEHC's debt agreements may further
limit NEHC's ability to make such purchases. See
"Risk Factors--Payment Upon Change of Control" and
"Description of Securities--Description of
Preferred Stock."
Certain Restrictive
Provisions................. The Certificate of Designations contains certain
restrictive provisions that, among other things,
limit the ability of NEHC and its subsidiaries to
incur additional debt, pay dividends or make
certain other restricted payments, enter into
certain transactions with affiliates, or merge or
consolidate with or sell all or substantially all
of their assets to any other person.
Use of Proceeds............ The net proceeds from the sale of the Preferred
Stock were approximately $240 million (after
deducting discounts and commissions and estimated
expenses of the Offering) and was or will be used
by NEHC (i) to finance the repurchase costs of the
Existing Preferred Stock of NEHC and (ii) for
general corporate purposes, including contributions
to the capital of AmeriServe.
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SUMMARY OF TERMS OF THE EXCHANGE DEBENTURES
Issue...................... 11 1/4% Subordinated Exchange Debentures due 2008
issuable, at NEHC's option, in exchange for the
Preferred Stock in an aggregate principal amount
equal to the aggregate liquidation preference of
the outstanding Preferred Stock, plus, without
duplication, accrued and unpaid dividends to the
date fixed for the exchange thereof (the "Exchange
Date"), plus any additional Exchange Debentures
issued from time to time in lieu of cash interest.
Maturity Date.............. March 1, 2008.
Interest Rate.............. The Exchange Debentures will bear interest at the
rate of 11 1/4%, per annum.
Interest Payment Dates..... March 1, June 1, September 1 and December 1.
Optional Redemption........ The Exchange Debentures will be redeemable at the
option of NEHC, in whole or in part, at any time on
or after March 1, 2003 at the redemption prices set
forth herein, plus accrued and unpaid interest and
Liquidated Damages (as defined), if any, thereon to
the date of redemption. In addition, at any time,
NEHC may redeem, in whole or in part, Exchange
Debentures at a redemption price equal to 109% of
the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
thereon to the redemption date, with the net cash
proceeds of a Public Equity Offering. See
"Description of Securities--Description of Exchange
Debentures--Optional Redemption."
Change of Control.......... Upon the occurrence of a Change of Control, each
holder of Exchange Debentures will have the right
to require NEHC to repurchase all or any part of
such holder's Exchange Debentures at an offer price
in cash equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to the date
of repurchase. See "Description of
Securities--Description of Exchange
Debentures--Repurchase at the Option of
Holders--Change of Control." There can be no
assurance that, in the event of a Change of
Control, NEHC would have sufficient funds to
purchase all Exchange Debentures tendered. See
"Risk Factors--Payment Upon a Change of Control."
Subordination.............. The Exchange Debentures will be general unsecured
obligations of NEHC, will rank subordinate in right
of payment with all existing and future Senior Debt
and senior or pari passu in right of payment to all
existing and future subordinated indebtedness of
NEHC. The Exchange Debentures will be effectively
subordinated to all indebtedness, including trade
payables, of NEHC's subsidiaries. At December 27,
1997, on a pro forma basis, after giving effect to
the ProSource Acquisition, the Exchange Debentures
would have been subordinated to $948.7 million of
Senior Debt. See "Risk Factors--Subordination" and
"--Holding Company Structure; Effective
Subordination."
Certain Covenants.......... The Exchange Debenture Indenture will contain
certain covenants that will limit, among other
things, the ability of NEHC and its Restricted
Subsidiaries to: (i) pay dividends, redeem capital
stock or make certain other restricted payments or
investments, (ii) incur additional indebtedness or
issue preferred equity interests, (iii) merge,
consolidate or sell all or substantially all of its
assets, (iv) create liens on assets and (v) enter
into certain transactions with affiliates or
related persons. See "Description of
Securities--Description of Exchange
Debentures--Certain Covenants."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY THOSE WHO
PURCHASE THE NEW PREFERRED STOCK, SEE "RISK FACTORS."
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RISK FACTORS
Investors should consider carefully the factors set forth below, as well as
the other information set forth elsewhere in this Prospectus, before purchasing
the New Preferred Stock. This Prospectus includes forward-looking statements,
including statements 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. NEHC'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 "Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "The Business." The forward-looking
statements are made as of the date of this Prospectus, and NEHC 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.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
NEHC is and will continue to be highly leveraged as a result of the
substantial indebtedness it has incurred in connection with previous
acquisitions and related financings. On a pro forma basis after giving effect to
the Offering and the ProSource Acquisition, the Company would have had total
indebtedness of $948.7 million, Preferred Stock with an aggregate liquidation
preference of $250.0 million, Senior Convertible Preferred with an aggregate
liquidation preference of $2.4 million and stockholders' deficit of $100.8
million as of December 27, 1997, and NEHC's earnings would have been inadequate
to cover combined fixed charges and preferred stock dividends by $111.7 million
for the year ended December 27, 1997. On a pro forma basis after giving effect
to the Offering and the ProSource Acquisition, cash interest expense for the
fiscal year ended December 27, 1997 would have been $85.9 million. NEHC or its
subsidiaries may incur additional indebtedness in the future, subject to
limitations imposed by the Certificate of Designations, the Indentures and the
Credit Facility. See "Capitalization," "Unaudited Pro Forma Consolidated
Financial Statements" and "The Business."
NEHC's ability to pay dividends, when payable, on, and to satisfy the
redemption obligations in respect of, the Preferred Stock and to satisfy its
debt obligations depends on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors beyond its control. Based upon the current level of operations
and anticipated growth, the management of NEHC believes that NEHC's available
cash flow, together with available borrowings under the Company's Credit
Facility and other sources of liquidity, including the Accounts Receivable
Program, will be adequate to pay such leases, dividends or other payments to
enable NEHC to meet NEHC's anticipated future requirements for working capital,
capital expenditures, scheduled payments of principal of and interest on its
indebtedness, and dividends when payable on the Preferred Stock. There can be no
assurance, however, that NEHC will generate sufficient cash flow from operations
or that future borrowings will be available in an amount sufficient to enable
NEHC to service its indebtedness, or to make necessary capital expenditures, or
that any refinancing would be available on commercially reasonable terms or at
all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
The degree to which NEHC is leveraged could have important consequences to
holders of the Preferred Stock, including, but not limited to, the following:
(i) a substantial portion of NEHC's cash flow will be required to be dedicated
to debt service and will not be available for other purposes; (ii) NEHC's
ability to obtain additional financing in the future could be limited; and (iii)
the Certificate of Designations, the Senior Discount Note Indenture, the Senior
Note Indenture, the Senior Subordinated Note Indenture and the Credit Facility
contain financial and restrictive covenants that limit the ability of NEHC to,
among other things, borrow additional funds, dispose of assets or pay cash
dividends. Failure by NEHC to comply with such covenants could result in an
event of default, which, if not cured or waived, could have a material adverse
effect on NEHC. In addition, the degree to which NEHC is leveraged could prevent
it from redeeming all Preferred Stock tendered to it upon the occurrence of a
Change of Control or when due at the redemption date. See "Description of
Securities--Description of Preferred Stock--Redemption at the Option of
Holders--Change of Control."
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<PAGE> 11
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION
NEHC is a holding company and does not have any material operations or
assets other than ownership of capital stock of its subsidiaries. Accordingly,
in addition to the Senior Discount Notes and the Company's Senior Notes, the
Exchange Debentures will be effectively subordinated to all existing and future
liabilities of NEHC's subsidiaries, including trade payables and indebtedness
under the Credit Facility and the Senior Subordinated Notes. As of December 27,
1997, on a pro forma basis after giving effect to the Offering and the ProSource
Acquisition, the Exchange Debentures would have been subordinated to $948.7
million of Senior Debt of which $890.5 million is indebtedness of NEHC's
subsidiaries. In addition, certain of NEHC's subsidiaries have $150.0 million of
additional availability under the Revolving Credit Facility for future
borrowings. NEHC and its subsidiaries may incur additional indebtedness in the
future, subject to certain limitations contained in the instruments governing
their indebtedness.
Any right of NEHC to participate in any distribution of the assets of its
subsidiaries upon the liquidation, reorganization or insolvency of any such
subsidiary (and the consequent right of the holders of Preferred Stock to
participate in the distribution of those assets) will be subject to the prior
claims of the respective subsidiary's creditors. The obligations of NEHC's
subsidiaries under the Credit Facility are secured by substantially all of their
respective assets. Additionally, NEHC has guaranteed AmeriServe's obligations
under the Credit Facility and such guarantee is secured by a first priority
pledge of all the capital stock of AmeriServe owned by NEHC. See "Description of
Indebtedness and Preferred Stock -- Credit Facility."
SUBORDINATION
The payment of dividends on and redemption price of the Preferred Stock
will be subordinated to all existing and future indebtedness of NEHC, including
the Senior Discount Notes. In addition, the payment of principal, premium, if
any, and interest on, and any other amounts owing in respect of, the Exchange
Debentures, if issued, will be contractually subordinated to the prior payment
in full of all existing and future Senior Debt of NEHC, and will be effectively
subordinated to all other indebtedness of AmeriServe and other subsidiaries of
NEHC. As of December 27, 1997, on a pro forma basis after giving effect to the
Offering and the ProSource Acquisition, NEHC would have had total indebtedness
of $948.7 million. In the event of the bankruptcy, liquidation, dissolution,
reorganization or other winding up of NEHC, the assets of NEHC will be available
to pay obligations on the Exchange Debentures only after all Senior Debt has
been paid in full, and there may not be sufficient assets remaining to pay
amounts due on any or all of the Exchange Debentures. In addition, under certain
circumstances, NEHC may not pay principal of, premium, if any, or interest on,
or any other amounts owing in respect of, the Exchange Debentures, or purchase,
redeem or otherwise retire the Exchange Debentures, if a payment default or a
nonpayment default exists with respect to certain Senior Debt, including Senior
Debt under the Senior Discount Note Indenture and, in the case of nonpayment
default, if a payment blockage notice has been received by the Trustee for the
Exchange Debentures. See "Description of Securities -- Description of Preferred
Stock" and "-- Description of Exchange Debentures -- Subordination."
LIMITATION ON THE PAYMENT OF FUNDS TO NEHC BY ITS SUBSIDIARIES
NEHC's cash flow, and consequently its ability to pay dividends and to
service debt, including its obligations in respect of the Preferred Stock, is
dependent upon the cash flows of its subsidiaries and the payment of funds by
such subsidiaries to NEHC in the form of loans, dividends or otherwise. NEHC's
subsidiaries have no obligation, contingent or otherwise, to pay any amounts due
pursuant to the Preferred Stock or to make any funds available therefor. In
addition, the Credit Facility, the Senior Note Indenture and the Senior
Subordinated Note Indenture impose, and agreements entered into in the future
may impose, significant restrictions on the payment of dividends and the making
of loans by the Company to NEHC.
LIMITATIONS ON ABILITY TO PAY DIVIDENDS
The Senior Discount Note Indenture prohibits cash dividends, except to the
extent, if any, that (i) the "basket" available for the making of "Restricted
Payments" under the Senior Discount Note Indenture
11
<PAGE> 12
permits such payments or (ii) after giving pro forma effect to the payment of
the dividend, NEHC would have been permitted to incur $1.00 of additional
indebtedness pursuant to the Fixed Charge Coverage Ratio test (as defined) and
the dividend payment is less than the sum of NEHC's Consolidated Net Worth (as
defined) plus cash proceeds received by NEHC from issuance of equity interests
and subject to certain other adjustments. These restrictions are expected to
continue through the maturity of the Senior Discount Notes in 2007 or in
connection with any debt that refinances or replaces the Senior Discount Notes.
In addition to the limitations imposed on the payment of dividends by the
Senior Discount Note Indenture, under Delaware law, NEHC is permitted to pay
dividends on its capital stock, including the Preferred Stock, only out of its
surplus or, in the event that it has no surplus, out of its net profits for the
year in which a dividend is declared, or for the immediately preceding fiscal
year. Surplus is defined as the excess of a company's total assets over the sum
of its total liabilities plus the par value of its outstanding capital stock. In
order to pay dividends in cash, NEHC must have surplus or net profits equal to
the full amount of the cash dividend at the time such dividend is declared.
However, NEHC may, at its option, pay dividends by issuing new shares of NEHC
Preferred Stock in lieu of paying cash dividends.
In determining NEHC's ability to pay dividends, Delaware law permits the
board of directors of NEHC to revalue NEHC's assets and liabilities from time to
time to their fair market values in order to create surplus. NEHC cannot predict
what the value of its assets or the amount of its liabilities will be in the
future and, accordingly, there can be no assurance that NEHC will be able to pay
cash dividends on Preferred Stock.
ASSET ENCUMBRANCES
In connection with the Credit Facility, NEHC has granted the lenders
thereunder a first priority lien on all of the capital stock of the Company as
security for its guarantee of the Company's obligations under the Credit
Facility. In the event of a default under the Credit Facility or such guarantee,
the lenders under the Credit Facility could foreclose upon the assets pledged to
secure the Credit Facility, including such capital stock, and the holders of
Preferred Stock might not be able to receive any dividends until any payment
default was cured or waived, any acceleration was rescinded, or the indebtedness
under the Credit Facility was discharged or paid in full.
KEY CONTRACTS
In January 1997, the Company entered into a three-year agreement, which
became effective April 1997, to become the primary supplier to approximately
2,600 Arby's restaurants nationwide. The Company expects to generate at least
$325 million of annual net sales during the term of the agreement. No assurance
can be given that the Company's contract with Arby's will be renewed upon
expiration, that any renewal of such contract will be on terms as favorable to
the Company as the current contract or that the Company will realize expected
net sales under the existing contract.
In connection with the PFS Acquisition, the Company and Tricon entered into
the Distribution Agreement pursuant to which the Company became the exclusive
distributor of specified restaurant products purchased by Pizza Hut, Taco Bell
and KFC restaurants within the continental United States, which are currently
owned, directly or indirectly, by Tricon (other than certain specified
restaurants) or which are acquired or built by Tricon during the term of the
Distribution Agreement. On a pro forma basis, assuming the inclusion of PFS and
Post for the full year, but excluding ProSource, approximately 40% of the
Company's 1997 sales would have been generated under the Distribution Agreement.
The Distribution Agreement may be terminated at any time (i) by any party in the
event that the other party breaches any material term and such breach remains
unremedied for a period of 30 calendar days after written notice of such breach,
(ii) by Tricon if the Company is in material breach of the Distribution
Agreement for failure to maintain specified service levels for any three months
of any calendar year (commencing in 1998) or (iii) by either party in the event
that the other party becomes the subject of a bankruptcy, insolvency or other
similar proceeding.
While exclusive or written arrangements are not typically the basis of
foodservice distribution sales and have not historically been requisite to the
Company's growth, the Distribution Agreement will expire in five years and no
assurance can be given that the Distribution Agreement will be renewed or, if
renewed, whether
12
<PAGE> 13
such renewal will be on terms as favorable as the existing agreement.
Furthermore, no assurance can be given that the Company will be able to achieve
the expected net sales under the current Distribution Agreement. Gross profit
and net pretax profit on certain sales by PFS to Pizza Hut under the
Distribution Agreement are limited. See Note 5 to the historical financial
statements of PFS.
DEPENDENCE ON CERTAIN CHAINS AND CUSTOMERS
The Company derives substantially all of its net sales from several chain
restaurant concepts. On a pro forma basis (including PFS and Post for all of
1997 but without giving effect to the ProSource Acquisition), the largest chains
serviced by the Company would have been Pizza Hut, Taco Bell and KFC,
representing 28%, 28% and 13% of 1997 total sales, respectively. 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 generally makes its
selection of a foodservice distributor from an approved group of distributors.
On a pro forma basis (including PFS and Post for all of 1997 but without giving
effect to the ProSource Acquisition) the Company's largest customer would have
been Tricon, representing approximately 40% of the Company's 1997 net sales. No
other customer accounted for more than 10% of the Company's sales in 1997 on
either a pro forma or reported basis. Adverse events affecting any of the
Company's largest customers, a material decrease in sales to any such customers
or the loss of a major customer through the acquisition thereof by a company
with an internal foodservice 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.
A significant portion of the Company's business is conducted with customers
with which the Company does not have contracts. Such customers could cease doing
business with the Company on little or no notice. The Company's contracts with
its other customers are subject to termination by the customer prior to
expiration of the stated term under circumstances specified in each contract,
including, in some cases, failure to comply with performance reliability
standards. Although the Company is not aware of any issues of non-compliance
that could reasonably be expected to result in termination of any such contracts
prior to expiration of the stated term, and has not been notified by any
customer that it intends to terminate its contract with the Company, there can
be no assurance that historic levels of business from any customer of the
Company will be maintained in the future. See "-- Key Contracts" and "The
Business -- Customers."
The Company has been informed by Wendy's International, the franchiser of
the Wendy's concept, that it has selected SYSCO/Sygma as its distributor in
certain geographic markets and that it will begin to transfer the business of
its corporate owned units away from the Company beginning in late 1998. In
addition, Wendy's International has indicated that it will attempt to remove the
Company as an authorized distributor and influence its franchisee operators to
transfer their business to SYSCO/Sygma. The Company intends to take all
appropriate actions to continue servicing the Wendy's franchisees, including
maintaining the highest levels of customer service. The Company and ProSource
currently service approximately 479 units owned by Wendy's International. In
addition, the Company and ProSource service approximately 1,500 franchised
units. In total, the Company's sales to the Wendy's concept, including ProSource
sales on a pro forma basis, were approximately $650 million in 1997, of which
Wendy's corporate owned units represented approximately $150 million, or less
than 2% of total pro forma revenues.
ABILITY TO INTEGRATE ACQUISITIONS
The Company has achieved a significant portion of its growth through
acquisitions and will continue to try to grow in this way. Although each of the
previously acquired companies has a significant operating history, the Company
has a limited history of owning and operating the most recently acquired of
these businesses on a consolidated basis. Holberg Industries, Inc. ("Holberg")
acquired NEBCO Distribution of Omaha, Inc.
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<PAGE> 14
("NEBCO") in 1986. NEBCO acquired Evans Brothers Company ("Evans") in January
1990 and the combined company was renamed "NEBCO EVANS Distribution, Inc."
("NEBCO EVANS"). NEBCO EVANS acquired L.L. Distribution Systems Inc. in 1990,
Condon Supply Company in 1991, AmeriServ in January 1996 and, in April 1997,
changed its name to AmeriServe Food Distribution, Inc. As a result of the PFS
Acquisition and, if consummated, the ProSource Acquisition, the Company will
have to integrate PFS and ProSource with its existing business, including its
prior acquisitions. While the Company believes that such integration provides
significant opportunities to reduce costs, there can be no assurance that the
Company will be able to meet performance expectations or successfully integrate
these businesses on a timely basis without disruption in the quality and
reliability of service to its customers or diversion of management resources. In
addition, while the Company has made acquisitions successfully before, both the
PFS Acquisition and the ProSource Acquisition are substantially larger than the
Company's prior acquisitions. The integration of such businesses will also
require improvements in the Company's management information systems. There can
be no assurance that such improvements will be realized on a timely basis.
DEPENDENCE ON KEY PERSONNEL
The Company's and NEHC's success is, and will continue to be, substantially
dependent upon the continued services of its senior management, particularly Mr.
John V. Holten, Chairman and Chief Executive Officer of NEHC and the Company,
and Mr. Raymond E. Marshall, President, Chief Operating Officer and Treasurer of
NEHC and President and Treasurer of the Company. The loss of the services of one
or more members of senior management could adversely affect NEHC's operating
results. The Company has entered into employment agreements with Mr. Marshall
and other members of senior management, and has obtained key-man life insurance
in the amount of $3.0 million on Mr. Marshall. 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."
COMPETITION
The foodservice distribution industry is highly competitive. The Company
competes with other systems foodservice distribution companies that focus on
chain restaurants and with broadline foodservice distributors that distribute to
a wide variety of customers. Further, 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. See "The Business -- Competition."
CONTROL BY PRINCIPAL STOCKHOLDER
Holberg indirectly owns a majority of the issued and outstanding capital
stock of NEHC. See "Security Ownership of Certain Beneficial Holders and
Management." Holberg and DLJ collectively have sufficient voting power to elect
the entire Board of Directors of each of NEHC, and through NEHC, the Company,
and thereby exercise control over the business, policies and affairs of NEHC and
the Company, and, in general, determine the outcome of any corporate transaction
or other matters submitted to stockholders for approval, such as amendments,
other than certain amendments affecting the rights or preference of holders of
Preferred Stock, to the Restated Certificate of Incorporation of NEHC (the
"Certificate of Incorporation"), the authorization of additional shares of
capital stock, and any merger, consolidation or sale of all or substantially all
of the assets of NEHC, all of which could adversely affect NEHC and holders of
Preferred Stock.
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Preferred Stock
may require, subject to certain conditions, NEHC to repurchase all or a portion
of such holder's Preferred Stock at 101% of the aggregate liquidation preference
thereof plus accrued and unpaid dividends, if any, to the repurchase date. In
addition, the Credit Facility provides that, if a Change of Control occurs, it
will constitute an event of default under such document. In the event of such a
Change of Control, NEHC and the Company would be required to repay the
indebtedness outstanding under the Credit Facility, the Senior Discount Notes,
the Senior Notes
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<PAGE> 15
and the Senior Subordinated Notes. There can be no assurance that the Company
and NEHC would have the resources necessary to repay their respective
indebtedness or that a Change of Control would not have a material adverse
effect on the value of the Preferred Stock or the ability of NEHC to repurchase
the Preferred Stock. See "Description of Securities -- Description of Preferred
Stock -- Repurchase at the Option of Holders -- Change of Control" and
"-- Holding Company Structure; Effective Subordination."
FRAUDULENT CONVEYANCE
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or avoid the Exchange
Debentures in favor of other existing or future creditors of NEHC. If a court in
a lawsuit on behalf of any unpaid creditor of NEHC or a representative of NEHC's
creditors were to find that, at the time NEHC issued the Exchange Debentures,
NEHC (x) intended to hinder, delay or defraud any existing or future creditor or
contemplated insolvency with a design to prefer one or more creditors to the
exclusion in whole or in part of others or (y) did not receive fair
consideration or reasonably equivalent value for issuing such Exchange
Debentures and NEHC (i) was insolvent, (ii) was rendered insolvent by reason of
such issuance, (iii) was engaged or about to engage in a business or transaction
for which its remaining assets constituted unreasonably small capital to carry
on its business or (iv) intended to incur, or believed that it would incur,
debts beyond its ability to pay such debts as they matured, such court could
void NEHC's obligations under the Exchange Debentures and void such
transactions. Alternatively, in such event, claims of the holders of such
Exchange Debentures could be subordinated to claims of the other creditors of
NEHC.
TRADING MARKET FOR THE NEW PREFERRED STOCK
There is no existing trading market for shares of New Preferred Stock, and
there can be no assurance regarding the future development of a market for the
New Preferred Stock or the ability of the holders of shares of New Preferred
Stock to sell their shares of New Preferred Stock or the price at which such
holders may be able to sell their shares of New Preferred Stock. If such market
were to develop, the New Preferred Stock could trade at prices that may be
higher or lower than their initial offering price depending on many factors,
including prevailing interest rates, NEHC's operating results and the market for
similar securities. Although it is not obligated to do so, DLJ intends to make a
market in the New Preferred Stock. Any such market-making activity may be
discontinued at any time, for any reason, without notice at the sole discretion
of DLJ. No assurance can be given as to the liquidity of or the trading market
for the New Preferred Stock.
DLJ may be deemed to be an affiliate of NEHC and, as such, may be required
to deliver a prospectus in connection with its market-making activities in
shares of New Preferred Stock. Pursuant to the Registration Rights Agreement,
NEHC agreed to use its respective best efforts to file and maintain a
registration statement that would allow DLJ to engage in market-making
transactions in shares of New Preferred Stock for up to 120 days from the date
on which the Exchange Offer is consummated. NEHC has agreed to bear
substantially all the costs and expenses related to such registration statement.
USE OF PROCEEDS
This Prospectus is delivered in connection with the sale of shares of New
Preferred Stock by DLJ in market-making transactions. NEHC will not receive any
of the proceeds from such transactions.
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<PAGE> 16
CAPITALIZATION
(DOLLARS IN THOUSANDS)
The following table sets forth the consolidated cash and capitalization of
NEHC as of December 27, 1997 and the pro forma consolidated capitalization of
NEHC as of December 27, 1997, adjusted to reflect the Offering and the ProSource
Acquisition. This table should be read in conjunction with the historical and
unaudited pro forma financial statements of NEHC and the related notes thereto
included elsewhere herein. See "The Company."
<TABLE>
<CAPTION>
AS OF DECEMBER 27, 1997
-----------------------
ACTUAL PRO FORMA
--------- -----------
<S> <C> <C>
Cash and cash equivalents................................... $231,450 $ 181,411
======== ==========
Long-term debt (including current portion):
Revolving Credit Facility................................. $ -- $ --
Capital lease obligation.................................. 37,043 37,043
Senior Notes due 2006..................................... 350,000 350,000
Senior Subordinated Notes due 2007........................ 500,000 500,000
Senior Discount Notes due 2007............................ 58,200 58,200
Other..................................................... 3,493 3,493
-------- ----------
Total long-term debt.............................. 948,736 948,736
Senior Redeemable Exchangeable Preferred Stock due 2008..... -- 240,000
Stockholders' equity (deficit):
Senior Convertible Preferred Stock........................ 2,350 2,350
Existing Preferred Stock.................................. 131,005 --
Common.................................................... (88,553) (103,188)
-------- ----------
Total stockholders' equity (deficit).............. 44,802 (100,838)
-------- ----------
Total capitalization........................................ $993,538 $1,087,898
======== ==========
</TABLE>
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<PAGE> 17
SELECTED NEHC HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following table presents selected historical financial data of NEHC at
and for the fiscal years 1993, 1994, 1995, 1996 and 1997 which have been derived
from the audited financial statements of NEHC. The historical financial
statements of NEHC for the fiscal years 1994, 1995, 1996 and 1997 were audited
by Ernst & Young LLP. The selected financial data set forth below should be read
in conjunction with "The Business," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the historical financial
statements of NEHC and the related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................................. $327,606 $358,516 $400,017 $1,389,601 $3,508,332
Gross profit.............................................. 35,153 37,914 40,971 140,466 348,975
Operating expenses........................................ 32,054 34,488 36,695 122,430 358,958
-------- -------- -------- ---------- ----------
Operating income (loss)................................... 3,099 3,426 4,276 18,036 (9,983)
Interest expense, net..................................... (2,759) (3,294) (3,936) (16,423) (54,016)
Loss on sale of accounts receivable....................... -- -- -- -- (6,757)
Interest income -- Holberg and affiliate.................. 150 533 749 528 632
Minority interest......................................... -- -- -- (2,345) --
-------- -------- -------- ---------- ----------
Income (loss) before income taxes, extraordinary loss, and
cumulative effect of accounting change.................. 490 665 1,089 (204) (70,124)
Provision (credit) for income taxes....................... 172 523 583 1,300 1,030
-------- -------- -------- ---------- ----------
Income (loss) before extraordinary loss and cumulative
effect of accounting change............................. 318 142 506 (1,504) (71,154)
Extraordinary loss on early extinguishment of debt........ (613) -- -- -- (15,935)
Cumulative effect of change in method of accounting for
income taxes............................................ (495) -- -- -- --
-------- -------- -------- ---------- ----------
Net income (loss)......................................... $ (790) $ 142 $ 506 $ (1,504) $ (87,089)
======== ======== ======== ========== ==========
OTHER DATA:
EBITDA(1)................................................. $ 6,195 $ 6,710 $ 7,038 $ 27,925 $ 76,959
Depreciation and amortization............................. 3,096 3,284 2,762 10,372 34,493
Capital expenditures...................................... 2,205 1,331 2,496 12,701 23,300
Net cash provided by (used in):
Operating activities.................................... 4,680 4,276 4,505 4,151 50,179
Investing activities.................................... (6,556) (5,422) (5,574) (105,417) (880,067)
Financing activities.................................... 2,676 490 619 102,915 1,059,114
Ratio of earnings to fixed charges(2)..................... 1.1x 1.1x 1.2x N/A N/A
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 1,682 $ 1,025 $ 575 $ 2,224 $ 231,450
Total assets.............................................. 75,265 79,218 77,503 314,946 1,478,790
Long-term debt, including current portion................. 34,170 32,160 32,779 164,444 948,736
Total stockholders' equity................................ 14,779 17,205 10,157 18,519 44,802
</TABLE>
- ---------------
(1) EBITDA represents operating income plus depreciation, amortization and
excludes one-time non-recurring gains and losses. EBITDA in fiscal 1996
excludes net one-time, non-recurring gains of $0.5 million. EBITDA in fiscal
1997 excludes $52.4 million of impairment, restructuring and other unusual
charges. EBITDA is presented because management believes it is a widely
accepted financial indicator used by certain investors and analysts to
analyze and compare companies on the basis of operating performance. EBITDA
is not intended to represent cash flows for the period, nor has it been
presented as an alternative to operating income as an indicator of operating
performance and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles. NEHC understands that, while EBITDA is frequently
used by securities analysts in the evaluation of companies, EBITDA, as used
herein, is not necessarily comparable to other similarly
17
<PAGE> 18
titled captions of other companies due to potential inconsistencies in the
method of calculation. See the historical and unaudited pro forma financial
statements of NEHC and the related notes thereto included elsewhere herein.
(2) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest expense,
amortization of deferred finance fees and one-third of the rent expense from
operating leases, which management believes is a reasonable approximation of
the interest factor of the rent. For the fiscal years 1996 and 1997,
earnings were inadequate to cover fixed charges by $0.2 million and $70.1
million, respectively.
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<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
NEHC is the parent of the Company and Holberg Warehouse Properties, Inc.
("HWPI"). The Company accounts for substantially all of NEHC's assets and
operations. HWPI's operations consist entirely of the leasing of two warehouse
facilities to the Company. The Company is North America's largest foodservice
distributor to chain restaurants, distributing a wide variety of items,
including meat, poultry, frozen foods, canned and dry goods, produce, beverages,
dairy products, paper goods, cleaning and other supplies and equipment to
approximately 25,500 restaurants. The Company's major customers are franchisers
and/or franchisees in the Pizza Hut, Taco Bell, KFC, Wendy's, Arby's, Burger
King and Dairy Queen restaurant systems.
On July 11, 1997, the Company acquired the U.S. and Canadian operations of
PFS. The effective date of the acquisition was June 11, 1997, the end of PFS'
second quarter. PFS distributed food products, supplies and equipment to
franchised and company-owned restaurants in the Pizza Hut, Taco Bell and KFC
systems, which were spun-off by PepsiCo, Inc. in October 1997 and are now
operating as TRICON Global Restaurants, Inc. ("Tricon"). As the acquisition has
been accounted for under the purchase method, twenty-eight weeks of PFS'
operating results are included in the Company's operating results for the year
ended December 27, 1997. Because of the relative sizes of the Company and PFS,
which had net sales of $1.3 billion and $3.4 billion, respectively, for fiscal
1996, the comparisons of operating results for 1997 to 1996 presented below are
significantly impacted by the PFS acquisition.
In April 1997, the Company began providing foodservice distribution to
approximately 2,600 Arby's restaurants under a three-year contract. While the
majority of Arby's restaurants are serviced directly by the Company, some are
serviced by other cooperating independent distributors.
On January 25, 1996, the Company acquired AmeriServ, a distributor of food
products and supplies to chain restaurants in such systems as Wendy's, Dairy
Queen, Burger King, KFC and Applebee's. Because of the relative sizes of the
Company and AmeriServ, which had net sales of $400.0 million and $939.0 million,
respectively, for fiscal 1995, the comparisons of operating results for 1996 to
1995 presented below are significantly impacted by the AmeriServ acquisition.
RECENT DEVELOPMENTS
On January 29, 1998, the Company entered into a definitive merger agreement
pursuant to which the Company will acquire all of the approximately 9.4 million
outstanding shares of ProSource for $15.00 per share in cash. The Company will
also refinance the existing indebtedness of ProSource of approximately $174
million. The transaction is expected to close in the second quarter of 1998.
ProSource, which reported sales of $3.9 billion for its fiscal year ended
December 27, 1997, is in the foodservice distribution business, specializing in
quick-service and casual dining chain restaurants. ProSource services
approximately 12,700 restaurants, principally in the United States, in such
chains as Burger King, Red Lobster, Olive Garden, TGI Friday's, Long John
Silver's, Chili's, Sonic, Chick-fil-A, Wendy's and TCBY. The Company will fund
the acquisition with cash and cash equivalents on hand as well as additional
capital expected from the accounts receivable sale program as discussed below.
Because of similarities in activities, the Company intends to consolidate
certain operations of ProSource with those of the Company. With opportunities to
combine certain warehousing, transportation and administrative activities, the
Company believes that significant cost efficiencies are achievable.
On March 6, 1998, NEHC consummated the Offering. Approximately $148.0
million of proceeds from the issuance were used to repurchase all of NEHC's
Existing Preferred Stock. The remaining proceeds will be used for general
corporate purposes, including contributions to the capital of the Company. See
Note 17 to historical financial statements of NEHC included elsewhere in this
Prospectus.
19
<PAGE> 20
RESULTS OF OPERATIONS
The following table presents certain financial information of NEHC,
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0%
Cost of goods sold............................ 89.8 89.9 90.1
Gross profit.................................. 10.2 10.1 9.9
Distribution, selling and administrative
expenses.................................... 8.8 8.5 8.3
Operating income before amortization of
intangible assets and impairment,
restructuring and other unusual charges..... 1.4 1.6 1.7
</TABLE>
Fiscal 1997 compared to Fiscal 1996
Net sales increased $2.1 billion, or 152% to $3.5 billion in 1997. The
acquisition of PFS accounted for $1.8 billion of the increase. The remaining
sales growth was largely due to the addition of service to Arby's.
Gross profit increased $208.5 million, or 148%, to $349.0 million in 1997
due primarily to the acquisition of PFS. The gross profit margin decreased from
10.1% in 1996 to 9.9% in 1997 reflecting a customer mix shift towards business
with relatively higher product costs.
Distribution, selling and administrative expenses increased $172.1 million,
or 146%, to $289.7 million in 1997 due primarily to the acquisition of PFS.
Distribution, selling and administrative expenses as a percent of net sales
decreased from 8.5% in 1996 to 8.3% in 1997. This change reflects the impact of
PFS' lower operating expense margin, as well as leveraging of the incremental
Arby's business.
Operating income before amortization of intangible assets and impairment,
restructuring and other unusual charges increased $36.4 million, or 159%, to
$59.3 million in 1997 due primarily to the acquisition of PFS. As a percent of
net sales, this income measure rose from 1.6% in 1996 to 1.7% in 1997. This
change was driven by the lower distribution, selling and administrative expense
as a percent of net sales as discussed above.
Amortization of intangible assets increased $12.0 million to $16.8 million
in 1997, reflecting the amortization of the intangible assets arising from the
allocation of the PFS purchase price.
Impairment, restructuring and other unusual charges in 1997 totaled $52.4
million. This charge includes (a) impairment of property, equipment and other
assets ($12.4 million), (b) restructuring (exit) costs for future lease
terminations and employee severance ($13.4 million), (c) costs incurred to date
to integrate the AmeriServ and PFS operations, and other unusual items ($13.0
million) and (d) bridge financing fees, commitment fees for the accounts
receivable sale program (see discussion below) and other one-time costs
associated with the acquisition of PFS ($13.6 million). The impairment charge
and the accrued restructuring (exit) costs reflect actions to be taken with
respect to the Company's existing facilities as a result of the acquisition of
PFS. During the third quarter of 1997, management performed an extensive review
of the existing and recently acquired PFS operations with the objective of
developing a business plan for the restructuring and consolidation of the
organizations. The business plan, which was approved by the Company's Board of
Directors late in the third quarter, identified a number of actions designed to
improve the efficiency and effectiveness of the combined entity's warehouse and
transportation network and operations support infrastructure. These actions,
which are expected to be completed by mid-1999, include construction of new
strategically located warehouse facilities, closures of certain existing
warehouse facilities and expansions of others, dispositions of property and
equipment, conversion of computer systems, reductions in workforce and
relocation of the Company's headquarters from Brookfield, Wisconsin to Dallas,
Texas. The costs incurred to date to integrate the AmeriServ and PFS operations
include start-up costs of new warehouse facilities and
20
<PAGE> 21
employee relocation and other expenses to realign the operations support
infrastructure. Ongoing integration costs will continue to be reported as a
separate component of operating expenses.
Interest expense net of interest income increased $37.6 million to $54.0
million in 1997, reflecting interest on additional debt primarily to finance the
acquisition of PFS.
Loss on sale of accounts receivable relates to an ongoing program
established by the Company to provide additional financing capacity. Under the
program, accounts receivable are sold to a consolidated, wholly owned special
purpose bankruptcy remote subsidiary, which in turn transfers the receivables to
a master trust. The loss on sale of accounts receivable of $6.8 million
represents the return to investors in certificates issued by the master trust.
In a transaction expected to be completed in April 1998, the current series of
certificates issued by the master trust will be restructured, resulting in
additional proceeds to the Company under the program of approximately $50
million. See Note 7 to the historical financial statements of NEHC included
elsewhere herein.
Provision for income taxes represents estimated current income taxes
payable. NEHC's net deferred tax assets are offset entirely by a valuation
allowance, reflecting a net operating loss carryforward position.
Extraordinary loss of $15.9 million in 1997 resulted from early
extinguishment of debt. This charge represents the unamortized balance of
deferred financing costs and unaccreted interest associated with previous credit
facilities and other indebtedness.
Net loss of $87.1 million in 1997 compared to net loss of $1.5 million in
1996 was driven by the impairment, restructuring and other unusual charges, as
well as the increased interest expense.
Fiscal 1996 compared to Fiscal 1995
Net sales increased $989.6 million, or 247%, to $1.4 billion in 1996 due
primarily to the AmeriServ acquisition. The increase in net sales was net of
certain account resignations made during fiscal 1996. The Company regularly
reviews the profitability of its account portfolio, and at times decides to
discontinue relationships with accounts deemed not sufficiently profitable for
the Company.
Gross profit increased $99.5 million, or 243%, to $140.5 million in 1996
due primarily to the AmeriServ acquisition. Gross margin declined slightly from
10.2% in 1995 to 10.1% in 1996, due to the slightly higher cost of products
purchased by customers added through the AmeriServ acquisition.
Distribution, selling and administrative expenses increased $82.2 million,
or 232%, to $117.6 million in 1996 due primarily to the AmeriServ acquisition.
Distribution, selling and administrative expenses as a percent of net sales
decreased from 8.8% in 1995 to 8.5% in 1996, due largely to a gain on sale of
property of $4.7 million.
Operating income before amortization of intangible assets increased $17.3
million, or 310%, to $22.9 million in 1996 due primarily to the AmeriServ
acquisition and the gain on sale of property. As a percent of net sales, this
income measure rose from 1.4% in 1995 to 1.6% in 1996, due primarily to the
operating expense margin change discussed above.
Amortization of intangible assets increased $3.6 million to $4.8 million in
1996 reflecting the amortization of intangible assets arising from the
allocation of the AmeriServ purchase price.
Interest expense net of interest income increased $12.5 million to $16.4
million in 1996, reflecting interest on additional debt primarily to finance the
acquisition of AmeriServ.
Provision for income taxes represents estimated current income taxes
payable. NEHC's net deferred tax assets are offset entirely by a valuation
allowance, reflecting a net operating loss carryforward position.
Net loss of $1.5 million in 1996 compared to net income of $.5 million in
1995 primarily reflected the increased interest expense, partially offset by the
operating income from the acquired AmeriServ business.
21
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
Capital resources are expected to be sufficient to support ongoing business
needs as well as activities to integrate acquisitions. These resources include
cash provided by operating activities, capital lease financing of capital
expenditures, cash and cash equivalents on hand and an available revolving
credit facility of approximately $137 million at March 15, 1998.
Fiscal 1997 compared to Fiscal 1996
Net cash provided by operating activities increased $46.0 million to $50.2
million in 1997. Net cash provided by operating activities in 1997 included
$13.6 million in cash outflows for bridge financing fees, commitment fees
related to the accounts receivable sale program and other indirect costs
associated with the PFS acquisition and $13.8 million of cash extraordinary
loss. Excluding these nonrecurring items, net cash provided by operating
activities was $77.5 million in 1997, compared to $4.2 million in 1996. This
increase reflects favorable working capital changes due primarily to timing of
payments as well as the cash earnings generated by the PFS operations, partially
offset by higher interest payments.
Unusual charges in 1997 also included $12.4 million in noncash impairment
of property, equipment and other assets and $13.4 million in restructuring
(exit) cost accruals for future lease terminations and employee severance. These
exit costs represent cash outflows in future periods.
Net cash used for investing activities increased $774.7 million to $880.1
million in 1997 reflecting the $841 million acquisition of PFS. Capital
expenditures increased $10.6 million to $23.3 million in 1997, driven by the
impact of the acquisition of PFS as well as additional warehouse capacity. Cash
capital expenditures (excluding capital leases) are expected to approximate $50
million in 1998, including spending related to new computer systems, warehouse
equipment purchases and leasehold improvements.
Net cash provided by financing activities in 1997 reflected debt and equity
financing transactions to support both the acquisition of PFS and future capital
needs and to refinance existing borrowings. The debt transactions included the
Company's issuance in July 1997 of $500 million of 10 1/8% Senior Subordinated
Notes due 2007 and $205 million in term loans. The term loans were repaid in
October 1997 with proceeds from the Company's issuance of $350 million of 8 7/8%
Senior Notes due 2006. In July 1997, NEHC received $55 million in proceeds upon
issuance of 12 3/8% Senior Discount Notes due 2007, and repaid subordinated
loans due 2006 with a carrying value of $26.8 million. Also included in net cash
provided by financing activities is $225 million in proceeds from the initial
sale under the Company's accounts receivable program described above and $115.0
million in proceeds from issuance of preferred stock and warrants by NEHC.
Fiscal 1996 compared to Fiscal 1995
Net cash provided by operating activities decreased $.4 million to $4.2
million in 1996. This change reflected an increase in working capital required
to service the customer base of the acquired AmeriServ business, partially
offset by an increase in cash earnings driven by the AmeriServ acquisition.
Net cash used for investing activities increased $99.8 million to $105.4
million in 1996 reflecting the $92.9 million acquisition of AmeriServ. Capital
expenditures increased $10.2 million to $12.7 million in 1996 as a result of
expenditures to modify and expand certain distribution centers.
Net cash provided by financing activities in 1996 reflected a net increase
of $116.7 million in borrowings under credit facilities and $30.0 million in
proceeds from issuance of subordinated loans and warrants to fund the
acquisition of AmeriServ and refinance existing borrowings.
SEASONALITY AND INFLATION
Historically, the Company's sales and operating results have reflected
seasonal variations. The Company experiences lower net sales and income from
operations in the first and fourth quarters, with the effects being more
pronounced in the first quarter. Additionally, the effect of these seasonal
variations is more pronounced in regions where winter weather is generally more
inclement.
22
<PAGE> 23
Inflation has not had a significant impact on the Company's operations.
Food price deflation could adversely affect the Company's profitability as a
significant portion of the Company's sales are at prices based on product cost
plus a percentage markup. The Company has not experienced significant adverse
effects of food price deflation in recent years.
COMPUTER SYSTEMS AND POTENTIAL YEAR 2000 ISSUE
An important component of the consolidation effort is the replacement of
most existing management information systems with a new software platform and
hardware configuration. The new computer system will complement the
consolidation effort by providing the flexibility to support the varied
processes of the combined business as well as allowing greater centralization of
support functions. The Company expects to incur significant internal staff costs
as well as significant consulting and other expenditures to implement the new
system. Another critical benefit of the new system is that it replaces
applications that are not Year 2000 compliant. The implementation of the new
system is underway and expected to be completed in mid-1999. Because of the Year
2000 issue, a delay in the implementation of the new system could have a
significant adverse impact on the Company's operations. Further, the Company is
working with vendors and customers who are at various stages in analyzing this
issue. There can be no assurance that the systems of other companies which the
Company's systems rely on or interface with will be timely converted. While the
cost to implement the new system is significant ($40-50 million), the
anticipated expenses to resolve Year 2000 issues with other peripheral systems
used by the Company are not expected to be significant.
23
<PAGE> 24
THE BUSINESS
NEHC is a Delaware corporation and the parent company of AmeriServe, a
Delaware corporation, and HWPI. AmeriServe accounts for substantially all of
NEHC's assets and NEHC conducts substantially all of its business through
AmeriServe. HWPI's sole operation consists of the ownership of two distribution
centers occupied by AmeriServe. AmeriServe operates in a single business
segment, as described below.
NEHC is a wholly owned subsidiary of Nebco Evans Distributors, Inc.
("NED"), which is a majority owned subsidiary (92.9%) of Holberg. Holberg is a
privately held diversified service company with subsidiaries operating within
the foodservice distribution and parking services industries in North America.
Holberg was formed in 1986 to acquire and manage foodservice distribution
businesses. Holberg acquired NEBCO in 1986. NEBCO acquired Evans in January 1990
and the combined company was renamed NEBCO EVANS Distribution, Inc. NEBCO EVANS
acquired L.L. Distribution Systems Inc. in 1990, Condon Supply Company in 1991
and AmeriServ, a distributor of food products and supplies to chain restaurants
in such systems as Wendy's, Dairy Queen, Burger King, KFC and Applebee's, in
January 1996. In conjunction with the AmeriServ acquisition, on January 25,
1996, NEHC was formed as a wholly-owned subsidiary of NED and acquired all of
the stock of NEBCO EVANS. In April 1997, NEBCO EVANS, a Nebraska corporation,
changed its name to AmeriServe Food Distribution, Inc.
AmeriServe is North America's largest systems foodservice distributor
specializing in distribution to chain restaurants. The Company is the primary
supplier to its customers of 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, cleaning supplies
and equipment. The Company currently serves over 30 different restaurant chains
and over 25,500 restaurant locations in North America. The Company has had
long-standing relationships with such leading restaurant concepts as Pizza Hut,
Taco Bell, KFC, Wendy's, Burger King, Dairy Queen, Subway and Applebee's.
On July 11, 1997, the Company completed the PFS Acquisition. PFS
distributed food products and supplies and restaurant equipment to franchised
and company-operated restaurants in the Pizza Hut, Taco Bell and KFC systems.
These systems were spun-off by PepsiCo in October 1997 and are now operating as
Tricon. In addition, in connection with the PFS Acquisition, the Company entered
into the Distribution Agreement whereby it became the exclusive distributor of
selected products until July 11, 2002 to the approximately 9,800 Pizza Hut, Taco
Bell and KFC restaurants in the continental United States owned by Pizza Hut,
Inc., Taco Bell Corp., Kentucky Fried Chicken Corporation and, Kentucky Fried
Chicken of California, Inc. (all subsidiaries of Tricon) and their subsidiaries
(the foregoing, collectively, the "Tricon Subsidiaries"), and previously
serviced by PFS. In October 1997, AmeriServe also acquired PFS de Mexico, S.A.
de C.V., a regional systems distributor based in Mexico City, Mexico for
approximately $8 million.
On July 11, 1997, in connection with the PFS Acquisition, the Company
issued and sold $500.0 million principal amount of its Senior Subordinated Notes
pursuant to the Senior Subordinated Note Indenture. The Senior Subordinated
Notes were sold pursuant to exemptions from, or in transactions not subject to,
the registration requirements of the Securities Act and applicable state
securities laws. On December 12, 1997, the Company consummated an offer to
exchange the Senior Subordinated Notes for new Senior Subordinated Notes, which
are registered under the Securities Act with terms substantially identical to
the Senior Subordinated Notes.
Also on July 11, 1997, NEHC issued and sold $100.4 million in aggregate
principal amount at maturity of its Senior Discount Notes pursuant to the Senior
Discount Note Indenture. The Senior Discount Notes were sold pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act. On December 12, 1997, NEHC consummated an
offer to exchange the Senior Discount Notes for new Senior Discount Notes, which
are registered under the Securities Act, with terms substantially identical to
the Senior Discount Notes.
On October 15, 1997, AmeriServe issued and sold $350.0 million in aggregate
principal amount of its Senior Notes pursuant to the Senior Note Indenture. The
Senior Notes were sold pursuant to an exemption from, or in transactions not
subject to, the registration requirements of the Securities Act. On December 12,
24
<PAGE> 25
1997, AmeriServe consummated an offer to exchange the Senior Notes for new
Senior Notes, which are registered under the Securities Act, with terms
substantially identical to the Senior Notes.
For further information about financings by NEHC and AmeriServe in
connection with the PFS Acquisition and subsequently, see Notes 6 and 7 to the
historical financial statements of NEHC included elsewhere in this Prospectus.
On December 28, 1997, pursuant to an Agreement and Plan of Merger by and
among Nebraska AmeriServe, AmeriServ, Post, Nebraska AmeriServe merged with and
into AmeriServ and Post merged with and into AmeriServ, in each case with
AmeriServ, a Delaware corporation, as the surviving corporation. In the mergers,
AmeriServ changed its name to AmeriServe Food Distribution, Inc. In the mergers,
all of the outstanding equity securities of AmeriServ and Post were cancelled,
and all of the outstanding equity securities of Nebraska AmeriServe were
converted into substantially identical securities of the Company. The Company
effected the mergers to rationalize its corporate organization and to reduce
various compliance and regulatory costs arising from having subsidiaries
incorporated in various jurisdictions and to move its jurisdiction of
incorporation from Nebraska to Delaware.
RECENT DEVELOPMENTS
On January 29, 1998, AmeriServe, Steamboat Acquisition Corp., a newly
formed Delaware corporation and wholly owned subsidiary of AmeriServe, and
ProSource, entered into the Merger Agreement pursuant to which AmeriServe will
acquire all outstanding shares of ProSource for cash. ProSource provides
foodservice distribution to restaurants in North America. ProSource also
provides purchasing and logistics services to the foodservice market in North
America. ProSource's 3,400 employees serve approximately 12,700 restaurants,
including Burger King, Chick-fil-A, Chili's, Long John Silver's, Olive Garden,
Red Lobster, Sonic, TCBY, TGI Friday's and Wendy's, from a nationwide network of
distribution centers and its Corporate Support Center in Coral Gables, Florida.
The ProSource Acquisition is subject to the approval of ProSource's stockholders
and certain other customary conditions. In connection with the Merger Agreement,
certain stockholders of ProSource have entered into a voting agreement with
AmeriServe pursuant to which such stockholders have agreed to vote their shares
in favor of the ProSource Acquisition. Such shares are sufficient to assure the
approval of the ProSource Acquisition. ProSource and AmeriServe have been
granted early termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
On March 6, 1998, NEHC consummated the Offering. Approximately $148.0
million of the net proceeds of the Offering was used by NEHC to repurchase all
of its Existing Preferred Stock. NEHC expects to use the remaining net proceeds
for general corporate purposes, including contributions to the capital of
AmeriServe.
FOODSERVICE DISTRIBUTION INDUSTRY
The foodservice distribution business involves the purchasing, receiving,
warehousing, marketing, selecting, loading and delivery of fresh and frozen meat
and poultry, seafood, frozen foods, canned and dry goods, fresh and preprocessed
produce, beverages, dairy products, paper goods, cleaning supplies, equipment
and other supplies from manufacturers and vendors to a broad range of
enterprises, including restaurants, cafeterias, nursing homes, hospitals, other
health care facilities and schools (but generally does not include supermarkets
and other retail grocery stores). The United States foodservice distribution
industry was estimated to generate $134 billion in sales in 1997.
Within the foodservice distribution industry, there are two primary types
of distributors: broadline foodservice distributors and specialist foodservice
distributors, such as the Company. 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: product specialists, which distribute a limited number of
products (such as produce or meat); market specialists,
25
<PAGE> 26
which distribute to one type of restaurant (such as Mexican); and systems
specialists, which focus on one type of customer (such as chain restaurants or
health care facilities).
The Company operates as a systems distributor that specializes in servicing
chain restaurants. Systems specialists, such as the Company, typically purchase
and inventory between 1,100 and 5,500 different food and foodrelated items and
often serve as a single source of supply for their customers. Broadline food
service distributors generally rely on sales representatives who must call on
customers regularly. Systems distributors, however, regularly process orders
electronically without the need for a sales representative's involvement.
BUSINESS STRATEGY
The Company's objective is to continue to grow net sales and EBITDA by
implementing the following key elements of its business strategy:
- Continue to Pursue Internal and External Growth Opportunities. The
Company intends to continue to grow through a combination of the
development of new business from existing customers, the addition of new
chains, international expansion and selective acquisitions.
Growth From Existing Chains. As the primary foodservice
distributor to most of its customers, the Company expects to benefit
from the continued growth of the domestic chain restaurant industry, the
fastest growing sector of the restaurant industry. From 1985 to 1995,
the chain restaurant segment experienced an approximately 7.4% net sales
CAGR, which exceeds the estimated 3.0% CAGR experienced by the overall
restaurant industry. The Company expects to realize growth from its
existing base of customers and concepts primarily due to: (i) increased
traffic within existing restaurants; (ii) the addition of new product
lines; (iii) new restaurant development and restaurant acquisitions by
existing customers; and (iv) the addition of new customers within
concepts currently serviced by the Company.
Growth Through Addition of New Chains. The Company continually
monitors the marketplace for opportunities to expand its portfolio of
customers and concepts. The Company targets (i) chains operating in
geographic areas where the Company could benefit from increased customer
density, further enhancing its operating leverage, and (ii) concepts
that could benefit from the Company's national presence and superior
customer service. In April 1997, the Company began operating under a
recently awarded three-year exclusive contract to provide foodservice
distribution to over 2,600 Arby's restaurants nationwide. In addition,
the Company plans to pursue additional export opportunities and further
expand its operations in international markets. After giving effect to
the PFS Acquisition, the Company exports products from its distribution
centers in the United States to approximately 65 foreign countries.
Pursue Selective Acquisition Opportunities. As North America's
largest systems foodservice distributor serving chain restaurants, the
Company believes it is well positioned to capitalize on the
consolidation taking place in the fragmented foodservice distribution
industry. The number of foodservice distributors has decreased from
approximately 3,600 in 1985 to approximately 3,000 in 1997, with a
significant increase in the market shares of the largest distributors.
The Company intends to continue to make strategic fold-in acquisitions
in order to augment its operations in existing markets, enhance customer
density and further reduce costs, and may also make larger acquisitions
as appropriate opportunities arise.
- Capitalize on the Benefits of the PFS and ProSource
Acquisitions. Management believes that combining the operations of
AmeriServe, PFS and ProSource will present it with opportunities to
eliminate duplicative costs and realign the Company's distribution
center network to effectively capitalize on economies of scale and the
benefits of higher customer density. Management has identified
approximately $25 million of annual cost savings as a result of the PFS
Acquisition, which it believes it can achieve through the elimination of
general and administrative expenses and the consolidation of
distribution centers in certain markets. In connection with the PFS
Acquisition, the Company expects to reduce the number of current
distribution centers from 40 to 25. In addition, the
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<PAGE> 27
five-year Distribution Agreement will further secure the Company's
customer base and provide for a long-term contract covering
approximately 40% of the Company's pro forma 1997 sales (assuming the
inclusion of PFS and Post for the full year).
- Continue to Maximize Operating Leverage. As the largest systems
foodservice distributor in North America, the Company pursues a low-cost
operating strategy based primarily on achieving economies of scale in
the areas of warehousing, transportation, general and administrative
functions and management information systems. The Company generates
significant operating leverage by utilizing large distribution centers
strategically within each of its geographic markets, enabling it to: (i)
service multiple concepts from the same warehouse; (ii) maximize the
density of restaurants served from each facility; (iii) optimize
delivery routes; (iv) invest in advanced technology, which increases
operational efficiencies and enhances customer service; and (v) manage
inventory more efficiently.
- Continue to Provide Superior Customer Service. The Company believes it
enjoys a reputation for providing consistent, high quality service based
on its customer focus, its commitment to service excellence and the
depth of its management team. The Company has successfully implemented a
decentralized management structure that enables the Company to respond
quickly and flexibly to local customer needs. The Company typically
interacts with its customers on a daily basis, and generally makes
multiple deliveries to each restaurant each week. The Company measures
daily its service performance by continuously monitoring the accuracy
and promptness of deliveries. The Company's advanced computer systems
are linked to many of its customers' locations, enabling customers to
communicate electronically with the Company, thereby reducing the
Company's administrative costs, and enabling it to more efficiently
respond to customers' needs. In addition, the Company's national
presence allows it to provide consistent and reliable service to
national restaurant concepts with geographically diverse locations.
CUSTOMERS
The Company's customers are generally individual franchisees or
franchiser-owned restaurants of chain restaurant concepts. The Company's
customers include over 30 restaurant concepts with over 25,500 restaurant
locations prior to the ProSource Acquisition. The corporate owner or franchiser
of the restaurant concept generally reserves the right to designate one or more
approved foodservice distributors within a geographic region, and each
franchisee is typically allowed to select its foodservice distributor from such
approved list.
Including sales to franchiser-owned and franchised restaurants, the
Company's sales to the following restaurant concepts as an approximate
percentage of total pro forma sales (including PFS for all of 1997 and Post for
all of 1996 and 1997 but without giving effect to the ProSource Acquisition)
were:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Pizza Hut................................................... -- 28%
Taco Bell................................................... -- 28%
KFC......................................................... 9% 13%
Wendy's..................................................... 35% 11%
Burger King................................................. 17% 5%
</TABLE>
On a pro forma basis, assuming the inclusion of PFS and Post for the full
year, restaurants owned by the Tricon Subsidiaries would have accounted for
approximately 40% of the Company's 1997 sales. No other customer accounted for
more than 10% of 1997 sales on either a pro forma or reported basis. One
customer, a franchiser, accounted for approximately 11% of 1996 net sales on a
reported basis.
The Distribution Agreement entered into with the Tricon Subsidiaries
provides the Company with exclusive distribution rights for certain restaurant
products to approximately 9,800 Pizza Hut, Taco Bell and KFC restaurants for a
five-year term expiring on July 11, 2002. Gross profit and net pretax profit on
certain sales to Pizza Hut under the Distribution Agreement are limited. Tricon
is actively engaged in the sale to franchisees of Taco Bell and Pizza Hut
restaurants covered by the Distribution Agreement. While the
27
<PAGE> 28
Distribution Agreement provides that prior to such sales, such franchisees will
enter into distribution agreements on substantially similar terms, there can be
no assurance that the transition from company-operated to franchised status will
not affect the Company's results. In addition, the Company's future results may
be impacted by the planned closure of poorly performing Tricon Subsidiaries'
restaurants announced by Tricon in December 1997.
In January 1997, the Company entered into a three-year agreement, which
became effective April 1997, to become the primary supplier to approximately
2,600 Arby's restaurants nationwide. The Company services these restaurants
together with three other cooperating distributors. The cooperating distributors
currently serve Arby's restaurants located outside the Company's pre-PFS
Acquisition primary service territories.
OPERATIONS AND DISTRIBUTION
The Company's operations generally can be categorized into three business
processes: product replenishment, product storage and order fulfillment. Product
replenishment involves the management of logistics from the vendors through the
delivery of products to the Company's distribution centers. Product storage
involves the warehousing and rotation of temperature-controlled inventory at the
distribution centers pending sale to customers. Order fulfillment involves all
activities from customer order placement and selecting and loading through
delivery from the distribution centers to the restaurant location. Supporting
these processes is the Company's nationwide network of 40 distribution centers,
its fleet of approximately 900 tractors and 1,200 trailers and its management
information systems. Substantially all of the Company's products are purchased,
stored and delivered in sealed cases which the Company does not open or alter.
In connection with the PFS Acquisition, the Company expects to reduce the number
of current distribution centers from 40 to 25. In order to accomplish this
consolidation, the Company will operate its business in new and larger
facilities.
Product Replenishment
While the Company is responsible for purchasing products to be delivered to
its customers, chain restaurants typically approve the vendors and negotiate the
price for their proprietary products. The Company determines the distribution
centers that 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 distribution centers
selected to serve a customer are based on the location of the restaurants to be
serviced.
Product Storage
The Company currently warehouses approximately 1,100 to 5,500 stock keeping
units ("SKU's") (excluding the redistribution and equipment distribution
centers) for its customers at 40 facilities in 33 metropolitan areas. Upon
receipt of the product at the distribution centers, the product is inspected and
stored on pallets, in racks or in bulk in the appropriate temperature-controlled
environment. Products stored at the distribution centers are generally not
reserved for a specific customer. Rather, customer orders are filled from the
common inventory at the relevant distribution center. The Company's computer
systems continuously monitor inventory levels in an effort to maintain optimal
levels, taking into account required service levels, buying opportunities and
capital requirements. Each distribution center contains ambient, refrigerated
(including cool docks) and frozen space, as well as offices for operations,
sales and customer service personnel and a computer network, accessing systems
at other distribution centers and the Company's corporate support centers.
A majority of the Company's distribution centers are between 100,000 to
200,000 square feet with approximately 20% refrigerated storage space, 30%
frozen storage space and 50% dry storage area. The Company uses sophisticated
logistics programs to strategically locate new distribution centers in areas
near key highways with specific consideration given to the proximity of
customers and suppliers. The Company also employs consultants in distribution
center layout and product flow to design the distribution center with the
objective of maximizing product throughput. The Company estimates that each
distribution center can effectively service customers within a 350 mile radius,
although the Company's objective is to service
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<PAGE> 29
customers within a 150 mile radius. The Company expects to begin operations at a
new distribution center in Orlando, Florida (269,000 sq. ft.) in April 1998. The
Company expects to begin operations at a new distribution center in Denver,
Colorado (161,000 sq. ft.) in September 1998.
Order Fulfillment
The Company places a significant emphasis on providing high quality service
in order fulfillment. By providing high quality service and reliability, NEHC
believes that the Company 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 uses its management information systems to continually
update routes and delivery times with each customer in order to lower
fulfillment costs. Product orders are placed with the Company one to three times
a week either through the Company's customer service representatives or through
electronic transmission using specially designed software. Many of the
restaurants served by the Company transmit product orders electronically.
Once ordered by the customer, products are picked and labeled at each
distribution center, and the products are generally placed on a pallet for the
loading of outbound trailers. Delivery routes are scheduled to both fully
utilize the trailer's load capacity and minimize the number of miles driven in
order to exploit the cost benefit of customer density.
Fleet
The Company operates a fleet of approximately 900 tractors and 1,200
trailers. The Company leases approximately 300 of the tractors from General
Electric Capital Corp. pursuant to full-service leases that include maintenance,
licensing and fuel tax reporting. The Company owns approximately 600 tractors
and approximately 800 trailers. The remaining trailers are leased under similar
full-service leases from a variety of leasing companies. Lease terms average six
years for new tractors and nine years for new trailers.
Most of the Company's tractors contain onboard 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. Data from the onboard computers are
loaded into the routing software after each route in order to continually
optimize the route structure. 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.
Management Information Systems
AmeriServe and the former PFS business currently operate with different
computer systems. AmeriServe utilizes a variety of personal computers and IBM
AS/400-based software applications. PFS also operates with a variety of
applications, the core of which are mainframe-based. Both companies have
invested significantly in their systems, and both consider their systems to be
among the leaders in the industry. Programs in use include various customized
and special-purpose applications, such as warehouse management tools, remote
order entry, automated replenishment, delivery routing, and onboard computers
for delivery trucks.
The Company is in the process of replacing its core applications with
software from J.D. Edwards in order to integrate the systems of AmeriServe and
PFS. This conversion process is expected to be substantially completed by
mid-1999 and will result in all of the Company's distribution centers operating
with the same computer systems and the same operating policies and practices.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Computer Systems and Potential Year 2000 Issues."
Procurement, Logistics and Re-Distribution
The Company procures a wide range of food, paper and cleaning products for
ultimate distribution to its chain restaurant customers. These products include
fresh and frozen meat and poultry, seafood, frozen foods, canned and dry goods,
fresh and preprocessed produce, beverages, dairy products, paper goods, cleaning
supplies and equipment. The Company also operates two re-distribution centers
for the purpose of purchasing
29
<PAGE> 30
slow-moving inventory items and consolidating these items into full truckload
shipments to the Company's distribution centers nationally, as well as to
customers outside the Company. The re-distribution division has been approved as
a national consolidation point for Burger King, Dairy Queen, Arby's, KFC and
other chains. The Company also offers re-distribution services to customers
outside of the continental United States.
The Company operates a freight logistics division for the purpose of
achieving the lowest landed costs to its distribution centers through the review
of purchase orders generated at the various distribution centers. The Company
generates freight savings through leveraged purchasing, with key carriers
operating in defined traffic lanes. This division also provides logistical
services to a substantial number of customers outside of the Company on a fee
basis. Current inbound purchase orders controlled by this division exceed 2,500
truckloads monthly. Further, the Company operates a nationally registered common
carrier fleet of temperature-controlled tractor-trailer units. This division
serves as a "core-carrier" to several national food manufacturers and is an
integral part of the Company's inbound freight logistics initiative.
MARKETING AND CUSTOMER SERVICE
The Company employs national and regional marketing representatives who
service existing customers, as well as focus on developing new customers from
among other restaurant concepts. Additionally, each division president and
certain members of senior management are active in maintaining relationships
with current and potential customers. The Company compensates its sales and
marketing representatives under various compensation plans, which combine a base
pay with an incentive bonus.
The Company's customer service activities are highly customized to the
unique needs of each customer. Each customer has a dedicated account manager who
is responsible for overseeing all of a customer's needs and coordinating the
services provided to such customer. In order to manage problem resolution, the
Company tracks customer calls to ensure that appropriate action and follow-up
occur. The Company's representatives travel frequently to the customer's
restaurant or office for regularly scheduled meetings and key project reviews to
ensure close coordination between the Company and the customer.
A key component of the Company's marketing plan is the use of customized
information systems to improve customer service, and to assist the customer in
the daily operation of its business. The Company utilizes on-line order entry
inventory systems, which permit the Company to simultaneously take orders,
compare the order to previous orders, track and replenish inventory and schedule
the delivery. In addition to placing orders, certain customers may also access
their own accounts, and inventory information, and print copies of order
acknowledgments, invoices and account statements. This electronic data
interchange system provides certain customers with access to the Company's
information systems at their convenience and enables the Company to accept
orders 24 hours a day, seven days a week. The electronic data interchange not
only allows for greater efficiencies, but also produces reduced administrative
expenses and fewer ordering errors.
COMPETITION
The foodservice distribution industry is highly competitive. Competitors
include other systems distribution companies focused on the chain restaurants
and captive, multi-unit franchiser-owned distribution companies and broadline
foodservice distributors.
The Company competes directly with other systems specialists that target
chain restaurant concepts. The Company's principal competitors are ProSource,
Inc., Sysco Corporation's Sygma division, Marriott Distribution Services Inc.,
Alliant Foodservice Inc., Performance Food Group, U.S. Foodservice (formerly JP
Foodservice), and MBM Corp. The Company also competes with regional and local
distributors in the foodservice industry, principally for business from
franchisee-owned chain restaurants. National and regional chain restaurant
concepts typically receive service from one or more systems distributors.
Distributors are appointed or approved to service these concepts and/or their
franchisees on either a national or regional basis. NEHC believes that
distributors in the foodservice industry compete on the basis of quality,
reliability of service and price. Because a number of the Company's customers
prefer a distributor that is able to service
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<PAGE> 31
their restaurants on a nationwide basis, NEHC believes that the Company is in a
strong position to retain and compete for national chain restaurant customers
and concepts.
Opportunities for growth by gaining access to new chains typically occur at
the expense of a competitor and are awarded in a bid or negotiation situation,
in which large blocks of business are awarded to the most efficient distributor.
NEHC believes that a key competitive advantage is continuously pursuing a
strategy of being the low-cost provider of distribution and other value-added
services within the industry.
LITIGATION
From time to time NEHC and/or the Company are involved in litigation
relating to claims arising out of their normal business operations. Neither NEHC
nor the Company is currently engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse effect on NEHC or
the Company.
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 believes
that it is in compliance, in all material respects, with all such laws,
regulations and codes. 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.
ENVIRONMENTAL MATTERS
Under applicable environmental laws, the Company and/or HWPI may be
responsible for remediation of environmental conditions and may be subject to
associated liabilities (including liabilities resulting from lawsuits brought by
private litigants) relating to its distribution centers and the land on which
its distribution centers are situated, regardless of whether the Company and/or
HWPI leases or owns the land in question and regardless of whether such
environmental conditions were created by the Company or by a prior owner or
tenant.
NEHC believes the Company and HWPI currently conduct their respective
businesses, and in the past have conducted their respective businesses, in
substantial compliance with applicable environmental laws and regulations. In
addition, compliance with federal, state and local laws enacted for protection
of the environment has had no material effect on either the Company or HWPI.
However, there can be no assurance that environmental conditions relating to
prior, existing or future distribution centers or distribution center sites will
not have a material adverse effect on the Company or HWPI.
In connection with the PFS Acquisition, the Company reviewed existing
reports and retained environmental consultants to conduct an environmental audit
of PFS's operations in order to identify conditions that could have a material
adverse effect on the Company. The Company has obtained final reports on the
results of such audit with regard to PFS, which concluded that there are no
environmental matters that are likely to have a material adverse effect on the
Company.
EMPLOYEES
NEHC has no paid employees. As of December 27, 1997, the Company had
approximately 5,000 full-time employees, approximately 500 of whom were employed
in corporate support functions and approximately 4,500 of whom were warehouse,
transportation, sales, and administrative staff at the distribution centers. As
of such date, approximately 275 of the Company's employees were covered by two
collective bargaining agreements. One such collective bargaining agreement,
covering approximately 200 employees and which expired in January 1998 is in the
process of being renewed. The other such collective bargaining agreement,
covering approximately 75 employees, will expire at the end of November 1998.
The Company has not
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<PAGE> 32
experienced any labor disputes or work stoppages and believes that its
relationships with its employees are good.
FACILITIES
The Company currently operates 40 distribution centers located throughout
the United States, Canada and Mexico and is constructing two new distribution
centers as follows:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET LEASED/OWNED
-------- ----------- ------------
<S> <C> <C>
Albany, NY................................................. 104,000 Leased
Albuquerque, NM............................................ 65,000 Leased
Arlington, TX.............................................. 105,600 Leased
Canton, MS................................................. 80,500 Leased
Charlotte, NC.............................................. 158,500 Owned
Charlotte, NC.............................................. 91,771 Leased
Columbus, OH............................................... 143,903 Leased
Denver, CO................................................. 119,000 Leased
Denver, CO................................................. 74,360 Leased
Denver, CO(2).............................................. 165,000 Leased
Fort Worth, TX............................................. 113,000 Leased
Gainesville, FL............................................ 53,000 Leased
Grand Rapids, MI........................................... 180,000 Owned
Gulfport, MS............................................... 63,792 Leased
Hebron, KY................................................. 124,000 Leased
Houston, TX................................................ 69,800 Leased
Indianapolis, IN........................................... 115,200 Leased
Indianapolis, IN(3)........................................ 180,100 Leased
Jacksonville, FL........................................... 119,600 Leased
Jonesboro, GA.............................................. 124,076 Leased
Lemont, IL(1).............................................. 105,000 Leased
Lenexa, KS................................................. 105,600 Leased
Madison, WI(1)............................................. 123,000 Leased
Manassas, VA............................................... 100,337 Owned
Memphis, TN................................................ 70,750 Leased
Mexico City, MX............................................ 35,000 Owned
Milwaukee, WI.............................................. 123,185 Leased
Mississauga, Ontario....................................... 53,487 Leased
Mt. Holly, NJ.............................................. 126,637 Leased
Norcross, GA............................................... 169,900 Owned
Novi, MI................................................... 72,830 Leased
Oklahoma City, OK(4)....................................... 52,500 Leased
Omaha, NE.................................................. 105,000 Owned
Ontario, CA................................................ 201,454 Leased
Orlando, FL(2)............................................. 269,000 Leased
Orlando, FL................................................ 115,240 Leased
Plymouth, MN............................................... 104,200 Leased
Portland, OR............................................... 81,815 Leased
Salt Lake City, UT......................................... 31,000 Leased
Stockton, CA............................................... 105,000 Leased
</TABLE>
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<PAGE> 33
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET LEASED/OWNED
-------- ----------- ------------
<S> <C> <C>
Tempe, AZ.................................................. 67,660 Leased
Waukesha, WI(5)............................................ 196,000 Leased
</TABLE>
- ---------------
(1) Re-distribution facilities.
(2) Under construction.
(3) Restaurant equipment distribution center.
(4) This facility is scheduled to close in April, 1998.
(5) NEHC capital lease.
Within four years of December 27, 1997, two of the Company's distribution
center leases are due to expire. NEHC believes that the Company will be able to
renew expiring leases at reasonable rates in the future. In addition, in
connection with the PFS Acquisition, the Company expects to reduce the number of
current distribution centers from 40 to 25. In order to accomplish this
integration and consolidation, the Company will operate its business in expanded
or new and larger facilities. NEHC believes that the Company's existing
distribution centers, together with planned modifications, expansions and new
distribution centers provide sufficient space to support the Company's expected
expansion over the next several years.
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<PAGE> 34
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of March 27, 1998,
with respect to each person who is an executive officer, a significant employee,
or director of NEHC:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
John V. Holten................... 41 Director, Chairman and Chief Executive Officer
John R. Evans.................... 58 Director and Vice Chairman
Raymond E. Marshall.............. 48 Director, President and Treasurer
Daniel W. Crippen................ 46 Director and Executive Vice President
Gunnar E. Klintberg.............. 49 Director and Assistant Secretary
A. Petter Ostberg................ 36 Vice President
Diana M. Moog.................... 38 Senior Vice President and Chief Financial Officer
Leif F. Onarheim................. 62 Director
Peter T. Grauer.................. 51 Director
Benoit Jamar..................... 42 Director
</TABLE>
John V. Holten. Mr. Holten has served as Chairman and Chief Executive
Officer of Holberg since its inception in 1986 and of NEHC since its inception
in 1996. Mr. Holten was Managing Director of DnC Capital Corporation, a merchant
banking firm in New York City, from 1984 to 1986. Mr. Holten has been a member
of the NEHC Board since 1996, and the AmeriServe Board since 1986.
John R. Evans. Mr. Evans became President of Evans in 1971, and was named
Chief Executive Officer of the combined company when Evans merged with NEBCO in
1990. Mr. Evans serves on the Board of Directors of each of M&I Northern Bank,
Aerial Company, Inc., and AFI Inc. Mr. Evans has been an officer of NEHC and a
member of the NEHC Board since 1996, and an officer of AmeriServe and a member
of its Board since 1990.
Raymond E. Marshall. Mr. Marshall has 28 years of foodservice distribution
experience, including 24 years with AmeriServe or its predecessors. Mr. Marshall
served as President and Chief Executive Officer of NEBCO from 1980 to 1989. Mr.
Marshall has served as President of AmeriServe since 1990. Mr. Marshall serves
on the Board of Directors of Independent Distributors of America ("IDA"). Mr.
Marshall has been an officer of NEHC and a member of the NEHC Board since 1996,
and a member of the AmeriServe Board since 1986.
Daniel W. Crippen. Mr. Crippen has spent the last 21 years in the
foodservice distribution business beginning with The Harry H. Post Company. In
addition, Mr. Crippen was appointed to his present position as Executive Vice
President of AmeriServe in 1997. He is Chairman of the Board of Directors of
IDA. Mr. Crippen has been an officer of NEHC and a member of the NEHC Board
since 1997, and an officer of AmeriServe and a member of its Board since 1997.
Gunnar E. Klintberg. Mr. Klintberg has served as Vice Chairman of Holberg
since its inception in 1986. Mr. Klintberg was a Managing Partner of DnC Capital
Corporation, a merchant banking firm in New York City, from 1983 to 1986. Mr.
Klintberg has been an officer of NEHC and a member of the NEHC Board since 1996,
and an officer of AmeriServe and its Board since 1986.
A. Petter Ostberg. Mr. Ostberg was appointed Vice President of NEHC in
1996. He joined Holberg in 1994 and was appointed as Senior Vice President and
Chief Financial Officer of Holberg in 1997. Prior to joining Holberg, Mr.
Ostberg held various finance positions from 1990 to 1994 with New York Cruise
Lines, Inc., including Group Vice President, Treasurer and Secretary.
Diana M. Moog. Ms. Moog was named Sr. Vice President and Chief Financial
Officer in January 1998. Ms. Moog joined AmeriServe as Senior Vice President and
Treasurer at the time of its acquisition of PFS in
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<PAGE> 35
1997. Previously, she had served as Vice President, Controller of PFS. Ms. Moog
had held various positions at PepsiCo, Inc. from 1989 to 1997 including Manager,
Financial Reporting for PepsiCo and Assistant Controller, Frito-Lay.
Leif F. Onarheim. In 1996, Mr. Onarheim was elected chairman of NHO, the
country's largest association of business and industry. From 1992 to 1997, Mr.
Onarheim served as President of Norway's largest business school and was Vice
Chairman of the Board of the Norwegian School of Management. From 1980 to 1992
Mr. Onarheim served as CEO of Nora Industries. When Nora merged with Orkla
Borregaard to form the Orkla Group in 1991, Onarheim briefly served as the new
group's Chairman. The Orkla Group is one of Scandinavia's largest branded goods
company with production facilities in the US, Germany, Poland and England. He
serves as Chairman of the Board of Directors of H. Aschehoug & Co. publishers,
Norwegian Fair, Netcom ASA and Narvesen ASA, Vice Chairman of Saga Petroleum ASA
and is a board member of Wilhelm Wihelmsen Ltd. (shipping). He has been a
director of NEHC since 1996, a director of AmeriServe since 1986, and a director
of Holberg since 1997.
Peter T. Grauer. Mr. Grauer has been a Managing Director of Donaldson,
Lufkin & Jenrette Merchant Banking, Inc. since September 1992. Mr. Grauer serves
on the Board of Directors of each of Doane Products Co. and Total Renal Care,
Inc. Mr. Grauer has been a member of the NEHC Board since January 1996, and the
AmeriServe Board since January 1996.
Benoit Jamar. Mr. Jamar is a Managing Director in the Mergers &
Acquisitions group at DLJSC. He joined DLJSC in 1989. Mr. Jamar has been a
member of the NEHC Board since 1997, and the AmeriServe Board since 1997.
The directors of NEHC are elected annually and each serves until his
successor has been elected and qualified, or until his or her death, resignation
or removal. The officers of NEHC are elected by the Board of Directors, and each
serves until his or her successor is elected and qualified, or until his or her
death, resignation or removal.
EXECUTIVE COMPENSATION
NEHC has no paid employees. The following table sets forth the information
for the three most recently completed fiscal years with regard to compensation
for services rendered in all capacities to the Company by the Chief Executive
Officer and the other four most highly compensated executive officers of the
Company (collectively, the "Named Executive Officers"). Information set forth in
the table reflects compensation earned by such individuals for services with the
Company or its respective subsidiaries.
35
<PAGE> 36
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER
ANNUAL ALL OTHER
FISCAL SALARY BONUS COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) ($) ($)(2)
--------------------------- ------ ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
John V. Holten....................... 1997 -- -- -- --
Chairman and Chief Executive
Officer 1996 -- -- -- --
1995 -- -- -- --
Raymond E. Marshall.................. 1997 301,375 500,000(3) 191,021(4) 11,600
President and Treasurer 1996 273,793 265,000(5) -- 11,600
1995 212,492 109,200 -- 10,400
Daniel W. Crippen.................... 1997 283,942 500,000(3) -- 9,659
Executive Vice President 1996 246,764 265,076 -- 9,659
1995 202,538 129,464 -- 9,788
Donald J. Rogers(6).................. 1997 190,811 350,000(3) 63,662(4) 11,600
Chief Financial Officer 1996 158,629 125,000(5) 33,000(7) 11,600
and Vice President 1995 115,671 45,000 33,000(7) 10,400
John R. Evans........................ 1997 260,000 -- -- 4,800
Vice Chairman 1996 263,000 -- -- 4,800
1995 262,832 -- -- 4,800
</TABLE>
- ---------------
(1) The amounts shown in this column include amounts contributed by the Company
to its 401(k) plan under a contribution matching program.
(2) The amounts shown in this column reflect premiums paid by the Company on
behalf of Named Executive Officers for whole life insurance policies and
annuities to which the Named Executive Officers are entitled to the cash
surrender value.
(3) These amounts include discretionary cash bonuses paid by AmeriServe for
services provided during 1997 in connection with the PFS acquisition.
(4) These amounts were paid to Messrs. Marshall and Rogers to reimburse
relocation expenses.
(5) These amounts include discretionary cash bonuses paid by Holberg for
services provided during 1995 in connection with the acquisition of
AmeriServ.
(6) As of January 5, 1998, Mr. Rogers is no longer an employee of NEHC or the
Company.
(7) This amount reflects forgiveness by the Company of a portion of a $100,000
relocation assistance loan.
The Company pays an annual management fee to Holberg for management services.
The amount of this fee is not set or allocated with respect to any particular
employee's compensation from Holberg.
DIRECTOR COMPENSATION
Directors of NEHC do not receive compensation for serving on NEHC's Board
of Directors or any committee thereof.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a compensation committee in fiscal 1997. Executive
officer compensation is determined by the Board of Directors of the Company. The
Company intends to form a compensation committee in fiscal 1998. The members of
such committee have not yet been determined. During fiscal 1997, no executive
officer of NEHC served as a member of the compensation committee of another
entity.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Mr. Marshall's current employment agreement with the Company provides for a
three year term, scheduled to lapse on January 1, 1999, with default annual
renewals, and an annual base salary of $285,000,
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<PAGE> 37
which will increase for 1998 to $315,000, plus an annual bonus to be determined
by the Board of Directors after considering the Company's Reported Operating
Profit (as defined in the employment agreement), plus participation in any
employee benefit plans sponsored by the Company. Mr. Marshall agrees not to
disclose confidential information for so long as such information remains
competitively sensitive. During the term of the employment agreement and for one
year after its termination, Mr. Marshall agrees not to render services to, or
have any ownership interest in, any business which is competitive with the
Company. Mr. Marshall's employment agreement does not contain any change of
control provisions.
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<PAGE> 38
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 27, 1998,
regarding the beneficial ownership of the common stock of NEHC by (i) each
person known to NEHC to own beneficially more than 5% of any class of the common
stock of NEHC, (ii) each director of NEHC, (iii) each Named Executive Officer of
NEHC and (iv) all executive officers and directors of NEHC as a group. All
information with respect to beneficial ownership has been furnished to NEHC by
the respective stockholders of NEHC. 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.
<TABLE>
<CAPTION>
PERCENT
AMOUNT AND NATURE OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP OUTSTANDING
---------------- ----------------------- -----------
<S> <C> <C>
NED.......................................... 6,508 shares of Class A Common Stock 100%(+)
1,733 shares of Class B Common Stock 100%(+)
Orkla........................................ (1)
DLJ Merchant Banking Partners, L.P. and Warrants to purchase 3,540 shares of
certain of its affiliates ("DLJMB")........ Class A Common Stock 30%(++)
Warrants to purchase 370 shares of
Class B Common Stock 30%(++)
Holberg...................................... Warrants to purchase 753 shares of
Class A Common Stock 6%(++)
John V. Holten............................... (2)
Daniel W. Crippen............................ (3)
John R. Evans................................ --
Peter T. Grauer.............................. (4)
Benoit Jamar................................. (4)
Gunnar E. Klintberg.......................... (5)
Raymond E. Marshall.......................... (6)
Leif F. Onarheim............................. (7)
Diana M. Moog................................ --
</TABLE>
- ---------------
(+) Computed with respect to the currently outstanding shares of Class A Common
Stock of NEHC (the "Class A Common Stock") and Class B Common Stock of NEHC
(the "Class B Common Stock"), and without taking into account any options or
convertible interests of NEHC.
(++) Computed with respect to the currently outstanding shares of Class A Common
Stock and Class B Common Stock of NEHC and the warrants held by DLJMB and
Holberg, but without taking into account any other options or convertible
interests of NEHC. On January 6, 1998, Holberg consummated a repurchase
from DLJMB and affiliates of (i) 49% of the Junior Preferred Stock acquired
by DLJMB and affiliates in connection with the PFS Acquisition (see Item
13. "Certain Relationships and Related Party Transactions"), and (ii)
warrants conferring the right to acquire 753.30 shares of the Class A
Common Stock.
(1) Orkla owns approximately 7% of the outstanding common stock of NED, and has
an additional interest in the common stock of NED of approximately 8%
through certain warrants to purchase such common stock. In addition, Orkla
owns approximately 30% of the outstanding common stock of Holberg (which
itself owns the balance of the common stock of NED not owned directly by
Orkla and has an additional interest in the common stock of NED of
approximately 75% through certain preferred stock convertible into common
stock), and an additional interest in the common stock of Holberg of
approximately 17% through certain preferred stock convertible into common
stock. The warrant and convertible interests described in this note have
been computed based upon the outstanding common shares of NED and Holberg,
without taking into account any options or convertible interests of NED or
Holberg. Orkla also has certain contractual rights as to NED and NEHC
pursuant to an Amended and Restated Investors Agreement, dated as of July
11, 1997, among DLJMB, NEHC, NED, Holberg, Holberg Incorporated
("Incorporated") and Orkla.
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(2) Mr. Holten owns all of the outstanding common stock of Incorporated,
corporate parent of Holberg, which entity owns approximately 70% of the
outstanding common stock of Holberg, and an additional interest in the
common stock of Holberg of approximately 25% through certain preferred stock
convertible into common stock. As noted above, Holberg owns approximately
93% of the outstanding NED common stock and has an additional interest
through certain preferred stock convertible into common stock. The
convertible interests described in this note have been computed based upon
the outstanding common shares of Holberg and NED, without taking into
account any options or convertible interests of Holberg or NED.
(3) Mr. Crippen owns shares of a series of convertible preferred stock of NEHC
that, if converted, would result in his ownership of approximately 1.6% of
the outstanding common stock of NEHC, taking into account the actually
outstanding shares and the warrants held by DLJMB.
(4) Messrs. Grauer and Jamar are Managing Directors of DLJSC, and may be
considered to have beneficial ownership of the interests of DLJMB in the
Company and NEHC. Messrs. Grauer and Jamar disclaim such beneficial
ownership.
(5) Mr. Klintberg is an officer and director of NED and certain of its corporate
parents, but disclaims beneficial ownership of any of the shares owned by
NED.
(6) Mr. Marshall has an interest of 5% in NED through certain options that have
been granted to him by NED. Such interest has been computed based upon the
outstanding common shares of NED, without taking into account any options or
convertible interests of NED.
(7) Mr. Onarheim has an interest of less than 1% in NED through certain options
that have been granted to him by NED. Such interest has been computed based
upon the outstanding common shares of NED, without taking into account any
options or convertible interests of NED. Mr. Onarheim has also had a long
affiliation with Orkla and acts as Orkla's representative on the Board of
Directors of the Company and NEHC, but disclaims beneficial ownership of any
interests held by Orkla.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
DLJMB, an affiliate of DLJSC, and certain of its affiliates beneficially
own approximately 30% of the common stock of NEHC. Mr. Grauer, a principal of
DLJSC, is a member of the Board of Directors of NEHC and the Company; Mr. Jamar,
a principal of DLJSC, is a member of the Board of Directors of NEHC and the
Company. Holberg indirectly owns a majority of the issued and outstanding
capital stock of NEHC. See "Security Ownership of Certain Beneficial Owners and
Management." Subject to the rights of holders of Preferred Stock, Holberg and
affiliates of DLJSC collectively have sufficient voting power to elect the
entire Board of Directors of each of NEHC, and through NEHC, the Company.
In connection with the PFS Acquisition, DLJSC received a merger advisory
fee of $4.0 million in cash from the Company upon consummation of the PFS
Acquisition and related financings. An affiliate of DLJ also received customary
fees in connection with their commitment to finance a portion of the purchase
price for PFS, in the event that the Company could not arrange alternative
financing prior to the closing.
In connection with the Credit Facility, DLJ Capital Funding, Inc., an
affiliate of DLJSC, acted as documentation agent for which it received certain
customary fees and expenses (see note 6 to the historical financial statements
of NEHC included elsewhere herein).
DLJSC has acted as an initial purchaser in connection with each of the
offerings of the Senior Discount Notes, the Senior Subordinated Notes, the
Senior Notes and the Preferred Stock for which it received certain customary
underwriting fees and discounts.
In connection with the ProSource Acquisition, it is expected that DLJSC
will receive a merger advisory fee from the Company of $3.25 million (and
reimbursement of expenses) at such time as the acquisition is consummated.
Holberg has received customary investment banking and advisory fees from
the Company and its affiliates in connection with certain prior transactions,
including a $4.0 million merger advisory fee in connection with the PFS
Acquisition. Holberg also received fees of $1.0 million in connection with the
offering of the Senior Notes.
Holberg also receives an annual management fee from the Company of $4.0
million, commencing in 1997. In addition, in connection with the ProSource
Acquisition, it is expected that Holberg will receive a merger advisory fee of
$3.25 million (and reimbursement of expenses) from the Company, at such time as
the acquisition is consummated.
A portion of the net proceeds of the Preferred Stock Offering was used to
finance the repurchase cost of the Senior Preferred Stock and the Junior
Preferred Stock held by Holberg and certain affiliates of DLJSC and the Junior
Non-Convertible Preferred Stock held by NED.
With the January 1996 acquisition of AmeriServ, the Company acquired a
minority interest in Post Holdings Company ("Post Holdings"), a 93.6% owner of
Post. On November 25, 1996 NEHC acquired: (i) the Company's ownership interest
in Post Holdings; and (ii) Daniel W. Crippen's 50% ownership of Post Holdings.
In connection with this transaction, Mr. Crippen, the Company's and NEHC's
Executive Vice President, received $4.4 million ($2.0 million cash and $2.4
million in NEHC 8% Senior Convertible Preferred Stock) in exchange for his 50%
equity interest in Post Holdings.
In connection with the PFS Acquisition: (i) the remaining 6.4% of the
capital stock outstanding of Post was acquired from the minority stockholder;
(ii) a dividend of $4.7 million was declared to eliminate the intercompany
balance between Post and NEHC; (iii) all of the capital stock of Post was
transferred to AmeriServ, then a wholly-owned subsidiary of the Company; (iv)
Post's $10.6 million of outstanding indebtedness was refinanced; and (v)
AmeriServ's investment in NEHC preferred stock of $2.5 million was cancelled.
In connection with the PFS Acquisition, NEHC contributed $130.0 million of
cash to the Company. This contribution was financed in part through NEHC's sale
of the Senior Discount Notes, Senior Preferred Stock and the Junior Preferred
Stock, as well as warrants to purchase NEHC Class A Common Stock, to affiliates
of
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DLJSC. On January 6, 1998, Holberg purchased from DLJ Merchant Banking Partners
II, L.P. and certain of its affiliates ("DLJMBII") warrants to purchase 753.30
shares of Class A Common Stock, which had originally been issued to DLJMBII in
connection with the PFS Acquisition in July 1997.
In addition to the equity contribution to AmeriServe, the proceeds from the
offering of the Senior Discount Notes were used to redeem the 12 1/2% Senior
Secured Notes of NEHC (the "Old NEHC Notes"), with an initial purchase amount of
$22.0 million beneficially owned by DLJMB and Old NEHC Notes, with an initial
principal amount of $8.0 million held by Orkla. The respective accrued principal
and interest of the Old NEHC Notes held by DLJMB and Orkla as of June 28, 1997
were $26.2 million and $9.5 million, respectively.
In connection with the PFS Acquisition, NEHC contributed to the Company an
aggregate principal amount of $45.0 million of outstanding non-convertible
preferred stock of the Company.
Prior to the PFS Acquisition, HWPI was owned 55% by Holberg and 45% by the
Company. In connection with the PFS Acquisition, NEHC purchased for $1.5 million
Holberg's 55% interest in HWPI. HWPI's sole operations consist of the ownership
of two distribution centers, located in Omaha, Nebraska and Waukesha, Wisconsin,
occupied by the Company.
The Company leases a warehouse and office facility in Waukesha, Wisconsin
from an affiliated partnership owned by certain former shareholders of an
acquired company, including Mr. John Evans, for approximately $810,000 per year
through May 31, 2008.
The Company and Holberg also periodically engage in bi-lateral
interest-bearing loans and advances. See Note 12 to the historical financial
statements of NEHC included elsewhere herein.
See "Plan of Distribution."
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DESCRIPTION OF INDEBTEDNESS AND PREFERRED STOCK
The following sets forth information concerning the Company's indebtedness
and preferred stock (other than the Preferred Stock) outstanding as of March 31,
1998.
SENIOR DISCOUNT NOTES
On July 11, 1997, NEHC issued and sold $100.4 million in aggregate
principal amount of the Senior Discount Notes pursuant to the Senior Discount
Note Indenture, in a private transaction not subject to the registration
requirements of the Securities Act (the "Senior Discount Notes Offering"). On
December 11, 1997, the Company consummated an offer to exchange the Senior
Discount Notes for new Senior Discount Notes, which are registered under the
Securities Act with terms substantially identical to the Senior Discount Notes.
The Senior Discount Notes will mature on July 15, 2007. No cash interest is
payable on the Senior Discount Notes prior to January 15, 2003. Interest on the
Senior Discount Notes accrues at the rate of 12 3/8% per annum and is payable
semi-annually in arrears on July 15 and January 15 of each year, commencing on
January 15, 2003, to holders of record on the immediately preceding July 1 and
January 1. The Senior Discount Notes rank pari passu in right of payment to all
senior Indebtedness of NEHC and rank senior in right of payment to all
subordinated Indebtedness of NEHC. As obligations of a holding company, the
Senior Discount Notes are effectively subordinated to all obligations of the
subsidiaries of NEHC, including the Senior Subordinated Notes and Senior Notes
and borrowings under the Credit Facility. See "Risk Factors -- Holding Company
Structure; Effective Subordination."
The Senior Discount Notes may not be redeemed by NEHC until July 15, 2002.
Thereafter, the Senior Discount Notes may be prepaid with a premium that
declines each year until July 15, 2005 when the Senior Discount Notes may be
prepaid in whole or in part at 100% of their principal amount. Upon a Change of
Control, each holder can require NEHC to redeem such holder's Senior Discount
Notes at an offer price equal to 101% of their principal amount plus accrued and
unpaid interest, subject to restrictions contained in the Credit Facility and
the Senior Discount Note Indenture and to the claims of holders of certain
indebtedness of NEHC's subsidiaries and other pari passu indebtedness of NEHC,
in each case, under similar repurchase provisions of the respective indentures
relating to such indebtedness.
The Senior Discount Note Indenture contains various restrictive covenants
that, among other things, limit (i) the incurrence of indebtedness by NEHC and
its subsidiaries and the issuance of certain types of capital stock by NEHC or
preferred stock by NEHC's subsidiaries, (ii) the payment of dividends on capital
stock of NEHC and its subsidiaries and certain other Restricted Payments (as
defined in the Senior Discount Note Indenture), (iii) transactions with
affiliates, (iv) the business activities of NEHC and certain of its
subsidiaries, (v) the creation of liens on the assets of NEHC or certain of its
subsidiaries and (vi) consolidations, mergers, conveyances, transfers and leases
of all or substantially all of NEHC's assets. All of these limitations, however,
are subject to a number of important qualifications.
Events of default under the Senior Discount Note Indenture include, among
other things, (i) a default continuing for 30 days in payment of interest or
Liquidated Damages when due, (ii) a default in the payment of any principal or
premium when due, (iii) the failure to comply with covenants in the Senior
Discount Note Indenture, subject in certain instances to grace periods, (iv) a
default under other indebtedness of NEHC or any subsidiary in excess of $15
million which is caused by a failure to make a required payment beyond any
applicable grace period or which results in the acceleration of such
indebtedness prior to its stated maturity, (v) certain events of bankruptcy or
insolvency with respect to NEHC or any subsidiary, and (vi) the failure to pay
any judgment in excess of $5 million for a period of 60 days. However, certain
of these defaults will not constitute an Event of Default (as defined under the
Senior Discount Note Indenture) until the Trustee or the holders of 25% in
principal amount of the outstanding Senior Discount Notes notify NEHC of the
default and NEHC does not cure such default within the time required after
receipt of such notice.
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8% SENIOR CONVERTIBLE PREFERRED STOCK
As of March 31, 1998, there were 300 authorized shares of 8% Senior
Convertible Preferred Stock (the "Senior Convertible Preferred") of NEHC, of
which 235 were outstanding. The Senior Convertible Preferred have a $10,000
liquidation preference per share and pay cash dividends quarterly at a rate of
8% per share per annum, payable annually. The Senior Convertible Preferred rank
pari passu with the Preferred Stock and senior to all other series of preferred
stock and to the common stock. Holders of shares of Senior Convertible Preferred
may convert each such share into 0.8766 (subject to equitable adjustment) of a
share of Class A Common Stock of NEHC (i) in the event of an initial public
offering, (ii) in the event of the acquisition of a majority of the outstanding
shares by persons not affiliated with the Company or (iii) on January 15, 2004
(at which time such shares may also be mandatorily redeemed by NEHC).
ACCOUNTS RECEIVABLE PROGRAM
In connection with the PFS Acquisition, the Company entered into the
Accounts Receivable Program (the "Accounts Receivable Program"). The Accounts
Receivable Program is structured as an off-balance sheet financing for
accounting purposes.
Under the Accounts Receivable Program, the Company transfers to AmeriServe
Funding Corporation ("AmeriServe Funding"), a wholly-owned, special purpose
bankruptcy-remote subsidiary, on a daily basis, all of the trade receivables
(the "Receivables") generated by the Company and/or one or more of its
subsidiaries. AmeriServe Funding then sells the receivables to a master trust,
AmeriServe Master Trust (the "Trust"), which issued a series of certificates
representing an undivided interest in the assets of the Trust. The certificates
were purchased by any of (i) Bank of America, (ii) a commercial paper conduit
administered by Bank of America National Trust and Savings Association ("Bank of
America NT&SA"), and/or (iii) a group of banks (all of the foregoing,
collectively, referred to as the "Banks").
Up to $225.0 million of proceeds are presently available under the Accounts
Receivable Program. However, when the Company satisfies certain reporting
requirements, up to $250.0 million of total proceeds will be available. The
Company expects to create an additional accounts receivable program for the sale
of up to $150.0 million of accounts receivable in connection with the ProSource
Acquisition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources -- Pro Forma." The
Accounts Receivable Program is available to AmeriServe Funding for five years
from the closing of the PFS Transactions, subject to early termination in
accordance with the terms of the transaction documents.
All of the Receivables are transferred on a daily basis to AmeriServe
Funding. The exchange price for the Receivables conveyed to AmeriServe Funding
is a dollar amount equal to the aggregate unpaid balance of the Receivables less
a discount specified in the transaction documents. AmeriServe Funding may also
pay the exchange price for such Receivables by increasing the principal amount
of notes payable by it to the Company and subsidiaries of the Company rather
than paying cash for such Receivables. Certain of the Receivables have been
transferred by the Company to AmeriServe Funding as a contribution of capital.
AmeriServe Funding (and the Trust, in turn) has obtained first priority,
perfected ownership interests in the Receivables, and any related security and
proceeds thereof. The Company serves as the initial master servicer of the
Accounts Receivable Program.
The Banks' yield on their Invested Amount will be based on either LIBOR or
a Base Rate plus a margin. The "Invested Amount" generally will be calculated as
the sum of the purchase prices paid by the Banks from time to time for undivided
interests in the Receivables in the Trust, reduced by the aggregate amount of
distributions made to the Banks on account of principal. As of September 27,
1997, the Banks' yield would have been 6.656%.
A non-usage fee of 3/8 of 1% per annum on a daily average of (i) the
aggregate commitments of the Banks under the Accounts Receivable Program minus
(ii) the Invested Amount is payable by AmeriServe Funding monthly in arrears.
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Prior to termination of the Banks' commitment under the Accounts Receivable
Program, AmeriServe Funding may cause the Trust to sell undivided interests in
the Receivables to the Banks from time to time so long as certain conditions are
satisfied, including, without limitation, that after giving effect to such sale,
the Invested Amount (less amounts held in certain Trust accounts) would not
exceed the Base Amount. The "Base Amount" generally will be equal to the result
of (a)(i) the Net Eligible Receivables, times (ii) 100% minus the Applicable
Reserve Ratio, minus (b) the Carrying Cost Receivables Reserve. The "Net
Eligible Receivables" generally will be calculated as the aggregate unpaid
balance of Receivables held by the Trust that satisfy certain eligibility
criteria, less unapplied cash held by the Trust, less funds not yet made
available by lockbox banks holding collections on Receivables, less the
aggregate amount of excess concentrations of Receivables as specified in the
transaction documents. The "Applicable Reserve Ratio" will be calculated
consistent with the trade receivable rating methodology of Standard & Poor's
and/or Duff & Phelps, will incorporate specified loss reserve ratios and
dilution reserve ratios, and will be subject to a floor of 15%. The "Carrying
Cost Receivables Reserve" generally will be calculated to reflect interest
payable to the Banks, the servicing fee payable from the Assets of the Trust,
certain accrued and unpaid expenses and certain additional amounts based on days
sales outstanding.
The Accounts Receivable Program contains customary conditions, including,
without limitation, delivery of true sale and non-consolidation opinions. In
addition, Bank of America NT&SA has been satisfied that structural enhancements
are in place so that the Accounts Receivable Program satisfies, at a minimum,
the "BBB" rating criteria of Standard & Poor's and/or Duff & Phelps. The
Accounts Receivable Program also contains customary termination events,
including, without limitation, bankruptcy or insolvency of the Company or
AmeriServe Funding, cross-acceleration to other material indebtedness of the
Company and Receivables performance triggers.
CREDIT FACILITY
The Company has entered into a senior credit facility (the "Credit
Facility"), pursuant to which the Company has available a new revolving credit
facility (the "Revolving Credit Facility"). The undrawn amount of $150.0 million
under the Revolving Credit Facility is available for working capital and general
corporate purposes, including the issuance of letters of credit, which were
$13.5 million at March 15, 1998 subject to the achievement of certain financial
ratios and compliance with certain conditions.
The initial interest rate for borrowings under the Revolving Credit
Facility were, at the option of the Company, LIBOR plus 2.50% or the Base Rate
plus 1.25%. The initial rates for borrowings under the Revolving Credit Facility
remained in effect until December 31, 1997, and now may be reduced according to
a pricing grid contained in the Credit Facility agreements. The Company may
elect interest periods of one, two, three or six months for LIBOR borrowings.
Calculation of interest shall be on the basis of actual days elapsed in a year
of 360 days (or 365 or 366 days, as the case may be, in the case of the Base
Rate Loans based on the Administrative Agent's "reference rate") and interest
shall be payable at the end of each interest period and, in any event, at least
every three months or 90 days, as the case may be. The "Base Rate" is the higher
of (i) the Administrative Agent's reference rate and (ii) the Federal Funds
Effective Rate plus one-half of 1%. LIBOR will at all times include statutory
reserves to the extent actually incurred.
NEHC and all domestic subsidiaries of the Company guarantee indebtedness
under the Credit Facility (the "Guarantors"). All extensions of credit under the
Credit Facility to the Company and guaranties of subsidiaries of the Company are
secured by all existing and after acquired personal property (other than
accounts receivable transferred in connection with the Accounts Receivable
Program or any securitization refinancing of the Accounts Receivable Program) of
the Company and its subsidiaries, including all outstanding capital stock of the
Company and of all of its domestic subsidiaries, 65% of outstanding capital
stock of the Company's foreign subsidiaries and any intercompany debt
obligations, and, subject to exceptions to be agreed upon all existing and
after-acquired real property fee and leasehold interests. NEHC's guaranty is
secured by a pledge of all outstanding capital stock of the Company. With
certain exceptions, NEHC, the Company and its subsidiaries are prohibited from
pledging any of their assets other than under the Credit Facility agreements.
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Under the Credit Facility, the letter of credit fee is 2.50% per annum for
standby letters of credit, which will be shared by all Lenders, and an
additional 0.25% per annum to be retained by the issuing bank for issuing the
standby letters of credit, based upon the amount available for drawing under
outstanding standby letters of credit. After December 31, 1997, adjustments in
the letter of credit fees described above may be made, according to a pricing
grid contained in the Credit Facility agreements.
Indebtedness under the Credit Facility may be prepaid in whole or in part
without premium or penalty (subject in some cases to related breakage) and the
Lenders' commitments relative thereto reduced or terminated upon such notice and
in such amounts as may be agreed upon.
The Company is required to make the following mandatory prepayments and
permanent reduction of the commitments under the Revolving Credit Facility
(subject to certain exceptions and basket amounts set forth in the Credit
Facility): (a) with respect to asset sales, prepayments in an amount equal to
100% of (i) the net after-tax cash proceeds of the sale or other disposition of
any property or assets of the Company or any of its subsidiaries other than net
cash proceeds of sales or certain other dispositions in the ordinary course of
business, or (ii) the net after-tax cash proceeds in excess of $275 million from
the sale or other disposition of receivables payable upon receipt; (b) with
respect to debt financings of the Company or any of its subsidiaries,
prepayments in an amount equal to 100% of the net cash proceeds received from
such debt financings (excluding, among other things, the Senior Subordinated
Notes and, with respect to the Revolving Credit Facility, the Senior Notes),
payable upon receipt; (c) with respect to equity offerings of the Company or any
of its subsidiaries, prepayments in an amount equal to 50% of the net cash
proceeds received from the issuance of such equity securities, payable upon
receipt; and (d) with respect to Excess Cash Flow (as defined in the Credit
Facility), prepayments in an amount equal to 50% of Excess Cash Flow, payable
within 90 days of fiscal year-end.
The Credit Facility contains customary and appropriate representations and
warranties, including without limitation those relating to due organization and
authorization, no conflicts, financial condition, no material adverse changes,
title to properties, liens, litigation, payment of taxes, no material adverse
agreements, compliance with laws, environmental liabilities and full disclosure.
The Credit Facility also contains customary and appropriate conditions to
all borrowings under the Revolving Credit Facility including requirements
relating to prior written notice of borrowing, the accuracy of representations
and warranties, and the absence of any default or potential event of default.
The Credit Facility also contains customary affirmative and negative
covenants (including, where appropriate, certain exceptions and baskets),
including but not limited to furnishing information and limitations on other
indebtedness, liens, investments, guarantees, restricted payments, restructuring
and reserve costs, mergers and acquisitions, sales of assets, capital
expenditures, leases, and affiliate transactions. The Credit Facility also
contains financial covenants relating to minimum interest coverage; minimum
fixed charge coverage; and maximum leverage.
Events of default under the Credit Facility include those relating to: (a)
non-payment of interest, principal or fees payable under the Credit Facility;
(b) non-performance of certain covenants; (c) cross default to other material
debt of the Company and its subsidiaries; (d) bankruptcy or insolvency; (e)
judgments in excess of specified amounts; (f) impairment of security interests
in collateral; (g) invalidity of guarantees; (h) materially inaccurate or false
representations or warranties; and (i) change of control.
SENIOR NOTES
On October 15, 1997, the Company issued and sold $350.0 million principal
amount of the Senior Notes pursuant to the Senior Note Indenture. The Senior
Notes were sold pursuant to exemptions from, or in transactions not subject to,
the registration requirements of the Securities Act and applicable state
securities laws. The Company consummated an offer to exchange the Senior Notes
for new Senior Notes, which are registered under the Securities Act with terms
substantially identical to the Senior Notes.
The Senior Notes will mature on October 15, 2006. Interest accrues at the
rate of 8 7/8% per annum and is payable semi-annually in arrears on April 15 and
October 15 of each year. Payment of principal, premium and
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interest are effectively subordinated, however, to all secured obligations of
the Company, including the Company's borrowings, if any, under the Credit
Facility, to the extent of the assets securing such obligations.
The Senior Notes may not be redeemed at the option of the Company any time
prior to April 15, 2002. Thereafter, the Senior Notes may be prepaid with a
premium that declines each year until April 15, 2004 when the Senior Notes may
be prepaid in whole or in part at 100% of their principal amount. Upon a Change
of Control, each holder can require the Company to redeem such holder's Senior
Notes at an offer price equal to 101% of their principal amount plus accrued and
unpaid interest, subject to restrictions contained in the Credit Facility and
the Senior Note Indenture.
The Senior Note Indenture contains various restrictive covenants that,
among other things, limit (i) the incurrence of indebtedness by the Company and
its subsidiaries and the issuance of preferred stock by the Company, (ii) the
payment of dividends on capital stock of the Company and its subsidiaries and
certain other Restricted Payments (as defined in the Senior Note Indenture),
(iii) transactions with affiliates, (iv) the business activities of the Company,
(v) the creation of liens on the assets of the Company and (vi) consolidations,
mergers, conveyances, transfers and leases of all or substantially all of the
Company's assets. All of these limitations, however, are subject to a number of
important qualifications.
Events of default under the Senior Note Indenture include, among other
things, (i) a default continuing for 30 days in payment of interest or
Liquidated Damages when due, (ii) a default in the payment of any principal or
premium when due, (iii) the failure to comply with covenants in the Senior Note
Indenture, subject in certain instances to grace periods, (iv) a default under
other indebtedness of the Company or any Subsidiary in excess of $15 million
which is caused by a failure to make a required payment beyond any applicable
grace period or which results in the acceleration or such indebtedness prior to
its stated maturity, (v) certain events of bankruptcy or insolvency with respect
to the Company of any subsidiary, and (vi) the failure to pay any judgment in
excess of $5 million for a period of 60 days. However, certain of these defaults
will not constitute an Event of Default (as defined under the Senior Note
Indenture) until the Trustee or the holders of 25% in principal amount of the
outstanding Senior Notes notify the Company of the default and the Company does
not cure such default within the time required after receipt of such notice.
SENIOR SUBORDINATED NOTES
On July 9, 1997, the Company issued and sold $500.0 million principal
amount of the Senior Subordinated Notes pursuant to the Senior Subordinated Note
Indenture. The Senior Subordinated Notes were sold pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. The Company consummated an
offer to exchange the Senior Subordinated Notes for new Senior Subordinated
Notes, which are registered under the Securities Act with terms substantially
identical to the Senior Subordinated Notes.
The Senior Subordinated Notes mature on July 15, 2007. Interest accrues at
the rate of 10 1/8% per annum and is payable semi-annually in arrears on January
15 and July 15 each year. Payment of principal, premium and interest on the
Senior Subordinated Notes are subordinated, as set forth in the Senior
Subordinated Indenture, to the prior payment in full of the Company's Senior
Debt (as defined in the Senior Subordinated Note Indenture), including the
Senior Notes.
The Senior Subordinated Notes may not be redeemed at the option of the
Company any time prior to July 15, 2002. Thereafter, the Senior Subordinated
Notes may be prepaid with a premium that declines each year until July 15, 2005
when the Senior Subordinated Notes may be prepaid in whole or in part at 100% of
their principal amount. Upon a Change of Control, each holder can require the
Company to redeem such holder's Senior Subordinated Notes at an offer price
equal to 101% of their principal amount plus accrued and unpaid interest,
subject to restrictions contained in the Credit Facility and the Senior
Subordinated Note Indenture.
The Senior Subordinated Note Indenture contains various restrictive
covenants that, among other things, limit (i) the incurrence of indebtedness by
the Company and its subsidiaries and the issuance of preferred stock by the
Company, (ii) the payment of dividends on capital stock of the Company and its
subsidiaries and
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certain other Restricted Payments (as defined in the Senior Subordinated Note
Indenture), (iii) transactions with affiliates, (iv) the business activities of
the Company, (v) the creation of liens on the assets of the Company and (vi)
consolidations, mergers, conveyances, transfers and leases of all or
substantially all of the Company's assets. All of these limitations, however,
are subject to a number of important qualifications.
Events of default under the Senior Subordinated Note Indenture include,
among other things, (i) a default continuing for 30 days in payment of interest
or Liquidated Damages when due, (ii) a default in the payment of any principal
or premium when due, (iii) the failure to comply with covenants in the Senior
Subordinated Note Indenture, subject in certain instances to grace periods, (iv)
a default under other indebtedness of the Company or any Subsidiary in excess of
$15 million which is caused by a failure to make a required payment beyond any
applicable grace period or which results in the acceleration of such
indebtedness prior to its stated maturity, (v) certain events of bankruptcy or
insolvency with respect to the Company of any subsidiary, and (vi) the failure
to pay any judgment in excess of $5 million for a period of 60 days. However,
certain of these defaults will not constitute an Event of Default (as defined
under the Senior Subordinated Note Indenture) until the Trustee or the holders
of 25% in principal amount of the outstanding Senior Subordinated Notes notify
the Company of the default and the Company does not cure such default within the
time required after receipt of such notice.
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DESCRIPTION OF SECURITIES
DESCRIPTION OF PREFERRED STOCK
The following is a summary of certain terms of the Preferred Stock. The
terms of the Preferred Stock are set forth in the Certificate of Designations,
Preferences and Relative, Participating, Optional and Other Special Rights and
Qualifications, Limitations and Restrictions of 11 1/4% Senior Redeemable
Exchangeable Preferred Stock due 2008 of NEHC (the "Certificate of
Designations"). The following summary of the Preferred Stock, the Certificate of
Designations, and the Registration Rights Agreement is not intended to be
complete and is subject to, and qualified in its entirety by reference to, the
Certificate of Incorporation, the Certificate of Designations and the
Registration Rights Agreement, including the definitions therein of certain
terms used below. Copies of the proposed form of Certificate of Designations and
Registration Rights Agreement are available as set forth under "-- Additional
Information." The definitions of certain terms used in the following summary are
set forth below under "-- Certain Definitions Relating to the Preferred Stock."
As used in this Description of Preferred Stock, references to the Preferred
Stock shall be deemed to include the New Preferred Stock to be issued in the
Exchange Offer.
GENERAL
NEHC is authorized to issue 30,000,000 shares of preferred stock as
designated by NEHC's board of directors, of which 2,500,000 shares of Preferred
Stock are authorized, issued and outstanding pursuant to the Offering and up to
an additional 5,500,000 shares of Preferred Stock have been designated and
reserved for issuance to pay dividends on the Preferred Stock if NEHC elects to
pay dividends on the Preferred Stock in additional shares of Preferred Stock in
accordance with the terms thereof. All such shares of Preferred Stock will have
a liquidation preference of $100 per share (the "Liquidation Preference"). On
March 1, 2008 (the "Mandatory Redemption Date"), NEHC will be required to redeem
(subject to the legal availability of funds therefor) all outstanding shares of
Preferred Stock at a price in cash equal to the Liquidation Preference thereof,
plus, without duplication, accrued and unpaid dividends (including an amount in
cash equal to a prorated dividend for any partial Dividend Period) and
Liquidated Damages, if any, to the date of redemption. Subject to certain
conditions, the Preferred Stock will be exchangeable (in whole but not in part)
for the Exchange Debentures at the option of NEHC on any Dividend Payment Date
on or after the Issue Date. The Preferred Stock, when issued and paid for by the
Initial Purchaser in accordance with the terms of the Purchase Agreement, will
be fully paid and non-assessable and the holders thereof will not have any
subscription or preemptive rights.
The Preferred Stock ranks junior in right of payment to all indebtedness
and other obligations of NEHC. As of December 27, 1997, on a pro forma basis
after giving effect to the Offering and the ProSource Acquisition, the Preferred
Stock would have been junior in right of payment to $948.7 million of
indebtedness of NEHC and its subsidiaries. See "Risk Factors -- Subordination."
In addition, NEHC has the ability to issue additional shares of Preferred Stock
to pay dividends. The Certificate of Designations provides that NEHC may not,
without the consent of the holders of at least a majority of the then
outstanding shares of Preferred Stock, authorize, create (by way of
reclassification or otherwise) or issue any Parity Securities (as defined below)
or any Obligation or security convertible or exchangeable into or evidencing a
right to purchase, shares of any class or series of Parity Securities, except,
NEHC may issue: (i) shares of New Preferred Stock pursuant to the Certificate of
Designations and as provided in the Registration Rights Agreement, (ii) shares
of Preferred Stock to pay dividends thereon in accordance with the terms of the
Certificate of Designations, and (iii) Parity Securities that may be issued in
accordance with the terms of the Certificate of Designations. See "-- Ranking"
and "-- Voting Rights." The Certificate of Designations provides that NEHC may
not authorize, create or issue (by way of reclassification or otherwise) any
future issuances of preferred stock that rank senior to the Preferred Stock.
All of NEHC's operations are conducted through its Subsidiaries and,
therefore, NEHC is dependent upon the cash flow of its Subsidiaries to meet its
obligations, including its ability to pay cash dividends on and to redeem the
Preferred Stock. Any right of NEHC to receive assets of any of its Subsidiaries
will be
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<PAGE> 49
effectively subordinated to all indebtedness and other liabilities and
commitments (including trade payables and lease obligations) of such entities.
The transfer agent and registrar for the Preferred Stock is State Street
Bank and Trust Company unless and until a successor is selected by NEHC (the
"Transfer Agent").
RANKING
The Preferred Stock, with respect to dividends and rights on the
liquidation, winding-up and dissolution of NEHC, (i) ranks senior to each class
of capital stock of NEHC currently outstanding and will rank senior to each
class of capital stock of NEHC established after the date of this Prospectus by
the Board of Directors of NEHC the terms of which do not expressly provide that
it ranks senior to, or on a parity with, the Preferred Stock as to dividends and
rights on the liquidation, winding-up and dissolution of NEHC (collectively
referred to, together with the common stock of NEHC, as "Junior Securities"),
(ii) subject to certain conditions, (a) ranks on a parity with the outstanding
Senior Convertible Preferred and (b) will rank on a parity with each other class
of preferred stock established after the date of this Prospectus by the Board of
Directors of NEHC the terms of which expressly provide that such class or series
will rank on a parity with the Preferred Stock as to dividends and rights on the
liquidation, winding-up and dissolution of NEHC (collectively referred to as the
"Parity Securities"). NEHC may not authorize or issue any Parity Securities
(other than additional Preferred Stock issued as dividends on the Preferred
Stock) without the approval of the holders of at least a majority of the
Preferred Stock then outstanding, voting or consenting as a separate class.
DIVIDENDS
The holders of shares of the Preferred Stock are entitled to receive,
whether or not dividends are declared by the Board of Directors out of funds of
NEHC, cumulative preferential dividends from the Issue Date of the Preferred
Stock accruing at 11 1/4% per annum quarterly from the date of issuance, payable
per share on March 1, June 1, September 1 and December 1, or, if any such date
is not a Business Day, on the next succeeding Business Day (each, a "Dividend
Payment Date"), to the holders of record as of the next preceding February 15,
May 15, August 15 and September 15 (each, a "Record Date"). Dividends may be
paid, at NEHC's option, in cash or by the issuance of additional shares of
Preferred Stock (including fractional shares) having an aggregate Liquidation
Preference equal to the amount of such dividends. The issuance of such
additional shares of Preferred Stock will constitute "payment" of the related
dividend for all purposes of the Certificate of Designations. The first dividend
payment of Preferred Stock will be payable on June 1, 1998. Dividends payable on
the Preferred Stock will be computed on the basis of a 360-day year consisting
of twelve 30-day months and will be deemed to accrue on a daily basis. For a
discussion of certain federal income tax considerations relevant to the payment
of dividends on the Preferred Stock, see "Certain Federal Income Tax
Consequences to Holders of Preferred Stock."
Dividends on the Preferred Stock will accrue whether or not NEHC has
earnings or profits, whether or not there are funds legally available for the
payment of such dividends and whether or not dividends are declared. Dividends
will accumulate to the extent they are not paid on the Dividend Payment Date for
the period to which they relate. In the event that dividends on the Preferred
Stock are in arrears and unpaid for three or more quarterly dividend periods
(whether or not consecutive), holders of Preferred Stock will be entitled to
certain voting rights. See "-- Voting Rights." The Certificate of Designations
provides that NEHC will take all actions required or permitted under the
Delaware General Corporation Law (the "DGCL") to permit the payment of dividends
on the Preferred Stock, including, without limitation, through the revaluation
of its assets in accordance with the DGCL, to make or keep funds legally
available for the payment of dividends.
Dividends on account of arrears for any past Dividend Period and dividends
in connection with any optional redemption may be declared and paid at any time,
without reference to any regular Dividend Payment Date, to holders of record of
Preferred Stock on such date, not more than forty-five (45) days prior to the
payment thereof, as may be fixed by the Board of Directors of NEHC.
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<PAGE> 50
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of Preferred Stock with
respect to any dividend period unless all dividends for all preceding dividend
periods have been declared and paid, or declared and a sufficient sum set apart
for the payment of such dividend, upon all outstanding shares of Preferred
Stock. No full dividends may be declared or paid or funds set apart for the
payment of dividends on any Parity Securities for any period unless full
cumulative dividends shall have been or contemporaneously are declared and paid
(or are deemed declared and paid) in full or declared and, if payable in cash, a
sum in cash sufficient for such payment set apart for such payment on the
Preferred Stock. If full dividends are not so paid, the Preferred Stock will
share dividends pro rata with the Parity Securities. So long as any Preferred
Stock is outstanding and unless and until full cumulative dividends have been
paid (or are deemed paid) in full on the Preferred Stock: (i) no dividend (other
than a dividend payable solely in shares of additional Junior Securities) shall
be declared or paid upon, or any sum set apart for the payment of dividends
upon, any shares of Junior Securities; (ii) no other distribution shall be
declared or made upon, or any sum set apart for the payment of any distribution
upon, any shares of Junior Securities, other than a distribution consisting
solely of Junior Securities; (iii) no shares of Parity Securities or Junior
Securities shall be purchased, redeemed or otherwise acquired or retired for
value (excluding an exchange for shares of other Junior Securities) by NEHC or
any of its Subsidiaries; (iv) no warrants, rights, calls or options to purchase
any Parity Securities or Junior Securities shall be directly or indirectly
issued by NEHC or any of its Subsidiaries; and (v) no monies shall be paid into
or set apart or made available for a sinking or other like fund for the
purchase, redemption or other acquisition or retirement for value of any shares
of Parity Securities or Junior Securities by NEHC or any of its Subsidiaries.
Holders of the Preferred Stock will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of the full cumulative dividends
as herein described.
The Senior Discount Note Indenture contains, and future credit agreements
or other agreements relating to Indebtedness to which NEHC becomes a party may
contain, restrictions on the ability of NEHC to pay dividends on the Preferred
Stock (other than solely in additional shares of Preferred Stock). See "Risk
Factors -- Limitations on Ability to Pay Dividends."
VOTING RIGHTS; AMENDMENT
Holders of record of shares of Preferred Stock will have no voting rights,
except as required by law and as provided in the Certificate of Designations.
The Certificate of Designations provides that upon (a) the accumulation of
accrued and unpaid dividends on the outstanding Preferred Stock in an amount
equal to three or more quarterly dividend periods (whether or not consecutive)
in the aggregate; (b) the failure of NEHC to make, pursuant to any required
Change of Control Offer) or mandatory redemption obligation with respect to the
Preferred Stock or (c) the failure of NEHC to comply with any of the other
covenants or agreements set forth in the Certificate of Designations and the
continuance of such failure for 30 consecutive days or more after receipt of
notice of such failure from the holders of at least 25% of the Preferred Stock
then outstanding, then the holders of a majority of the outstanding shares of
Preferred Stock, with the holders of shares of any Parity Securities, issued
after the Issue Date, upon which the voting rights have been conferred and are
exercisable, voting as a single class, will be entitled to elect lesser of the
two directors or that number of directors constituting at least 25% of NEHC's
Board of Directors (each of the events described in clauses (a), (b) and (c)
being referred to herein as a "Voting Rights Triggering Event"). The voting
rights provided for in the Certificate of Designations will be the holder's
exclusive remedy at law or in equity.
In addition to the provisions described above in "Ranking," the Certificate
of Designations also provides that NEHC will not, without the approval of the
holders of at least a majority of the Preferred Stock then outstanding amend,
alter or repeal any of the provisions of NEHC's Certificate of Incorporation
(including the Certificate of Designations) or the bylaws of NEHC so as to
affect adversely the powers, preferences or rights of the holders of the
Preferred Stock or reduce the time for any notice to which the holders of the
Preferred Stock may be entitled. Subject to the provisions described above under
"Ranking," the Certificate of Designations provides that an amendment of NEHC's
Certificate of Incorporation to authorize or create, or to increase the amount
of Junior Securities or Parity Securities shall not be deemed to affect
adversely the powers, preferences or rights of the holders of the Preferred
Stock.
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<PAGE> 51
Notwithstanding the foregoing, modifications and amendments to the
Certificate of Designations described below under "-- Change of Control" and
"-- Certain Covenants" may be made by NEHC with the consent of the holders of a
majority of the Preferred Stock; provided that following the mailing of any
Offer to Purchase and until the Expiration Date of that Offer to Purchase no
such modification or amendment may, without the consent of the holder of each
outstanding share of Preferred Stock affected thereby, modify any Offer to
Purchase for the Preferred Stock required under the covenant entitled "-- Change
of Control" in a manner materially adverse to the holders of outstanding
Preferred Stock. In addition, holders of a majority of the outstanding Preferred
Stock may waive compliance by NEHC with the covenants described below under
"-- Certain Covenants" and may waive any past default of the provisions of the
Certificate of Designations described below under "-- Change of Control" and
"-- Certain Covenants," except a default arising from failure to purchase any
Preferred Stock tendered pursuant to an Offer to Purchase.
EXCHANGE
NEHC may, at its option, on any Dividend Payment Date, exchange, in whole,
but not in part, the then outstanding shares of Preferred Stock for Exchange
Debentures with a principal amount equal to the liquidation preference of the
Preferred Stock; provided that (i) on the date of such exchange there are no
accumulated and unpaid dividends and Liquidated Damages, if any, on the
Preferred Stock (including the dividend payable on such date) or other
contractual impediments to such exchange; (ii) there shall be legally available
funds sufficient for the dividend to be paid on such Dividend Payment Date;
(iii) immediately after giving effect to such exchange, no Default or Event of
Default (each as defined in the Senior Discount Note Indenture) would exist
under the Senior Discount Note Indenture with respect to NEHC's Senior Discount
Notes or would be caused thereby; (iv) the Exchange Debenture Indenture
governing the Exchange Debentures has been qualified under the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"), if such qualification is
required at the time of exchange; and (v) NEHC shall have delivered a written
opinion to the Trustee to the effect that all conditions to be satisfied prior
to such exchange have been satisfied.
Upon any exchange pursuant to the preceding paragraph, holders of
outstanding Preferred Stock will be entitled to receive, subject to the second
succeeding sentence of this paragraph, $1.00 principal amount of Exchange
Debentures for each $1.00 of the aggregate Liquidation Preference, plus, without
duplication, accrued and unpaid dividends, plus any additional Exchange
Debentures issued from time to time in lieu of cash interest, of Preferred Stock
held by them. The Exchange Debentures will be issued in registered form, without
coupons and will contain non-financial terms substantially similar to NEHC's
outstanding Senior Discount Notes. The Exchange Debentures will be issued in
principal amounts of $1,000 and integral multiples thereof to the extent
possible, and will also be issuable in principal amounts less than $1,000 so
that each holder of Preferred Stock will receive interests representing the
entire amount of Exchange Debentures to which such holder's shares of Preferred
Stock entitle such holder; provided that NEHC may pay cash in lieu of issuing an
Exchange Debenture having a principal amount less than $1,000. Notice of the
intention to exchange will be sent by or on behalf of NEHC not more than 60 days
nor less than 30 days prior to the Exchange Date, by first class mail, postage
prepaid, to each holder of record of Preferred Stock at its registered address.
In addition to any information required by law or by the applicable rules of any
exchange upon which Preferred Stock may be listed or admitted to trading, such
notice will state: (i) the Exchange Date; (ii) the place or places where
certificates for such shares are to be surrendered for exchange, including any
procedures applicable to exchanges to be accomplished through book-entry
transfers; and (iii) that dividends on the shares of Preferred Stock to be
exchanged will cease to accrue on the Exchange Date. If notice of any exchange
has been properly given, and if on or before the Exchange Date the Exchange
Debentures have been duly executed and authenticated and deposited with the
Transfer Agent, then on and after the close of business on the Exchange Date,
the shares of Preferred Stock to be exchanged will no longer be deemed to be
outstanding and may thereafter be issued in the same manner as the other
authorized but unissued preferred stock, but not as Preferred Stock, and all
rights of the holders thereof as stockholders of NEHC will cease, except the
right of the holders to receive upon surrender of their certificates the
Exchange Debentures and all accrued interest, if any, thereon.
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<PAGE> 52
REDEMPTION
Mandatory Redemption
On the Mandatory Redemption Date, NEHC will be required to redeem (subject
to the legal availability of funds therefor) all outstanding shares of Preferred
Stock at a price in cash equal to the Liquidation Preference thereof, plus
accrued and unpaid dividends (including an amount in cash equal to a prorated
dividend for any partial Dividend Period) and Liquidated Damages, if any, to the
date of redemption. NEHC will not be required to make sinking fund payments with
respect to the Preferred Stock. The Certificate of Designations will provide
that NEHC will take all actions required or permitted under Delaware law to
permit such redemption.
Optional Redemption
The Preferred Stock may be redeemed, in whole or in part, at the option of
NEHC on or after March 1, 2003, at the redemption prices specified below
(expressed as percentages of the Liquidation Preference thereof), in each case,
together with accrued and unpaid dividends (including an amount in cash equal to
a prorated dividend for any partial dividend period) and Liquidated Damages, if
any, to the date of redemption, upon not less than 30 nor more than 60 days'
prior written notice, if redeemed during the 12-month period commencing on March
1 of each of the years set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003...................................................... 105.625%
2004...................................................... 103.750%
2005...................................................... 101.875%
2006 and thereafter....................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time NEHC may, at its option, redeem
in whole or in part, outstanding shares of the Preferred Stock at a price in
cash equal to 109.000% of the Liquidation Preference thereof, plus accrued and
unpaid dividends to the redemption date with the net cash proceeds from one or
more Public Equity Offerings; provided that any such redemption shall occur
within 45 days of the date of the closing of such Public Equity Offerings.
LIQUIDATION RIGHTS
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
NEHC or reduction or decrease in its capital stock resulting in a distribution
of assets to the holders of any class or series of NEHC's capital stock, each
holder of shares of the Preferred Stock will be entitled to payment out of the
assets of NEHC available for distribution of an amount equal to the Liquidation
Preference per share of Preferred Stock held by such holder, plus accrued and
unpaid dividends and Liquidated Damages, if any, to the date fixed for
liquidation, dissolution, winding-up or reduction or decrease in capital stock,
before any distribution is made on any Junior Securities, including, without
limitation, common stock of NEHC. After payment in full of the Liquidation
Preference and all accrued dividends and Liquidated Damages, if any, to which
holders of Preferred Stock are entitled, such holders will not be entitled to
any further participation in any distribution of assets of NEHC. If, upon any
voluntary or involuntary liquidation, dissolution or winding-up of NEHC, the
amounts payable with respect to the Preferred Stock and all other Parity
Securities are not paid in full, the holders of the Preferred Stock and the
Parity Securities will share equally and ratably in any distribution of assets
of NEHC in proportion to the full liquidation preference and accumulated and
unpaid dividends and Liquidated Damages to which each is entitled. However,
neither the voluntary sale, conveyance, exchange or transfer (for cash, shares
of stock, securities or other consideration) of all or substantially all of the
property or assets of NEHC nor the consolidation or merger of NEHC with or into
one or more corporations will be deemed to be a voluntary or involuntary
liquidation, dissolution or winding-up of NEHC or reduction or decrease in
capital stock, unless such sale, conveyance, exchange or transfer shall be in
connection with a liquidation, dissolution or winding-up of the business of NEHC
or reduction or decrease in capital stock.
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The Certificate of Designations will not contain any provision requiring
funds to be set aside to protect the Liquidation Preference of the Preferred
Stock, although such Liquidation Preference will be substantially in excess of
the par value of the shares of the Preferred Stock and there can be no assurance
that, upon any such voluntary or involuntary liquidation, dissolution or
winding-up of NEHC that there will be funds available in amount sufficient to
pay such Liquidation Preference in full, in part or at all.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, NEHC will be required to make
an offer (the "Change of Control Offer") to each holder of shares of Preferred
Stock to repurchase all or any part (but not, in the case of any holder
requiring NEHC to purchase less than all of the shares of Preferred Stock held
by such holder, any fractional shares) of such holder's Preferred Stock at an
offer price in cash equal to 101% of the aggregate Liquidation Preference
thereof plus, without duplication, all accrued and unpaid dividends per share to
the date of purchase (including an amount in cash equal to a prorated dividend
for the period from the Dividend Payment Date immediately prior to the date of
purchase (as defined below) to the date of purchase) (the "Change of Control
Payment"); provided that NEHC will not be required to repurchase or redeem any
shares of Preferred Stock pursuant to the foregoing provision prior to NEHC's
repurchase of any Senior Discount Notes that are required to be repurchased
pursuant to the Change of Control covenant in the Senior Discount Note
Indenture. As a result of the foregoing, a holder of the Preferred Stock may not
be able to compel NEHC to purchase the Preferred Stock unless NEHC is able at
the time to refinance all such indebtedness.
The Certificate of Designations provides that, prior to complying with the
provisions of this covenant, but in any event within 90 days following a Change
of Control, NEHC will either repay all outstanding Senior Debt or obtain the
requisite consents, if any, under all agreements governing outstanding Senior
Debt to permit the repurchase of the Preferred Stock required by this covenant.
See "Risk Factors -- Change of Control."
Within 30 days following any Change of Control, NEHC will mail a notice to
each holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase Preferred Stock on the date
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"), pursuant to the procedures required by the Certificate of
Designations and described in such notice. NEHC will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Preferred Stock as a result
of a Change of Control.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Certificate of Designations are applicable.
Except as described above with respect to a Change of Control, the Certificate
of Designations does not contain provisions that permit the holders of the
Preferred Stock to require that NEHC repurchase or redeem the Preferred Stock in
the event of a takeover, recapitalization or similar transaction.
NEHC will not be required to make a Change of Control Offer to the holders
of Preferred Stock upon a Change of Control if a third party makes the Change of
Control Offer described above in the manner, at the times and otherwise in
compliance with the requirements set forth in the Certificate of Designations
and purchases all shares of Preferred Stock validly tendered and not withdrawn
under such Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of NEHC and its Subsidiaries taken as a whole. Although there is a
developing body of case law interpreting the phrase "substantially all," there
is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a holder of Preferred Stock to require NEHC to
repurchase such Preferred Stock as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of NEHC and its
Subsidiaries taken as a whole to another Person may be uncertain.
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ASSET SALES
The Certificate of Designations provides that NEHC will not, and will not
permit any of its Restricted Subsidiaries to, consummate an Asset Sale other
than transfers of Receivables to a Receivables Subsidiary in connection with a
Receivables Transaction unless (i) NEHC (or the Restricted Subsidiary, as the
case may be) receives consideration at the time of such Asset Sale at least
equal to the fair market value (evidenced by a resolution of the Board of
Directors set forth in an Officers' Certificate delivered to the Trustee) of the
assets or Equity Interests issued or sold or otherwise disposed of and (ii) at
least 80% of the consideration therefor received by NEHC or such Restricted
Subsidiary is in the form of cash; provided that the amount of (x) any
liabilities (as shown on NEHC's or such Restricted Subsidiary's most recent
balance sheet) of NEHC or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the
Preferred Stock or any guarantee thereof) that are assumed by the transferee of
any such assets pursuant to a customary novation agreement that releases NEHC or
such Restricted Subsidiary from further liability and (y) any securities, notes
or other obligations received by NEHC or any such Restricted Subsidiary from
such transferee that are converted by NEHC or such Restricted Subsidiary into
cash within 180 days (to the extent of the cash received), shall be deemed to be
cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
NEHC may apply such Net Proceeds, at its option, to permanently repay
Indebtedness, the acquisition of a controlling interest in another business, the
making of a capital expenditure or the acquisition of other long-term assets, in
each case, in a Permitted Business. Pending the final application of any such
Net Proceeds, NEHC may invest such Net Proceeds in any manner that is not
prohibited by the Certificate of Designations. Any Net Proceeds from Asset Sales
that are not applied or invested as provided in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $20.0 million, NEHC will be required to make
an offer to all holders of Preferred Stock (an "Asset Sale Offer") to purchase
the maximum principal amount of Preferred Stock that may be purchased out of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest and Liquidated Damages
thereon, if any, to the date of purchase, in accordance with the procedures set
forth in the Certificate of Designations. To the extent that the aggregate
amount of Preferred Stock tendered pursuant to an Asset Sale Offer is less than
the Excess Proceeds, NEHC may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate liquidated preference of Preferred Stock
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Preferred Stock to be purchased on a pro rata basis.
Upon completion of such offer to purchase, the amount of Excess Proceeds shall
be reset at zero.
CERTAIN COVENANTS
The sole remedy to holders of Preferred Stock in the event of a breach of
any of the covenants contained in the Certificate of Designations, including the
mandatory redemption provisions thereof, will be the voting rights arising from
certain circumstances described under "Voting Rights" and such breach by NEHC
will not cause any action taken by NEHC to be invalid or unauthorized under its
charter documents.
Restricted Payments
The Certificate of Designations provides that from and after the Issue
Date, NEHC will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly: (i) declare or pay any dividend or make any other
payment or distribution on account of NEHC's Junior Securities (including,
without limitation, any payment in connection with any merger or consolidation
involving NEHC) or to the direct or indirect holders of NEHC's Junior Securities
in their capacity as such (other than dividends or distributions payable in
Junior Securities of NEHC); (ii) purchase, redeem or otherwise acquire or retire
for value (including without limitation, in connection with any merger or
consolidation involving NEHC) any Junior Securities of NEHC or any direct or
indirect parent of NEHC; or (iii) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iii) above being
collectively referred to as "Restricted Payments"), unless, at the time of and
after giving effect to such Restricted Payment:
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(a) no Voting Rights Triggering Event shall have occurred and be
continuing or would occur as a consequence thereof;
(b) NEHC would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under caption "-- Incurrence of Indebtedness and Issuance
of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by NEHC and its Subsidiaries after the Issue
Date (excluding Restricted Payments permitted by clause (ii) of the next
succeeding paragraph), is less than the sum of (i) 50% of the Consolidated
Net Income of NEHC for the period (taken as one accounting period) from the
beginning of the first fiscal quarter commencing after the Issue Date to
the end of NEHC's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds
received by NEHC from the issue or sale since the Issue Date of Junior
Securities of NEHC, plus (iii) to the extent that any Restricted Investment
that was made after the Issue Date is sold for cash or otherwise liquidated
or repaid for cash, the lesser of (A) the cash return of capital with
respect to such Restricted Investment (less the cost of disposition, if
any) and (B) the initial amount of such Restricted Investment plus (iv) if
any Unrestricted Subsidiary (A) is redesignated as a Restricted Subsidiary,
the fair market value of such redesignated Subsidiary (as determined in
good faith by the Board of Directors) as of the date of its redesignation
or (B) pays any cash dividends or cash distributions to NEHC or any of its
Restricted Subsidiaries, 50% of any such cash dividends or cash
distributions made after the Issue Date.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Certificate of Designations; (ii) the redemption, repurchase, retirement,
defeasance or other acquisition of any Junior Securities of NEHC in exchange
for, or out of the net cash proceeds of the substantially concurrent sale or
issuance (other than to a Restricted Subsidiary of NEHC) of, other Junior
Securities of NEHC; provided that the amount of any such net cash proceeds that
are utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of
Junior Securities with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness; (iv) the payment of any dividend by a Restricted
Subsidiary of NEHC to the holders of its Equity Interests on a pro rata basis;
(v) the declaration or payment of dividends to Holberg for expenses incurred by
Holberg in its capacity as a holding company that are attributable to the
operations of NEHC and its Restricted Subsidiaries, including, without
limitation, (a) customary salary, bonus and other benefits payable to officers
and employees of Holberg, (b) fees and expenses paid to members of the Board of
Directors of Holberg, (c) general corporate overhead expenses of Holberg, (d)
foreign, federal, state or local tax liabilities paid by Holberg, (e)
management, consulting or advisory fees paid to Holberg not to exceed $1.0
million in any fiscal year, and (f) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of NEHC or Holberg
held by any member of NEHC's (or any of their Restricted Subsidiaries')
management pursuant to any management equity subscription agreement or stock
option agreement in effect as of the Issue Date; provided, however, the
aggregate amount paid pursuant to the foregoing clauses (a) through (f) does not
exceed $10.0 million in any fiscal year; (vii) Investments in any Person (other
than NEHC or a Wholly-Owned Restricted Subsidiary) engaged in a Permitted
Business in an amount not to exceed $7.0 million; (viii) other Investments in
Unrestricted Subsidiaries having an aggregate fair market value, taken together
with all other Investments made pursuant to this clause (viii) that are at that
time outstanding, not to exceed $3.0 million; (ix) Permitted Investments; (x)
payments to Holberg pursuant to the tax sharing agreement among Holberg and
other members of the affiliated corporations of which Holberg is the common
parent, and (xi) other Restricted Payments in an aggregate amount not to exceed
$15.0 million.
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The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Voting Rights
Triggering Event; provided that in no event shall the business currently
operated by any Subsidiary Guarantor be transferred to or held by an
Unrestricted Subsidiary. For purposes of making such determination, all
outstanding Investments by NEHC and its Restricted Subsidiaries (except to the
extent repaid in cash) in the Subsidiary so designated will be deemed to be
Restricted Payments at the time of such designation and will reduce the amount
available for Restricted Payments under the first paragraph of this covenant.
All such outstanding Investments will be deemed to constitute Investments in an
amount equal to the fair market value of such Investments at the time of such
designation (as determined in good faith by the Board of Directors). Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by NEHC or such Subsidiary, as the case may
be, pursuant to the Restricted Payment. The fair market value of any non-cash
Restricted Payment shall be determined in good faith by the Board of Directors
whose resolution with respect thereto shall be delivered to the Transfer Agent
such determination to be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, NEHC shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant "Restricted Payments" were
computed, together with a copy of any fairness opinion or appraisal required by
the Certificate of Designations.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Certificate of Designations provides that NEHC will not, and will not
permit any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that NEHC will not issue any
Disqualified Stock and will not permit any of its Subsidiaries to issue any
shares of Preferred Stock; provided, however that NEHC may incur Indebtedness
(including Acquired Debt) or issue shares of Disqualified Stock if NEHC's Fixed
Charge Coverage Ratio for the most recently ended four full fiscal quarters for
which internal financial statements are available immediately preceding the date
on which such additional Indebtedness is incurred or such Disqualified Stock is
issued would have been at least 2.0 to 1, determined on a pro forma basis
(including pro forma application of the net proceeds therefrom), as if such
Indebtedness had been incurred, or such Disqualified Stock had been issued, as
the case may be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Restricted Subsidiaries of NEHC of term
Indebtedness under the New Credit Facility; provided that the aggregate
principal amount of all term Indebtedness outstanding under the New Credit
Facility after giving effect to such incurrence does not exceed the aggregate
amount of term Indebtedness borrowed under the New Credit Facility on the date
of the Certificate of Designations less the aggregate amount of all repayments,
optional or mandatory, of the principal of any Indebtedness under the New Credit
Facility (other than repayments that are immediately reborrowed) that have been
made since the Issue Date; provided, that the foregoing proviso shall not apply
to Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (i);
(ii) the incurrence by the Restricted Subsidiaries of NEHC of revolving
credit Indebtedness and letters of credit pursuant to the New Credit Facility;
provided that the aggregate principal amount of all revolving credit
Indebtedness (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of the Restricted Subsidiaries of NEHC
thereunder) outstanding under the New Credit Facility after giving effect to
such incurrence does not exceed the aggregate amount of term Indebtedness
borrowed under the New Credit Facility on the Issue Date; provided that the
foregoing proviso shall not apply
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to Permitted Refinancing Indebtedness incurred to refinance or replace any
Indebtedness incurred pursuant to this clause (ii);
(iii) the incurrence by NEHC and its Restricted Subsidiaries of the
Existing Indebtedness;
(iv) the incurrence by NEHC of Indebtedness represented by the Exchange
Debentures issuable in accordance with the terms of the Certificate of
Designations;
(v) the incurrence by NEHC or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of NEHC or such Restricted
Subsidiary (whether through the direct purchase of assets or the Capital Stock
of any Person owning such Assets), in an aggregate principal amount not to
exceed $150 million;
(vi) the incurrence by NEHC or any of its Restricted Subsidiaries of
Indebtedness in connection with the acquisition of assets or a new Restricted
Subsidiary; provided that such Indebtedness was incurred by the prior owner of
such assets or such Restricted Subsidiary prior to such acquisition by NEHC or
one of its Subsidiaries and was not incurred in connection with, or in
contemplation of, such acquisition by NEHC or one of it Subsidiaries; provided,
further, that the principal amount (or accreted value, as applicable) of such
Indebtedness, together with any other outstanding Indebtedness incurred pursuant
to this clause (vi), does not exceed $7.0 million;
(vii) the incurrence by NEHC or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which
are used to refund, refinance or replace Indebtedness that was permitted by the
Certificate of Designations to be incurred;
(viii) the incurrence by NEHC or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among NEHC and any of its Wholly Owned
Restricted Subsidiaries; provided, however, that (A) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness being held by
a Person other than NEHC or a Wholly Owned Restricted Subsidiary and (B) any
sale or other transfer of any such Indebtedness to a Person that is not either
NEHC or a Wholly Owned Restricted Subsidiary shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by NEHC or such Restricted
Subsidiary, as the case may be;
(ix) the incurrence by NEHC or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
currency risk or interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the Certificate of Designations
to be outstanding;
(x) the guarantee by NEHC or any of its Restricted Subsidiaries of
Indebtedness of NEHC or a Restricted Subsidiary of NEHC that was permitted to be
incurred by another provision of this covenant;
(xi) the incurrence by NEHC's Unrestricted Subsidiaries of Non-Recourse
Debt, provided, however, that if any such Indebtedness ceases to be Non-Recourse
Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an
incurrence of Indebtedness by a Restricted Subsidiary of NEHC;
(xii) Asset Sales in the form of Receivables Transactions;
(xiii) Indebtedness incurred by NEHC any of its Restricted Subsidiaries
constituting reimbursement obligations with respect to letters of credit issued
in the ordinary course of business, including without limitation to letters of
credit in respect to workers' compensation claims or self-insurance, or other
Indebtedness with respect to reimbursement type obligations regarding workers'
compensation claims' provided, however, that upon the drawing of such letters of
credit or the incurrence of such Indebtedness, such obligations are reimbursed
within 30 days following such drawing or incurrence;
(xiv) Indebtedness arising from agreements of NEHC or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with the
disposition of any business, asset or a Subsidiary, other than guarantees of
Indebtedness incurred by any Person acquiring all or any portion of such
business, assets or a Subsidiary for the purpose of
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financing such acquisition; provided that the maximum aggregate liability of all
such Indebtedness shall at no time exceed 50% of the gross proceeds actually
received by NEHC and its Restricted Subsidiaries in connection with such
disposition;
(xv) obligations in respect of performance and surety bonds and completion
guarantees provided by NEHC or any Restricted Subsidiary in the ordinary course
of business;
(xvi) guarantees incurred in the ordinary course of business in an
aggregate principal amount not to exceed $7.0 million at any time outstanding;
and
(xvii) the incurrence by NEHC or any of its Restricted Subsidiaries of
additional Indebtedness, including Attributable Debt incurred after the Issue
Date, in an aggregate principal amount (or accreted value, as applicable) at any
time outstanding, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any other Indebtedness incurred pursuant to this
clause (xvii), not to exceed $30.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xvii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, NEHC
shall, in its sole discretion, classify such item of Indebtedness in any manner
that complies with this covenant and such item of Indebtedness will be treated
as having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof. Accrual of interest and the accretion of accreted value
will not be deemed to be an incurrence of Indebtedness for purposes of this
covenant.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Certificate of Designations provides that NEHC will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends
or make any other distributions to NEHC or any of its Restricted Subsidiaries
(1) on its Capital Stock or (2) with respect to any other interest or
participation in, or measured by, its profits, or (b) pay any indebtedness owed
to NEHC or any of its Restricted Subsidiaries, (ii) make loans or advances to
NEHC or any of its Restricted Subsidiaries or (iii) transfer any of its
properties or assets to NEHC or any of its Restricted Subsidiaries, except for
such encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the Issue Date, (b) the New Credit Facility as in
effect as of the Issue Date, and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
thereof, provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacement or refinancings are no more
restrictive in the aggregate (as determined by the Credit Agent in good faith)
with respect to such dividend and other payment restrictions than those
contained in the New Credit Facility as in effect on the Issue Date, (c) the
Certificate of Designations, the Preferred Stock, the New Preferred Stock, the
Exchange Debentures and the New Exchange Debentures (if issued), (d) any
applicable law, rule, regulation or order, (e) any instrument governing
Indebtedness or Capital Stock of a Person acquired by NEHC or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Certificate of
Designations to be incurred, (f) by reason of customary non-assignment
provisions in leases entered into in the ordinary course of business and
consistent with past practices, (g) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, (h)
Permitted Refinancing Indebtedness, provided that the material restrictions
contained in the agreements governing such Permitted Refinancing Indebtedness
are no more restrictive than those contained in the agreements governing the
Indebtedness being refinanced, (i) contracts for the sale of assets, including
without limitation customary restrictions with respect to a Subsidiary pursuant
to an agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock
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or assets of such Subsidiary, and (j) restrictions on cash or other deposits or
net worth imposed by customers under contracts entered into in the ordinary
course of business.
Merger, Consolidation or Sale of Assets
The Certificate of Designations provides that NEHC may not consolidate or
merge with or into (whether or not NEHC is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) NEHC is the surviving corporation or
the entity or the Person formed by or surviving any such consolidation or merger
(if other than NEHC) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation organized
or existing under the laws of the United States, any state thereof or the
District of Columbia; (ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than NEHC) or the entity or Person to which
such sale, assignment, transfer, lease, conveyance or other disposition shall
have been made assumes all the obligations of NEHC under the Preferred Stock and
the Certificate of Designations; (iii) immediately after such transaction no
Voting Rights Triggering Event exists; and (iv) except in the case of a merger
of NEHC with or into a Wholly Owned Restricted Subsidiary of NEHC, NEHC or the
entity or Person formed by or surviving any such consolidation or merger (if
other than NEHC), or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made will, at the time of such transaction
and after giving pro forma effect thereto as if such transaction had occurred at
the beginning of the applicable four-quarter period, be permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant described above
under the caption "-Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Certificate of Designations provides that NEHC will not, and will not
permit any of its Restricted Subsidiaries to, make any payment to, or sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction") involving consideration in excess of $5.0 million unless (i) such
Affiliate Transaction is on terms that are no less favorable to NEHC or the
relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction by NEHC or such Restricted Subsidiary with an unrelated
Person and (ii) NEHC delivers to the Transfer Agent (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $7.5 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving either aggregate consideration in excess of
$15.0 million or an aggregate consideration in excess of $10.0 million where
there are no disinterested members of the Board of Directors, an opinion as to
the fairness to the Holders of such Affiliate Transaction from a financial point
of view issued by an accounting, appraisal or investment banking firm of
national standing; provided that the following shall not be deemed Affiliate
Transactions: (q) any employment agreement entered into by NEHC or any of its
Restricted Subsidiaries in the ordinary course of business and consistent with
the past practice of NEHC or such Restricted Subsidiary, (r) transactions
between or among NEHC and/or its Restricted Subsidiaries, (s) Permitted
Investments and Restricted Payments that are permitted by the provisions of the
Certificate of Designations described above under the caption "-- Restricted
Payments," (t) customary loans, advances, fees and compensation paid to, and
indemnity provided on behalf of, officers, directors, employees or consultant of
NEHC or any of its Restricted Subsidiaries, (u) annual management fees paid to
Holberg Industries, Inc. not to exceed $10.0 million in any one year, (v)
transactions pursuant to any contract or agreement in effect on the Issue Date
of the Certificate of Designations as the same may be amended, modified or
replaced from time to time so long as any such amendment, modification or
replacement is no less favorable to NEHC and its Restricted Subsidiaries than
contract or agreement as in effect on the Issue Date or is approved by a
majority of the disinterested directors
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of NEHC, (w) transactions between NEHC or its Restricted Subsidiaries on the one
hand, and Holberg on the other hand, involving the provision of financial or
advisory services by Holberg; provided that fees payable to Holberg do not
exceed the usual and customary fees for similar services, (x) transactions
between NEHC or its Restricted Subsidiaries on the one hand, and DLJ on the
other hand, involving the provision of financial, advisory, placement or
underwriting services by DLJ; provided that fees payable to DLJ do not exceed
the usual and customary fees of DLJ for similar services, (y) the insurance
arrangements between NEHC and its Subsidiaries and an Affiliate of Holberg that
are not less favorable to NEHC or any of its Subsidiaries than those that are in
effect on the date hereof provided such arrangements are conducted in the
ordinary course of business consistent with past practices; and (z) payments
under the tax sharing agreement among Holberg and other members of the
affiliated group of corporations of which it is the common parent.
Sale and Leaseback Transactions
The Certificate of Designations provides that NEHC will not, and will not
permit any of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that NEHC may enter into a sale and leaseback transaction
if (i) NEHC could have incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback transaction pursuant to
the covenant described above under the caption "-- Incurrence of Additional
Indebtedness and Issuance of Preferred Stock", (ii) the gross cash proceeds of
such sale and leaseback transaction are at least equal to the fair market value
(as determined in good faith by the Board of Directors and set forth in an
Officers' Certificate delivered to the Transfer Agent) of the property that is
the subject of such sale and leaseback transaction and (iii) the transfer of
assets in such sale and leaseback transaction is permitted by, and NEHC applies
the proceeds of such transaction in compliance with, the covenant described
above under the caption "-- Asset Sales."
Limitation on Issuances and Sales of Capital Stock of Wholly Owned
Restricted Subsidiaries
The Certificate of Designations will provide that NEHC (i) will not, and
will not permit any Wholly Owned Restricted Subsidiary of NEHC to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any Wholly
Owned Subsidiary of NEHC to any Person (other than NEHC or a Wholly Owned
Restricted Subsidiary of NEHC), unless (a) such transfer, conveyance, sale,
lease or other disposition is of all the Capital Stock of such Wholly Owned
Restricted Subsidiary and (b) the cash Net Proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with the
covenant described above under the caption "-- Asset Sales," and (ii) will not
permit any Wholly Owned Restricted Subsidiary of NEHC to issue any of its Equity
Interests (other than, if necessary, shares of its Capital Stock constituting
directors' qualifying shares) to any Person other than to NEHC or a Wholly Owned
Restricted Subsidiary of NEHC.
Business Activities
NEHC will not, and will not permit any Restricted Subsidiary to, engage in
any business other than a Permitted Business, except to such extent as would not
be material to NEHC and its Restricted Subsidiaries taken as a whole.
Reports
The Certificate of Designations provides that, whether or not required by
the rules and regulations of the Commission, so long as any Preferred Stock, New
Preferred Stock, Exchange Debentures or New Exchange Debentures (if issued) are
outstanding, NEHC will furnish to the holders of Preferred Stock, New Preferred
Stock, Exchange Debentures or New Exchange Debentures, as applicable, (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if NEHC were
required to file such Forms, including a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and, with respect to the
annual information only, a report thereon by NEHC's certified independent
accountants; (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if NEHC were required to file such reports. In
addition, whether or not required by the rules and regulations of the
Commission, NEHC will file a copy of all such information
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and reports with the Commission for public availability (unless the Commission
will not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, NEHC has agreed
that, for so long as any Preferred Stock, New Preferred Stock, Exchange
Debentures or New Exchange Debentures, as the case may be, remain outstanding,
it will furnish to the holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
CERTAIN DEFINITIONS RELATING TO THE PREFERRED STOCK
Set forth below are certain defined terms used in the Certificate of
Designations. Reference is made to the Certificate of Designations for a full
disclosure of all such terms, as well as any other capitalized terms used herein
for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices and other than a Receivables Transaction
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of NEHC and its Restricted Subsidiaries taken as
a whole will be governed by the provisions of the Certificate of Designations
described above under the caption "-- Change of Control" and/or the provisions
described above under the caption "-- Merger, Consolidation or Sale of Assets"
and not by the provisions of the Asset Sale covenant), and (ii) the issue or
sale by NEHC or any of its Restricted Subsidiaries of Equity Interests of any of
NEHC's Restricted Subsidiaries, in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $3.0 million or (b) for net proceeds in
excess of $3.0 million. Notwithstanding the foregoing: (i) a transfer of assets
by NEHC to a Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted
Subsidiary to NEHC or to another Wholly Owned Restricted Subsidiary, (ii) an
issuance of Equity Interests by a Wholly Owned Restricted Subsidiary to NEHC or
to another Wholly Owned Restricted Subsidiary, and (iii) a Restricted Payment
that is permitted by the covenant described above under the caption
"-- Restricted Payments" will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership
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interests (whether general or limited) and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any lender party to the New Credit
Facility or with any domestic commercial bank having capital and surplus in
excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above, (v) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each
case maturing within six months after the date of acquisition and (vi)
securities quoted by the Nasdaq National Market or listed on a United States,
Canadian or Western European national securities exchange.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of NEHC and its Subsidiaries taken as a whole to
any "person" (as such term is used in Section 13(d)(3) of the Exchange Act)
other than the Principals or their Related Parties (as defined below), (ii) the
adoption of a plan relating to the liquidation or dissolution of NEHC, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above),
other than the Principals and their Related Parties, becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
currently exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 50% of the Voting Stock of NEHC
(measured by voting power rather than number of shares), (iv) the first day on
which a majority of the members of the Board of Directors of NEHC are not
Continuing Directors or (v) NEHC consolidates with, or merges with or into, any
Person or sells, assigns, conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets to any Person, or any Person consolidates
with, or merges with or into, NEHC, in any such event pursuant to a transaction
in which any of the outstanding Voting Stock of NEHC is converted into or
exchanged for cash, securities or other property, other than any such
transaction where the Voting Stock of NEHC outstanding immediately prior to such
transaction is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving or
transferee Person (immediately after giving effect to such issuance).
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or
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amortization of a prepaid cash expense that was paid in a prior period) of such
Person and its Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, plus (v) projected quantifiable
improvements in operating results (on an annualized basis) due to cost
reductions calculated in good faith by NEHC or one of its Restricted
Subsidiaries, as evidenced by (A) in the case of cost reductions of less than
$10.0 million, an Officers' Certificate delivered to the Trustee and (B) in the
case of cost reductions of $10.0 million or more, a resolution of the Board of
Directors set forth in an Officers' Certificate delivered to the Trustee, minus
(vi) non-cash items increasing such Consolidated Net Income for such period.
Notwithstanding the foregoing, the provision for taxes on the income or profits
of, and the depreciation and amortization and other non-cash charges of, a
Subsidiary of the referent Person shall be added to Consolidated Net Income to
compute Consolidated Cash Flow only to the extent that a corresponding amount
would be permitted at the date of determination to be dividended to NEHC by such
Subsidiary without prior governmental approval (that has not been obtained), and
without direct or indirect restriction pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Subsidiary or its stockholders,
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iv) the cumulative effect of a change in accounting principles shall
be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be
excluded, whether or not distributed to NEHC or one of its Restricted
Subsidiaries for purposes of the covenant described under the covenant
"Incurrence of Indebtedness and Issuance of Preferred Stock."
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of NEHC who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election.
"Credit Agent" means the Bank of America, in its capacity as Administrative
Agent for the lenders party to the New Credit Facility or any successor thereto
or any person otherwise appointed.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Preferred Stock mature; provided,
however, that any Capital Stock that would not qualify as Disqualified Stock but
for change of control provisions shall not constitute Disqualified Stock if the
provisions are not more favorable to the holders of such Capital Stock than the
provisions described under "-- Change of Control" applicable to the Holders of
the Preferred Stock.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Offer" means the exchange offer of the Preferred Stock for the
New Preferred Stock, or, if the Preferred Stock is exchanged for Exchange
Debentures in accordance with the provisions of the Certificate of Designations,
the exchange offer of the Exchange Debentures for the New Exchange Debentures,
as applicable, pursuant to the Registration Rights Agreement.
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"Existing Indebtedness" means Indebtedness of NEHC and its Subsidiaries
(other than Indebtedness under the New Credit Facility) in existence on the
Issue Date, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations) and (ii) the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period, and (iii) any
interest expense on Indebtedness of another Person that is Guaranteed by such
Person or one of its Restricted Subsidiaries or secured by a Lien on assets of
such Person or one of its Restricted Subsidiaries (whether or not such Guarantee
or Lien is called upon) and (iv) the product of (a) all dividend payments,
whether or not in cash, on any series of preferred stock of such Person or any
of its Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of NEHC, times (b) a fraction, the numerator
of which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of such Person, expressed
as a decimal, in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that NEHC or any of
its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by NEHC or any of its Restricted Subsidiaries, including through
mergers or consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date shall be deemed to have occurred on the
first day of the four-quarter reference period and Consolidated Cash Flow for
such reference period shall be calculated without giving effect to clause (iii)
of the proviso set forth in the definition of Consolidated Net Income, and (ii)
the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the referent Person or any of its Restricted
Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
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"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or currency rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness that does not require current payments
of interest, and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If NEHC or any Restricted Subsidiary of NEHC sells or otherwise disposes of any
Equity Interests of any direct or indirect Restricted Subsidiary of NEHC such
that, after giving effect to any such sale or disposition, such Person is no
longer a Restricted Subsidiary of NEHC, NEHC shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Restricted Subsidiary not sold or disposed
of in an amount determined as provided in the final paragraph of the covenant
described above under the caption "-- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by NEHC or any of
its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), and any
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reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"New Credit Facility" means that certain Credit Facility, dated as of July
11, 1997, by and among AmeriServe and Bank of America, providing for up to
$150.0 million of revolving credit borrowings, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time.
"Non-Recourse Debt" means Indebtedness (i) as to which neither NEHC nor any
of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of NEHC or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated maturity;
and (iii) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of NEHC or any of its Restricted
Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any of the businesses and any other businesses
related to the businesses engaged in by NEHC and its respective Restricted
Subsidiaries on the date of the Issue Date.
"Permitted Investments" means (a) any Investment in NEHC or in a Wholly
Owned Restricted Subsidiary of NEHC that is engaged in a Permitted Business; (b)
any Investment in Cash Equivalents; (c) any Investment by NEHC or any Restricted
Subsidiary of NEHC in a Person, if as a result of such Investment (i) such
Person becomes a Wholly Owned Restricted Subsidiary of NEHC that is engaged in a
Permitted Business or (ii) such Person is merged, consolidated or amalgamated
with or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, NEHC or a Wholly Owned Restricted Subsidiary of NEHC that is
engaged in a Permitted Business; (d) any Restricted Investment made as a result
of the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "-- Repurchase at the Option of Holders -- Asset Sales"; (e) any
acquisition of assets solely in exchange for the issuance of Equity Interests
(other than Disqualified Stock) of NEHC; (f) loans and advances made after the
Issue Date to Holberg Industries, Inc. not to exceed $12.0 million at any time
outstanding; and (g) other Investments made after the Issue Date in any Person
having an aggregate fair market value (measured on the date each such Investment
was made and without giving effect to subsequent changes in value), when taken
together with all other Investments made pursuant to this clause (g) that are at
the time outstanding, not to exceed $12.0 million.
"Permitted Refinancing Indebtedness" means any Indebtedness of NEHC or any
of its Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of NEHC or any of its Restricted Subsidiaries; provided that: (i)
except for Indebtedness used to extend, refinance, renew, replace, defease or
refund the New Credit Facility, the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses incurred in connection
therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iii) such Indebtedness is incurred either by NEHC or by the
Restricted Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Principals" means Holberg Industries, Inc., John V. Holten, Orkla, Nebco
Evans Distributors, Inc. and DLJ Merchant Banking, L.P.
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"Public Equity Offering" means a public offering of Equity Interests (other
than Disqualified Stock) of (i) NEHC; or (ii) Holberg.
"Receivables" means, with respect to any Person or entity, all of the
following property and interests in property of such Person or entity, whether
now existing or existing in the future or hereafter acquired or arising: (i)
accounts, (ii) accounts receivable incurred in the ordinary course of business,
including without limitation, all rights to payment created by or arising from
sales of goods, leases of goods or the rendition of services no matter how
evidenced, whether or not earned by performance, (iii) all rights to any goods
or merchandise represented by any of the foregoing after creation of the
foregoing, including, without limitation, returned or repossessed goods, (iv)
all reserves and credit balances with respect to any such accounts receivable or
account debtors, (v) all letters of credit, security, or guarantees for any of
the foregoing, (vi) all insurance policies or reports relating to any of the
foregoing, (vii) all collection or deposit accounts relating to any of the
foregoing, (viii) all proceeds of the foregoing and (ix) all books and records
relating to any of the foregoing.
"Receivables Subsidiary" means an Unrestricted Subsidiary exclusively
engaged in Receivables Transactions and activities related thereto; provided,
however, that (i) at no time shall NEHC and its Subsidiaries have more than one
Receivables Subsidiary and (ii) all Indebtedness or other borrowings of such
Unrestricted Subsidiary shall be Non-Recourse Debt.
"Receivables Transaction" means (i) the sale or other disposition to a
third party of Receivables or an interest therein, or (ii) the sale or other
disposition of Receivables or an interest therein to a Receivables Subsidiary
followed by a financing transaction in connection with such sale or disposition
of such Receivables (whether such financing transaction is effected by such
Receivables Subsidiary or by a third party to whom such Receivables Subsidiary
sells such Receivables or interests therein); provided that in each of the
foregoing, NEHC or its Subsidiaries receive at least 80% of the aggregate
principal amount of any Receivables financed in such transaction.
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (B) or trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with NEHC or any Restricted Subsidiary of NEHC
unless the terms of any such agreement,
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contract, arrangement or understanding are no less favorable to NEHC or such
Restricted Subsidiary than those that might be obtained at the time from Persons
who are not Affiliates of NEHC; (c) is a Person with respect to which neither
NEHC nor any of its Restricted Subsidiaries has any direct or indirect
obligation (x) to subscribe for additional Equity Interests or (y) to maintain
or preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; (d) has not guaranteed or otherwise
directly or indirectly provided credit support for any Indebtedness of NEHC or
any of its Restricted Subsidiaries; and (e) has at least one director on its
board of directors that is not a director or executive officer of NEHC or any of
its Restricted Subsidiaries and has at least one executive officer that is not a
director or executive officer of NEHC or any of its Restricted Subsidiaries. Any
such designation by the Board of Directors shall be evidenced to the Transfer
Agent by filing with the Transfer Agent a certified copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "Certain Covenants -- Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Certificate of Designations
and any Indebtedness of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of NEHC as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under the
caption "Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock," NEHC shall be in default of such covenant). The Board of
Directors of NEHC may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of NEHC of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant described
under the caption "Certain Covenants -- Incurrence of Indebtedness and Issuance
of Preferred Stock," and (ii) no Voting Rights Triggering Event would be in
existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
DESCRIPTION OF EXCHANGE DEBENTURES
GENERAL
The Exchange Debentures will, if and when issued, be issued pursuant to an
indenture to be dated as of the date of first issuance (the "Exchange Date") of
the Exchange Debentures (the "Exchange Debenture Indenture") among NEHC and The
Bank of New York, as trustee (the "Trustee"). The terms of the Exchange
Debentures include those stated in the Exchange Debenture Indenture and those
made part of the Exchange Debenture Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Exchange
Debentures are subject to all such terms, and Holders of Exchange Debentures are
referred to the Exchange Debenture Indenture and the Trust Indenture Act for a
statement thereof. The following summary of the material provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Exchange Debenture Indenture, including the definitions therein
of certain terms used below. Copies of the proposed form of Exchange Debenture
Indenture and Registration Rights Agreement are available as set forth below
under "-- Additional Information." As used in
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this Description of Exchange Debentures, the term "Company" refers to Nebco
Evans Holding Company, excluding its subsidiaries and references to the Exchange
Debentures shall be deemed to include the New Exchange Debentures to be issued
pursuant to the terms of the Registration Rights Agreement. The definitions of
certain terms used in the following summary are set forth below under
"-- Certain Definitions Relating to the Exchange Debentures."
The Exchange Debentures will be subordinated in right of payment to all
Senior Debt of NEHC. In addition, as obligations of a holding company, the
Exchange Debentures will be effectively subordinated to all obligations of the
Subsidiaries of NEHC. As of December 27, 1997, on a pro forma basis after giving
effect to the Offering and the ProSource Acquisition, the Exchange Debentures,
if issued, would have been subordinated to approximately $948.7 million of
Senior Debt. See "Risk Factors -- Holding Company Structure; Effective
Subordination."
PRINCIPAL, MATURITY AND INTEREST
The Exchange Debentures will be general unsecured obligations of NEHC and
will mature on March 1, 2008. The Exchange Debentures will bear interest at the
rate of 11 1/4% per annum and will be payable quarterly in arrears on March 1,
June 1, September 1 and December 1 of each year to Holders of record on the
immediately preceding February 15, May 15, August 15 and November 15. Interest
payable on the Exchange Debentures may be paid in the form of additional
Exchange Debentures valued at the principal amount thereof. Interest on the
Exchange Debentures will accrue from the most recent date to which interest has
been paid or, if no interest has been paid, from the Exchange Date. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. Principal, premium and Liquidated Damages, if any, and interest on the
Exchange Debentures will be payable at the office or agency of NEHC maintained
for such purpose within the City and State of New York or, at the option of
NEHC, payment of interest and Liquidated Damages, if any, may be made by check
mailed to the Holders of the Exchange Debentures at their respective addresses
set forth in the register of Holders of Exchange Debentures; provided that all
payments of principal, premium and Liquidated Damages, if any, and interest with
respect to Exchange Debentures the Holders of which have given wire transfer
instructions to NEHC will be required to be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof. Until
otherwise designated by NEHC, NEHC's office or agency in New York will be the
office of the Trustee maintained for such purpose. The Exchange Debentures will
be issued in denominations of $1,000 and integral multiples thereof.
SUBORDINATION
The payment of principal of, premium and Liquidated Damages, if any, and
interest on the Exchange Debentures will be subordinated in right of payment, as
set forth in the Exchange Debenture Indenture, to the prior payment in full of
all Senior Debt, whether outstanding on the date of the Exchange Debenture
Indenture or thereafter created, incurred or assumed and all permissible
renewals, extensions, refundings or refinancings thereof.
The Exchange Debenture Indenture will provide that, upon any payment or
distribution of assets of NEHC of any kind or character, whether in cash,
property or securities, to creditors in any Insolvency or Liquidation Proceeding
with respect to NEHC all amounts due or to become due under or with respect to
all Senior Debt will first be paid in full in cash before any payment is made on
account of the Exchange Debentures, except that the Holders of Exchange
Debentures may receive Reorganization Securities. Upon any such Insolvency or
Liquidation Proceeding, any payment or distribution of assets of NEHC of any
kind or character, whether in cash, property or securities (other than
Reorganization Securities), to which the Holders of the Exchange Debentures or
the Trustee would be entitled will be paid by NEHC or by any receiver, trustee
in bankruptcy, liquidating trustee, agent or other person making such payment or
distribution, or by the Holders of the Exchange Debentures or by the Trustee if
received by them, directly to the holders of Senior Debt (pro rata to such
holders on the basis of the amounts of Senior Debt held by such holders) or
their Representative or Representatives, as their interests may appear, for
application to the payment of the
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Senior Debt remaining unpaid until all such Senior Debt has been paid in full in
cash, after giving effect to any concurrent payment, distribution or provision
therefor to or for the holders of Senior Debt.
The Exchange Debenture Indenture will provide that (a) in the event of and
during the continuation of any default in the payment of principal of, interest
or premium, if any, on any Senior Debt, or any Obligation owing from time to
time under or in respect of Senior Debt, or in the event that any event of
default (other than a payment default) with respect to any Senior Debt will have
occurred and be continuing and will have resulted in such Senior Debt becoming
or being declared due and payable prior to the date on which it would otherwise
have become due and payable, or (b) if any event of default other than as
described in clause (a) above with respect to any Designated Senior Debt will
have occurred and be continuing permitting the holders of such Designated Senior
Debt (or their Representative or Representatives) to declare such Designated
Senior Debt due and payable prior to the date on which it would otherwise have
become due and payable, then no payment will be made by or on behalf of NEHC on
account of the Exchange Debentures (other than payments in the form of
Reorganization Securities) (x) in case of any payment or nonpayment default
specified in (a), unless and until such default will have been cured or waived
in writing in accordance with the instruments governing such Senior Debt or such
acceleration will have been rescinded or annulled, or (y) in case of any
nonpayment event of default specified in (b), during the period (a "Payment
Blockage Period") commencing on the date NEHC or the Trustee receive written
notice (a "Payment Notice") of such event of default (which notice will be
binding on the Trustee and the Holders of Exchange Debentures as to the
occurrence of such a payment default or nonpayment event of default) from the
Credit Agent (or other holders of Designated Senior Debt or their Representative
or Representatives) and ending on the earliest of (A) 179 days after such date,
(B) the date, if any, on which such Designated Senior Debt to which such default
relates is paid in full in cash or such default is cured or waived in writing in
accordance with the instruments governing such Designated Senior Debt by the
holders of such Designated Senior Debt and (C) the date on which the Trustee
receives written notice from the Credit Agent (or other holders of Designated
Senior Debt or their Representative or Representatives), as the case may be,
terminating the Payment Blockage Period. During any consecutive 360-day period,
the aggregate of all Payment Blockage Periods shall not exceed 179 days and
there shall be a period of at least 181 consecutive days in each consecutive
360-day period when no Payment Blockage Period is in effect. No event of default
which existed or was continuing with respect to the Senior Debt for which notice
commencing a Payment Blockage Period was given on the date such Payment Blockage
Period commenced shall be or be made the basis for the commencement of any
subsequent Payment Blockage Period unless such event of default is cured or
waived for a period of not less than 90 consecutive days.
As a result of the subordination provisions described above, in the event
of NEHC's liquidation, dissolution, bankruptcy, reorganization, insolvency,
receivership or similar proceeding or in an assignment for the benefit of the
creditors or a marshalling of the assets and liabilities of NEHC, Holders of
Exchange Debentures may recover less ratably than creditors of NEHC who are
holders of Senior Debt. See "Risk Factors -- Subordination." The Exchange
Debenture Indenture will limit, subject to certain financial tests, the amount
of additional Indebtedness, including Senior Debt, that NEHC and its Restricted
Subsidiaries can incur. See "-- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Preferred Stock."
OPTIONAL REDEMPTION
The Exchange Debentures will not be redeemable at NEHC's option prior to
March 1, 2003. Thereafter, the Exchange Debentures will be subject to redemption
at any time at the option of NEHC, in whole or in part, upon not less than 30
nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest and Liquidated Damages thereon, if
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any, to the applicable redemption date, if redeemed during the twelve-month
period beginning on March 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003...................................................... 105.625%
2004...................................................... 103.750%
2005...................................................... 101.875%
2006 and thereafter....................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time NEHC may redeem the Exchange
Debentures, in whole or in part, at the option of NEHC, at a redemption price of
109.000% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the redemption date with the net cash
proceeds of one or more Public Equity Offerings; provided that such redemption
shall occur within 45 days of the date of the closing of such Public Equity
Offerings.
SELECTION AND NOTICE
If less than all of the Exchange Debentures are to be redeemed at any time,
selection of Exchange Debentures for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Exchange Debentures are listed, or, if the Exchange
Debentures are not so listed, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided that no Exchange
Debentures of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Exchange Debentures to be redeemed at its
registered address. Notices of redemption may not be conditional. If any
Exchange Debenture is to be redeemed in part only, the notice of redemption that
relates to such Exchange Debenture shall state the portion of the principal
amount thereof to be redeemed. A new Exchange Debenture in principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Exchange Debenture. Exchange
Debentures called for redemption become due on the date fixed for redemption. On
and after the redemption date, interest ceases to accrue on Exchange Debentures
or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders,"
NEHC is not required to make mandatory redemption or sinking fund payments with
respect to the Exchange Debentures.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Exchange
Debentures will have the right to require NEHC to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's Exchange
Debentures pursuant to the offer described below (the "Change of Control Offer")
at an offer price in cash equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any,
to the date of purchase (the "Change of Control Payment"). Within 30 days
following any Change of Control, NEHC will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of Control
and offering to repurchase Exchange Debentures on the date specified in such
notice, which date shall be no earlier than 30 days and no later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Exchange Debenture Indenture and
described in such notice. NEHC will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable in connection with the
repurchase of the Exchange Debentures as a result of a Change of Control.
On the Change of Control Payment Date, NEHC will, to the extent lawful, (1)
accept for payment all Exchange Debentures or portions thereof properly tendered
pursuant to the Change of Control Offer,
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(2) deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all Exchange Debentures or portions thereof so tendered
and (3) deliver or cause to be delivered to the Trustee the Exchange Debentures
so accepted together with an Officers' Certificate stating the aggregate
principal amount of Exchange Debentures or portions thereof being purchased by
NEHC. The Paying Agent will promptly mail to each Holder of Exchange Debentures
so tendered the Change of Control Payment for such Exchange Debentures, and the
Trustee will promptly authenticate and mail (or cause to be transferred by book
entry) to each Holder a new Exchange Debenture equal in principal amount to any
unpurchased portion of the Exchange Debentures surrendered, if any; provided
that each such new Exchange Debenture will be in a principal amount of $1,000 or
an integral multiple thereof. NEHC will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
Due to Change of Control repayment provisions in the Senior Discount
Indenture and in certain indebtedness of NEHC's Subsidiaries and the existence
of a Change of Control event of default in the New Credit Facility, it is
unlikely that NEHC would be able to repurchase all of the Exchange Debentures
upon the occurrence of a Change of Control. See "Risk Factors -- Payment Upon
Change of Control." The ability of NEHC to redeem all of the Exchange Debentures
upon a Change of Control may also be limited by restrictions on the ability of
NEHC's Subsidiaries to pay dividends to NEHC. Finally, the Exchange Debentures
will be effectively subordinated to Obligations of Subsidiaries of NEHC,
including with respect to Change of Control Payments. See "-- General."
The Change of Control provision of the Exchange Debenture Indenture could
have the effect of deterring certain acquisition proposals which would
constitute a Change of Control even if such acquisition might be beneficial to
certain Holders of Exchange Debentures, as well as restricting the ability of
NEHC to obtain additional financing in the future.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Exchange Debenture Indenture are applicable.
Except as described above with respect to a Change of Control, the Exchange
Debenture Indenture does not contain provisions that permit the Holders of the
Exchange Debentures to require that NEHC repurchase or redeem the Exchange
Debentures in the event of a takeover, recapitalization or similar transaction.
NEHC will not be required to make a Change of Control Offer upon a Change
of Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
Exchange Debenture Indenture applicable to a Change of Control Offer made by
NEHC and purchases all Exchange Debentures validly tendered and not withdrawn
under such Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of NEHC and its Subsidiaries taken as a whole. Although there is a
developing body of case law interpreting the phrase "substantially all," there
is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a Holder of Exchange Debentures to require NEHC to
repurchase such Exchange Debentures as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of NEHC and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Exchange Debenture Indenture will provide that NEHC will not, and will
not permit any of its Restricted Subsidiaries to, consummate an Asset Sale other
than transfers of Receivables to a Receivables Subsidiary in connection with a
Receivables Transaction unless (i) NEHC (or the Restricted Subsidiary, as the
case may be) receives consideration at the time of such Asset Sale at least
equal to the fair market value (evidenced by a resolution of the Board of
Directors set forth in an Officers' Certificate delivered to the Trustee) of the
assets or Equity Interests issued or sold or otherwise disposed of and (ii) at
least 80% of the consideration therefor received by NEHC or such Restricted
Subsidiary is in the form of cash; provided that the amount of (x) any
liabilities (as shown on NEHC's or such Restricted Subsidiary's most recent
balance sheet) of NEHC or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their
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terms subordinated to the Exchange Debentures or any guarantee thereof) that are
assumed by the transferee of any such assets pursuant to a customary novation
agreement that releases NEHC or such Restricted Subsidiary from further
liability and (y) any securities, notes or other obligations received by NEHC or
any such Restricted Subsidiary from such transferee that are converted by NEHC
or such Restricted Subsidiary into cash within 180 days (to the extent of the
cash received), shall be deemed to be cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
NEHC may apply such Net Proceeds, at its option, (a) to permanently repay Senior
Debt (and to correspondingly reduce commitments with respect thereto in the case
of revolving borrowings) or (b) to the acquisition of a controlling interest in
another business, the making of a capital expenditure or the acquisition of
other long-term assets, in each case, in a Permitted Business. Pending the final
application of any such Net Proceeds, NEHC may invest such Net Proceeds in any
manner that is not prohibited by the Exchange Debenture Indenture. Any Net
Proceeds from Asset Sales that are not applied or invested as provided in the
first sentence of this paragraph will be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $20.0 million, NEHC will be
required to make an offer to all Holders of Exchange Debentures (an "Asset Sale
Offer") to purchase the maximum principal amount of Exchange Debentures that may
be purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the principal amount thereof plus accrued and unpaid interest
and Liquidated Damages thereon, if any, to the date of purchase, in accordance
with the procedures set forth in the Exchange Debenture Indenture. To the extent
that the aggregate amount of Exchange Debentures tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, NEHC may use any remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
Exchange Debentures surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Exchange Debentures to be purchased on a
pro rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
CERTAIN COVENANTS
Restricted Payments
The Exchange Debenture Indenture will provide that from and after the date
of the Exchange Debenture Indenture NEHC will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of NEHC's or any
of its Restricted Subsidiaries' Equity Interests (including, without limitation,
any payment in connection with any merger or consolidation involving NEHC) or to
the direct or indirect holders of NEHC's or any of its Restricted Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
NEHC); (ii) purchase, redeem or otherwise acquire or retire for value (including
without limitation, in connection with any merger or consolidation involving
NEHC) any Equity Interests of NEHC or any direct or indirect parent of NEHC;
(iii) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness of NEHC that is pari
passu with or subordinated to the Exchange Debentures (other than Exchange
Debentures), except a payment of interest or principal at Stated Maturity; or
(iv) make any Restricted Investment (all such payments and other actions set
forth in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) NEHC would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under caption "-- Incurrence of Indebtedness and Issuance
of Preferred Stock"; and
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(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by NEHC and its Subsidiaries after March 6,
1998 (excluding Restricted Payments permitted by clause (ii) of the next
succeeding paragraph), is less than the sum of (i) 50% of the Consolidated
Net Income of NEHC for the period (taken as one accounting period) from the
beginning of the first fiscal quarter commencing after March 6, 1998 to the
end of NEHC's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds
received by NEHC from the issue or sale since the date of the Exchange
Debenture Indenture of Equity Interests of NEHC (other than Disqualified
Stock) or of Disqualified Stock or debt securities of NEHC that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of
NEHC and other than Disqualified Stock or convertible debt securities that
have been converted into Disqualified Stock), plus (iii) to the extent that
any Restricted Investment that was made after the date of the Exchange
Debenture Indenture is sold for cash or otherwise liquidated or repaid for
cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment plus (iv) if any Unrestricted
Subsidiary (A) is redesignated as a Restricted Subsidiary, the fair market
value of such redesignated Subsidiary (as determined in good faith by the
Board of Directors) as of the date of its redesignation or (B) pays any
cash dividends or cash distributions to NEHC or any of its Restricted
Subsidiaries, 50% of any such cash dividends or cash distributions made
after the date of the Exchange Debenture Indenture.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the Exchange
Debenture Indenture; (ii) the redemption, repurchase, retirement, defeasance or
other acquisition of any pari passu or subordinated Indebtedness or Equity
Interests of NEHC in exchange for, or out of the net cash proceeds of the
substantially concurrent sale or issuance (other than to a Restricted Subsidiary
of NEHC) of, other Equity Interests of NEHC (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other acquisition shall
be excluded from clause (c) (ii) of the preceding paragraph; (iii) the
defeasance, redemption, repurchase or other acquisition of pari passu or
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a
Restricted Subsidiary of NEHC to the holders of its Equity Interests on a pro
rata basis; (v) the declaration or payment of dividends to Holberg for expenses
incurred by Holberg in its capacity as a holding company that are attributable
to the operations of NEHC and its Restricted Subsidiaries, including, without
limitation, (a) customary salary, bonus and other benefits payable to officers
and employees of Holberg, (b) fees and expenses paid to members of the Board of
Directors of Holberg, (c) general corporate overhead expenses of Holberg, (d)
foreign, federal, state or local tax liabilities paid by Holberg, (e)
management, consulting or advisory fees paid to Holberg not to exceed $1.0
million in any fiscal year, and (f) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of NEHC or Holberg
held by any member of NEHC's (or any of their Restricted Subsidiaries')
management pursuant to any management equity subscription agreement or stock
option agreement in effect as of the date of the Exchange Debenture Indenture;
provided, however, the aggregate amount paid pursuant to the foregoing clauses
(a) through (f) does not exceed $10.0 million in any fiscal year; (vii)
Investments in any Person (other than NEHC or a Wholly-Owned Restricted
Subsidiary) engaged in a Permitted Business in an amount not to exceed $7.0
million; (viii) other Investments in Unrestricted Subsidiaries having an
aggregate fair market value, taken together with all other Investments made
pursuant to this clause (viii) that are at that time outstanding, not to exceed
$3.0 million; (ix) Permitted Investments; (x) payments to Holberg pursuant to
the tax sharing agreement among Holberg and other members of the affiliated
corporations of which Holberg is the common parent, and (xi) other Restricted
Payments in an aggregate amount not to exceed $15.0 million.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default; provided
that in no event shall the business currently operated by any Subsidiary
Guarantor be transferred to or held by an Unrestricted Subsidiary. For purposes
of making such determination, all outstanding Investments by NEHC and its
Restricted Subsidiaries (except to the extent
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repaid in cash) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the fair market value of such Investments at the time of such
designation (as determined in good faith by the Board of Directors). Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by NEHC or such Subsidiary, as the case may
be, pursuant to the Restricted Payment. The fair market value of any non-cash
Restricted Payment shall be determined in good faith by the Board of Directors
whose resolution with respect thereto shall be delivered to the Trustee such
determination to be based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if such fair market
value exceeds $10.0 million. Not later than the date of making any Restricted
Payment, NEHC shall deliver to the Trustee an Officers' Certificate stating that
such Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed,
together with a copy of any fairness opinion or appraisal required by the
Exchange Debenture Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Exchange Debenture Indenture will provide that NEHC will not, and will
not permit any of its Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that NEHC will not issue any
Disqualified Stock and will not permit any of its Subsidiaries to issue any
shares of preferred stock; provided, however, that NEHC may incur Indebtedness
(including Acquired Debt) or issue shares of Disqualified Stock if the Fixed
Charge Coverage Ratio for NEHC's most recently ended four full fiscal quarters
for which internal financial statements are available immediately preceding the
date on which such additional Indebtedness is incurred or such Disqualified
Stock is issued would have been at least 2.0 to 1, determined on a pro forma
basis (including a pro forma application of the net proceeds therefrom), as if
the additional Indebtedness had been incurred, or the Disqualified Stock had
been issued, as the case may be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Restricted Subsidiaries of NEHC of term
Indebtedness under the New Credit Facility; provided that the aggregate
principal amount of all term Indebtedness outstanding under the New Credit
Facility after giving effect to such incurrence does not exceed the aggregate
amount of term Indebtedness borrowed under the New Credit Facility on the date
of the Exchange Debenture Indenture less the aggregate amount of all repayments,
optional or mandatory, of the principal of any Indebtedness under the New Credit
Facility (other than repayments that are immediately reborrowed) that have been
made since the date of the Exchange Debenture Indenture; provided that the
foregoing proviso shall not apply to Permitted Refinancing Indebtedness incurred
to refund, refinance or replace any other Indebtedness incurred pursuant to this
clause (i);
(ii) the incurrence by the Restricted Subsidiaries of NEHC of revolving
credit Indebtedness and letters of credit pursuant to New Credit Facility;
provided that the aggregate principal amount of all revolving credit
Indebtedness (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of the Restricted Subsidiaries of NEHC
thereunder) outstanding under the New Credit Facility after giving effect to
such incurrence does not exceed the aggregate amount of term Indebtedness
borrowed under the New Credit Facility on the date of the Exchange Debenture
Indenture; provided that the foregoing proviso shall not apply to Permitted
Refinancing Indebtedness incurred to refinance or replace any Indebtedness
incurred pursuant to this clause (ii);
(iii) the incurrence by NEHC and its Restricted Subsidiaries of the
Existing Indebtedness;
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(iv) the incurrence by NEHC of Indebtedness represented by the Exchange
Debentures and the New Exchange Debentures, respectively;
(v) the incurrence by NEHC or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of NEHC or such Restricted
Subsidiary (whether through the direct purchase of assets or the Capital Stock
of any Person owning such Assets), in an aggregate principal amount not to
exceed $150 million;
(vi) the incurrence by NEHC or any of its Restricted Subsidiaries of
Indebtedness in connection with the acquisition of assets or a new Restricted
Subsidiary; provided that such Indebtedness was incurred by the prior owner of
such assets or such Restricted Subsidiary prior to such acquisition by NEHC or
one of its Subsidiaries and was not incurred in connection with, or in
contemplation of, such acquisition by NEHC or one of its Subsidiaries; provided
further that the principal amount (or accreted value, as applicable) of such
Indebtedness, together with any other outstanding Indebtedness incurred pursuant
to this clause (vi), does not exceed $7.0 million;
(vii) the incurrence by NEHC or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which
are used to refund, refinance or replace Indebtedness that was permitted by the
Exchange Debenture Indenture to be incurred;
(viii) the incurrence by NEHC or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among NEHC and any of its Wholly Owned
Restricted Subsidiaries; provided, however, that (i) if NEHC is the obligor on
such Indebtedness and the payee is not a Subsidiary Guarantor, such Indebtedness
is expressly subordinated to the prior payment in full in cash of all
Obligations with respect to the Exchange Debentures and (ii)(A) any subsequent
issuance or transfer of Equity Interests that results in any such Indebtedness
being held by a Person other than NEHC or a Wholly Owned Restricted Subsidiary
and (B) any sale or other transfer of any such Indebtedness to a Person that is
not either NEHC or a Wholly Owned Restricted Subsidiary shall be deemed, in each
case, to constitute an incurrence of such Indebtedness by NEHC or such
Restricted Subsidiary, as the case may be;
(ix) the incurrence by NEHC or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
currency risk or interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the Exchange Debenture Indenture
to be outstanding;
(x) the guarantee by NEHC or any of its Restricted Subsidiaries of
Indebtedness of NEHC or a Restricted Subsidiary of NEHC that was permitted to be
incurred by another provision of this covenant;
(xi) the incurrence by NEHC's Unrestricted Subsidiaries of Non-Recourse
Debt, provided, however, that if any such Indebtedness ceases to be Non-Recourse
Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an
incurrence of Indebtedness by a Restricted Subsidiary of NEHC;
(xii) Asset Sales in the form of Receivables Transactions;
(xiii) Indebtedness incurred by NEHC or any of its Restricted Subsidiaries
constituting reimbursement obligations with respect to letters of credit issued
in the ordinary course of business, including without limitation to letters of
credit in respect to workers' compensation claims or self-insurance, or other
Indebtedness with respect to reimbursement type obligations regarding workers'
compensation claims' provided, however, that upon the drawing of such letters of
credit or the incurrence of such Indebtedness, such obligations are reimbursed
within 30 days following such drawing or incurrence;
(xiv) Indebtedness arising from agreements of NEHC or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with the
disposition of any business, asset or a Subsidiary, other than guarantees of
Indebtedness incurred by any Person acquiring all or any portion of such
business, assets or a Subsidiary for the purpose of financing such acquisition;
provided that the maximum aggregate liability of all such Indebtedness shall at
no
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time exceed 50% of the gross proceeds actually received by NEHC and its
Restricted Subsidiaries in connection with such disposition;
(xv) obligations in respect of performance and surety bonds and completion
guarantees provided by NEHC or any Restricted Subsidiary in the ordinary course
of business;
(xvi) guarantees incurred in the ordinary course of business in an
aggregate principal amount not to exceed $7.0 million at any time outstanding;
and
(xvii) the incurrence by NEHC or any of its Restricted Subsidiaries of
additional Indebtedness, including Attributable Debt incurred after the date of
the Exchange Debenture Indenture, in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (xvii), not to exceed $30.0
million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xvii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, NEHC
shall, in its sole discretion, classify such item of Indebtedness in any manner
that complies with this covenant and such item of Indebtedness will be treated
as having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof. Accrual of interest and the accretion of accreted value
will not be deemed to be an incurrence of Indebtedness for purposes of this
covenant.
No Senior Subordinated Debt
The Exchange Debenture Indenture will provide that NEHC will not incur,
create, issue, assume, guarantee or otherwise become liable for any Indebtedness
that is subordinate or junior in right of payment to any Senior Debt and senior
in any respect in right of payment to the Exchange Debentures.
Liens
The Exchange Debenture Indenture will provide that NEHC will not and will
not permit any of its Restricted Subsidiaries to, create, incur, assume or
otherwise cause or suffer to exist or become effective any Lien of any kind
securing Indebtedness or trade payables that do not constitute Senior Debt
(other than Permitted Liens) upon any of their property or assets, now owned or
hereafter acquired.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Exchange Debenture Indenture will provide that NEHC will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends
or make any other distributions to NEHC or any of its Restricted Subsidiaries
(1) on its Capital Stock or (2) with respect to any other interest or
participation in, or measured by, its profits, or (b) pay any indebtedness owed
to NEHC or any of its Restricted Subsidiaries, (ii) make loans or advances to
NEHC or any of its Restricted Subsidiaries or (iii) transfer any of its
properties or assets to NEHC or any of its Restricted Subsidiaries, except for
such encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Exchange Debenture Indenture, (b)
the New Credit Facility as in effect as of the date of the Exchange Debenture
Indenture, and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided that
such amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive in the aggregate
(as determined by the Credit Agent in good faith) with respect to such dividend
and other payment restrictions than those contained in the New Credit Facility
as in effect on the date of the Exchange Debenture Indenture, (c) the Exchange
Debenture Indenture and the Exchange Debentures, (d) any applicable law, rule,
regulation or order, (e) any instrument governing Indebtedness or Capital Stock
of a Person acquired by NEHC or any of its Restricted Subsidiaries as in effect
at the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation
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of such acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Exchange
Debenture Indenture to be incurred, (f) by reason of customary non-assignment
provisions in leases entered into in the ordinary course of business and
consistent with past practices, (g) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, (h)
Permitted Refinancing Indebtedness, provided that the material restrictions
contained in the agreements governing such Permitted Refinancing Indebtedness
are no more restrictive than those contained in the agreements governing the
Indebtedness being refinanced, (i) contracts for the sale of assets, including
without limitation customary restrictions with respect to a Subsidiary pursuant
to an agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary, and (j)
restrictions on cash or other deposits or net worth imposed by customers under
contracts entered into in the ordinary course of business.
Merger, Consolidation, or Sale of Assets
The Exchange Debenture Indenture will provide that NEHC may not consolidate
or merge with or into (whether or not NEHC is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) NEHC is the
surviving corporation or the entity or the Person formed by or surviving any
such consolidation or merger (if other than NEHC) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than NEHC) or the
entity or Person to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made assumes all the obligations of NEHC under
the Exchange Debentures and the Exchange Debenture Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) except in the case of a merger of NEHC with or into a Wholly Owned
Restricted Subsidiary of NEHC, NEHC or the entity or Person formed by or
surviving any such consolidation or merger (if other than NEHC), or to which
such sale, assignment, transfer, lease, conveyance or other disposition shall
have been made will, at the time of such transaction and after giving pro forma
effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Exchange Debenture Indenture will provide that NEHC will not, and will
not permit any of its Restricted Subsidiaries to, make any payment to, or sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction") involving consideration in excess of $5.0 million unless (i) such
Affiliate Transaction is on terms that are no less favorable to NEHC or the
relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction by NEHC or such Restricted Subsidiary with an unrelated
Person and (ii) NEHC delivers to the Trustee (a) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $7.5 million, a resolution of the Board of Directors
set forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (i) above and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of Directors
and (b) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving either aggregate consideration in excess of $15.0 million
or an aggregate consideration in excess of $10.0 million where there are no
disinterested members of the Board of Directors, an opinion as to the fairness
to the Holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
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standing; provided that the following shall not be deemed Affiliate
Transactions: (q) any employment agreement entered into by NEHC or any of its
Restricted Subsidiaries in the ordinary course of business and consistent with
the past practice of NEHC or such Restricted Subsidiary, (r) transactions
between or among NEHC and/or its Restricted Subsidiaries, (s) Permitted
Investments and Restricted Payments that are permitted by the provisions of the
Exchange Debenture Indenture described above under the caption "-- Restricted
Payments," (t) customary loans, advances, fees and compensation paid to, and
indemnity provided on behalf of, officers, directors, employees or consultant of
NEHC or any of its Restricted Subsidiaries, (u) annual management fees paid to
Holberg Industries, Inc. not to exceed $10.0 million in any one year, (v)
transactions pursuant to any contract or agreement in effect on the date of the
Exchange Debenture Indenture as the same may be amended, modified or replaced
from time to time so long as any such amendment, modification or replacement is
no less favorable to NEHC and its Restricted Subsidiaries than contract or
agreement as in effect on the Issue Date or is approved by a majority of the
disinterested directors of NEHC, (w) transactions between NEHC or its Restricted
Subsidiaries on the one hand, and Holberg on the other hand, involving the
provision of financial or advisory services by Holberg; provided that fees
payable to Holberg do not exceed the usual and customary fees for similar
services, (x) transactions between NEHC or its Restricted Subsidiaries on the
one hand, and DLJ on the other hand, involving the provision of financial,
advisory, placement or underwriting services by DLJ; provided that fees payable
to DLJ do not exceed the usual and customary fees of DLJ for similar services,
(y) the insurance arrangements between NEHC and its Subsidiaries and an
Affiliate of Holberg that are not less favorable to NEHC or any of its
Subsidiaries than those that are in effect on the date hereof provided such
arrangements are conducted in the ordinary course of business consistent with
past practices, and (z) payments under the tax sharing agreement among Holberg
and other members of the affiliated group of corporations of which it is the
common parent.
Sale and Leaseback Transactions
The Exchange Debenture Indenture will provide that NEHC will not, and will
not permit any of its Restricted Subsidiaries to, enter into any sale and
leaseback transaction; provided that NEHC may enter into a sale and leaseback
transaction if (i) NEHC could have (a) incurred Indebtedness in an amount equal
to the Attributable Debt relating to such sale and leaseback transaction
pursuant to the covenant described above under the caption "-- Incurrence of
Additional Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien
to secure such Indebtedness pursuant to the covenant described above under the
caption "-- Liens," (ii) the gross cash proceeds of such sale and leaseback
transaction are at least equal to the fair market value (as determined in good
faith by the Board of Directors and set forth in an Officers' Certificate
delivered to the Trustee) of the property that is the subject of such sale and
leaseback transaction and (iii) the transfer of assets in such sale and
leaseback transaction is permitted by, and NEHC applies the proceeds of such
transaction in compliance with, the covenant described above under the caption
"-- Asset Sales."
Limitation on Issuances and Sales of Capital Stock of Wholly Owned
Restricted Subsidiaries
The Exchange Debenture Indenture will provide that NEHC (i) will not, and
will not permit any Wholly Owned Restricted Subsidiary of NEHC to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any Wholly
Owned Subsidiary of NEHC to any Person (other than NEHC or a Wholly Owned
Restricted Subsidiary of NEHC), unless (a) such transfer, conveyance, sale,
lease or other disposition is of all the Capital Stock of such Wholly Owned
Restricted Subsidiary and (b) the cash Net Proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with the
covenant described above under the caption "-- Asset Sales," and (ii) will not
permit any Wholly Owned Restricted Subsidiary of NEHC to issue any of its Equity
Interests (other than, if necessary, shares of its Capital Stock constituting
directors' qualifying shares) to any Person other than to NEHC or a Wholly Owned
Restricted Subsidiary of NEHC.
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Business Activities
NEHC will not, and will not permit any Restricted Subsidiary to, engage in
any business other than a Permitted Business, except to such extent as would not
be material to NEHC and its Restricted Subsidiaries taken as a whole.
Reports
The Exchange Debenture Indenture will provide that, whether or not required
by the rules and regulations of the Commission, so long as any Exchange
Debentures are outstanding, NEHC will furnish to the Holders of Exchange
Debentures (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-K
if NEHC were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with respect
to the annual information only, a report thereon by NEHC's certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if NEHC were required to file such reports. In
addition, whether or not required by the rules and regulations of the
Commission, NEHC will file a copy of all such information and reports with the
Commission for public availability (unless the Commission will not accept such a
filing) and make such information available to securities analysts and
prospective investors upon request. In addition, NEHC has agreed that, for so
long as any Exchange Debentures remain outstanding, it will furnish to the
Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Exchange Debenture Indenture will provide that each of the following
constitutes an Event of Default: (i) default for 30 days in the payment when due
of interest on, or Liquidated Damages with respect to, the Exchange Debentures
(whether or not prohibited by the subordination provisions of the Exchange
Debenture Indenture); (ii) default in payment when due of the principal of or
premium, if any, on the Exchange Debentures (whether or not prohibited by the
subordination provisions of the Exchange Debenture Indenture); (iii) failure by
NEHC to comply with the provisions described under the captions "-- Change of
Control," "-- Asset Sales," or "-- Merger, Consolidation, or Sale of Assets;"
(iv) failure by NEHC for 30 days after notice from the Trustee or at least 25%
in principal amount of the Exchange Debentures then outstanding to comply with
the provisions described under the captions "-- Restricted Payments" or
"-- Incurrence of Indebtedness and Issuance of Preferred Stock;" (v) failure by
NEHC for 60 days after notice from the Trustee or at least 25% in principal
amount of the Exchange Debentures then outstanding to comply with any of its
other agreements in the Exchange Debenture Indenture, the Exchange Debentures or
the New Exchange Debentures; (vi) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by NEHC or any of its Subsidiaries
(or the payment of which is guaranteed by NEHC or any of its Subsidiaries)
whether such Indebtedness or Guarantee now exists, or is created after the date
of the Exchange Debenture Indenture, which default (a) is caused by a failure to
pay principal of or premium, if any, or interest on such Indebtedness prior to
the expiration of the grace period provided in such Indebtedness on the date of
such default (a "Payment Default") or (b) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $15.0 million or more; (vii)
failure by NEHC or any of its Subsidiaries to pay final judgments aggregating in
excess of $5.0 million, which judgments are not paid, discharged or stayed for a
period of 60 days; and (viii) certain events of bankruptcy or insolvency with
respect to NEHC or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Exchange
Debentures may declare all the Exchange Debentures to be due and payable
immediately; provided, however, that if any Indebtedness or Obligation is
outstanding pursuant to the New Credit Facility, upon a declaration of
acceleration by the holders of the Exchange Debentures or the
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Trustee, all principal and interest under the Exchange Debenture Indenture shall
be due and payable upon the earlier of (x) the day which is five Business Days
after the provision to NEHC, the Credit Agent and the Trustee of such written
notice of acceleration or (y) the date of acceleration of any Indebtedness under
the New Credit Facility; and provided, further, that in the event of an
acceleration based upon an Event of Default set forth in clause (vi) above, such
declaration of acceleration shall be automatically annulled if the holders of
Indebtedness which is the subject of such failure to pay at maturity or
acceleration have rescinded their declaration of acceleration in respect of such
Indebtedness or such failure to pay at maturity shall have been cured or waived
within 30 days thereof and no other Event of Default has occurred during such
30-day period which has not been cured, paid or waived. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to NEHC or any of its Subsidiaries all
outstanding Exchange Debentures will become due and payable without further
action or notice. Holders of the Exchange Debentures may not enforce the
Exchange Debenture Indenture or the Exchange Debentures except as provided in
the Exchange Debenture Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Exchange Debentures may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Exchange Debentures notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of NEHC with the
intention of avoiding payment of the premium that NEHC would have had to pay if
NEHC then had elected to redeem the Exchange Debentures pursuant to the optional
redemption provisions of the Exchange Debenture Indenture, an equivalent premium
shall also become and be immediately due and payable to the extent permitted by
law upon the acceleration of the Exchange Debentures. If an Event of Default
occurs prior to March 1, 2003 by reason of any willful action (or inaction)
taken (or not taken) by or on behalf of NEHC with the intention of avoiding the
prohibition on redemption of the Exchange Debentures prior to March 1, 2003,
then the premium specified in the Exchange Debenture Indenture shall also become
immediately due and payable to the extent permitted by law upon the acceleration
of the Exchange Debentures.
The Holders of a majority in aggregate principal amount of the Exchange
Debentures then outstanding by notice to the Trustee may on behalf of the
Holders of all of the Exchange Debentures waive any existing Default or Event of
Default and its consequences under the Exchange Debenture Indenture except a
continuing Default or Event of Default in the payment of interest on, or the
principal of, the Exchange Debentures.
NEHC is required to deliver to the Trustee annually a statement regarding
compliance with the Exchange Debenture Indenture, and NEHC is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of NEHC, as
such, shall have any liability for any obligations of NEHC under the Exchange
Debentures, the Exchange Debenture Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder of
Exchange Debentures by accepting an Exchange Debenture waives and releases all
such liability. The waiver and release are part of the consideration for
issuance of the Exchange Debentures. Such waiver may not be effective to waive
liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
NEHC may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Exchange Debentures
("Legal Defeasance") except for (i) the rights of Holders of outstanding
Exchange Debentures to receive payments in respect of the principal of, premium
and Liquidated Damages, if any, and interest on such Exchange Debentures when
such payments are due from the trust
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referred to below, (ii) NEHC's obligations with respect to the Exchange
Debentures concerning issuing temporary Exchange Debentures, registration of
Exchange Debentures, mutilated, destroyed, lost or stolen Exchange Debentures
and the maintenance of an office or agency for payment and money for security
payments held in trust, (iii) the rights, powers, trusts, duties and immunities
of the Trustee, and NEHC's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Exchange Debenture Indenture. In addition,
NEHC may, at its option and at any time, elect to have the obligations of NEHC
released with respect to certain covenants that are described in the Exchange
Debenture Indenture ("Covenant Defeasance") and thereafter any omission to
comply with such obligations shall not constitute a Default or Event of Default
with respect to the Exchange Debentures. In the event Covenant Defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Exchange
Debentures.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
NEHC must irrevocably deposit with the Trustee, in trust, for the benefit of the
Holders of the Exchange Debentures, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium and Liquidated Damages, if any,
and interest on the outstanding Exchange Debentures on the stated maturity or on
the applicable redemption date, as the case may be, and NEHC must specify
whether the Exchange Debentures are being defeased to maturity or to a
particular redemption date; (ii) in the case of Legal Defeasance, NEHC shall
have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) NEHC has received from,
or there has been published by, the Internal Revenue Service a ruling or (B)
since the date of the Exchange Debenture Indenture, there has been a change in
the applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Exchange Debentures will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, NEHC shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that the Holders of the outstanding Exchange Debentures
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Exchange Debenture Indenture)
to which NEHC or any of its Subsidiaries is a party or by which NEHC or any of
its Subsidiaries is bound; (vi) NEHC must have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) NEHC must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by NEHC with the intent of preferring the
Holders of Exchange Debentures over the other creditors of NEHC with the intent
of defeating, hindering, delaying or defrauding creditors of NEHC or others; and
(viii) NEHC must deliver to the Trustee an Officers' Certificate and an opinion
of counsel, each stating that all conditions precedent provided for relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Debentures in accordance with the
Exchange Debenture Indenture. The Transfer Agent and the Trustee may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and NEHC may require a Holder to pay any taxes and fees required by
law or permitted by the Exchange Debenture Indenture. NEHC is not required to
transfer or exchange any
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Exchange Debenture selected for redemption. Also, NEHC is not required to
transfer or exchange any Exchange Debenture for a period of 15 days before a
selection of Exchange Debentures to be redeemed.
The registered Holder of an Exchange Debenture will be treated as the owner
of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Exchange
Debenture Indenture or the Exchange Debentures may be amended or supplemented
with the consent of the Holders of at least a majority in principal amount of
the Exchange Debentures then outstanding (including, without limitation,
consents obtained in connection with a purchase of, or tender offer or exchange
offer for, Exchange Debentures), and any existing default or compliance with any
provision of the Exchange Debenture Indenture or the Exchange Debentures may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding Exchange Debentures (including consents obtained in connection
with a tender offer or exchange offer for Exchange Debentures).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Exchange Debentures held by a non-consenting Holder): (i)
reduce the principal amount of Exchange Debentures whose Holders must consent to
an amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Exchange Debenture or alter the provisions with respect to
the redemption of the Exchange Debentures (other than provisions relating to the
covenants described above under the caption "-- Repurchase at the Option of
Holders"), (iii) reduce the rate of or change the time for payment of interest
on any Exchange Debenture, (iv) waive a Default or Event of Default in the
payment of principal of or premium, if any, or interest on the Exchange
Debentures (except a rescission of acceleration of the Exchange Debentures by
the Holders of at least a majority in aggregate principal amount of the Exchange
Debentures and a waiver of the payment default that resulted from such
acceleration), (v) make any Exchange Debenture payable in money other than that
stated in the Exchange Debentures, (vi) make any change in the provisions of the
Exchange Debenture Indenture relating to waivers of past Defaults or the rights
of Holders of Exchange Debentures to receive payments of principal of or
premium, if any, or interest on the Exchange Debentures, (vii) waive a
redemption payment with respect to any Exchange Debenture (other than a payment
required by one of the covenants described above under the caption
"-- Repurchase at the Option of Holders") or (viii) make any change in the
foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Exchange Debenture Indenture (which relate to
subordination) will require the consent of the Holders of at least 75% in
aggregate principal amount of the Exchange Debentures then outstanding if such
amendment would adversely affect the rights of Holders of Exchange Debentures.
Notwithstanding the foregoing, without the consent of any Holder of
Exchange Debentures, NEHC and the Trustee may amend or supplement the Exchange
Debenture Indenture or the Exchange Debentures to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Exchange Debentures in addition to
or in place of certificated Exchange Debentures, to provide for the assumption
of NEHC's obligations to Holders of Exchange Debentures in the case of a merger
or consolidation, to make any change that would provide any additional rights or
benefits to the Holders of Exchange Debentures or that does not adversely affect
the legal rights under the Exchange Debenture Indenture of any such Holder, or
to comply with requirements of the Commission in order to effect or maintain the
qualification of the Exchange Debenture Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Exchange Debenture Indenture contains certain limitations on the rights
of the Trustee, should it become a creditor of NEHC, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
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The Holders of a majority in principal amount of the then outstanding
Exchange Debentures will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Exchange Debenture Indenture provides that in
case an Event of Default shall occur (which shall not be cured), the Trustee
will be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Exchange Debenture Indenture at the request of any Holder of Exchange
Debentures, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
CERTAIN DEFINITIONS RELATING TO THE EXCHANGE DEBENTURES
Set forth below are certain defined terms used in the Exchange Debenture
Indenture. Reference is made to the Exchange Debenture Indenture for a full
disclosure of all such terms, as well as any other capitalized terms used herein
for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices and other than a Receivables Transaction
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of NEHC and its Restricted Subsidiaries taken as
a whole will be governed by the provisions of the Exchange Debenture Indenture
described above under the caption "-- Change of Control" and/or the provisions
described above under the caption "-- Merger, Consolidation or Sale of Assets"
and not by the provisions of the Asset Sale covenant), and (ii) the issue or
sale by NEHC or any of its Restricted Subsidiaries of Equity Interests of any of
NEHC's Restricted Subsidiaries, in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $3.0 million or (b) for net proceeds in
excess of $3.0 million. Notwithstanding the foregoing: (i) a transfer of assets
by NEHC to a Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted
Subsidiary to NEHC or to another Wholly Owned Restricted Subsidiary, (ii) an
issuance of Equity Interests by a Wholly Owned Restricted Subsidiary to NEHC or
to another Wholly Owned Restricted Subsidiary, and (iii) a Restricted Payment
that is permitted by the covenant described above under the caption
"-- Restricted Payments" will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
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"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any lender party to the New Credit
Facility or with any domestic commercial bank having capital and surplus in
excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above, (v) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each
case maturing within six months after the date of acquisition and (vi)
securities quoted by the Nasdaq National Market or listed on a United States,
Canadian or Western European national securities exchange.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of NEHC and its Subsidiaries taken as a whole to
any "person" (as such term is used in Section 13(d)(3) of the Exchange Act)
other than the Principals or their Related Parties (as defined below), (ii) the
adoption of a plan relating to the liquidation or dissolution of NEHC, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above),
other than the Principals and their Related Parties, becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
currently exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 50% of the Voting Stock of NEHC
(measured by voting power rather than number of shares), (iv) the first day on
which a majority of the members of the Board of Directors of NEHC are not
Continuing Directors or (v) NEHC consolidates with, or merges with or into, any
Person or sells, assigns, conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets to any Person, or any Person consolidates
with, or merges with or into, NEHC, in any such event pursuant to a transaction
in which any of the outstanding Voting Stock of NEHC is converted into or
exchanged for cash, securities or other property, other than any such
transaction where the Voting Stock of NEHC outstanding immediately prior to such
transaction is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving or
transferee Person (immediately after giving effect to such issuance).
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation,
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amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) and other non-cash expenses (excluding any such non-cash expense to the
extent that it represents an accrual of or reserve for cash expenses in any
future period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Subsidiaries for such period to the extent that
such depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, plus (v) projected quantifiable
improvements in operating results (on an annualized basis) due to cost
reductions calculated in good faith by NEHC or one of its Restricted
Subsidiaries, as evidenced by (A) in the case of cost reductions of less than
$10.0 million, an Officers' Certificate delivered to the Trustee and (B) in the
case of cost reductions of $10.0 million or more, a resolution of the Board of
Directors set forth in an Officers' Certificate delivered to the Trustee, minus
(vi) non-cash items increasing such Consolidated Net Income for such period.
Notwithstanding the foregoing, the provision for taxes on the income or profits
of, and the depreciation and amortization and other non-cash charges of, a
Subsidiary of the referent Person shall be added to Consolidated Net Income to
compute Consolidated Cash Flow only to the extent that a corresponding amount
would be permitted at the date of determination to be dividended to NEHC by such
Subsidiary without prior governmental approval (that has not been obtained), and
without direct or indirect restriction pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Subsidiary or its stockholders,
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iv) the cumulative effect of a change in accounting principles shall
be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be
excluded, whether or not distributed to NEHC or one of its Restricted
Subsidiaries for purposes of the covenant described under the covenant
"Incurrence of Indebtedness and Issuance of Preferred Stock."
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of NEHC who (i) was a member of such Board of
Directors on the date of the Exchange Debenture Indenture or (ii) was nominated
for election or elected to such Board of Directors with the approval of a
majority of the Continuing Directors who were members of such Board at the time
of such nomination or election.
"Credit Agent" means the Bank of America, in its capacity as Administrative
Agent for the lenders party to the New Credit Facility or any successor thereto
or any person otherwise appointed.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
New Credit Facility, (ii) Indebtedness represented by the Senior Discount Notes,
and (iii) any other Senior Debt permitted under the Exchange Debenture Indenture
the principal amount of which is $25.0 million or more and that has been
designated by NEHC as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Exchange Debentures mature;
provided, however, that any Capital Stock that would not qualify as Disqualified
Stock
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but for change of control provisions shall not constitute Disqualified Stock if
the provisions are not more favorable to the holders of such Capital Stock than
the provisions described under "-- Change of Control" applicable to the Holders
of the Exchange Debentures.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of NEHC and its Subsidiaries
(other than Indebtedness under the New Credit Facility) in existence on the date
of the Exchange Debenture Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations) and (ii) the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period, and (iii) any
interest expense on Indebtedness of another Person that is Guaranteed by such
Person or one of its Restricted Subsidiaries or secured by a Lien on assets of
such Person or one of its Restricted Subsidiaries (whether or not such Guarantee
or Lien is called upon) and (iv) the product of (a) all dividend payments,
whether or not in cash, on any series of preferred stock of such Person or any
of its Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of NEHC, times (b) a fraction, the numerator
of which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of such Person, expressed
as a decimal, in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that NEHC or any of
its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by NEHC or any of its Restricted Subsidiaries, including through
mergers or consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date shall be deemed to have occurred on the
first day of the four-quarter reference period and Consolidated Cash Flow for
such reference period shall be calculated without giving effect to clause (iii)
of the proviso set forth in the definition of Consolidated Net Income, and (ii)
the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the referent Person or any of its Restricted
Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Exchange Debenture Indenture.
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"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or currency rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness that does not require current payments
of interest, and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"Insolvency or Liquidation Proceedings" means (i) any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding, relative to NEHC or to the creditors of
NEHC, as such, or to the assets of NEHC, or (ii) any liquidation, dissolution,
reorganization or winding up of NEHC, whether voluntary or involuntary, and
involving insolvency or bankruptcy, or (iii) any assignment for the benefit of
creditors or any other marshalling of assets and liabilities of NEHC.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If NEHC or any Restricted Subsidiary of NEHC sells or otherwise disposes of any
Equity Interests of any direct or indirect Restricted Subsidiary of NEHC such
that, after giving effect to any such sale or disposition, such Person is no
longer a Restricted Subsidiary of NEHC, NEHC shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Restricted Subsidiary not sold or disposed
of in an amount determined as provided in the final paragraph of the covenant
described above under the caption "-- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized
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in connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or (b) the disposition
of any securities by such Person or any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss),
together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by NEHC or any of
its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"New Credit Facility" means that certain Credit Facility, dated as of July
11, 1997, by and among AmeriServe and Bank of America, providing for up to
$150.0 million of revolving credit borrowings, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time.
"Non-Recourse Debt" means Indebtedness (i) as to which neither NEHC nor any
of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness (other than the Exchange
Debentures being offered hereby) of NEHC or any of its Restricted Subsidiaries
to declare a default on such other Indebtedness or cause the payment thereof to
be accelerated or payable prior to its stated maturity; and (iii) as to which
the lenders have been notified in writing that they will not have any recourse
to the stock or assets of NEHC or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any of the businesses and any other businesses
related to the businesses engaged in by NEHC and its respective Restricted
Subsidiaries on the date of the Exchange Debenture Indenture.
"Permitted Investments" means (a) any Investment in NEHC or in a Wholly
Owned Restricted Subsidiary of NEHC that is engaged in a Permitted Business; (b)
any Investment in Cash Equivalents; (c) any Investment by NEHC or any Restricted
Subsidiary of NEHC in a Person, if as a result of such Investment (i) such
Person becomes a Wholly Owned Restricted Subsidiary of NEHC that is engaged in a
Permitted Business or (ii) such Person is merged, consolidated or amalgamated
with or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, NEHC or a Wholly Owned Restricted Subsidiary of NEHC that is
engaged in a Permitted Business; (d) any Restricted Investment made as a result
of the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "-- Repurchase at the Option of Holders -- Asset Sales"; (e) any
acquisition of assets solely in exchange for the issuance of Equity Interests
(other than Disqualified Stock) of NEHC; (f) loans and advances made after the
date of the Exchange Debenture Indenture to Holberg Industries, Inc. not to
exceed $12.0 million at any time outstanding; and (g) other Investments made
after the date of the Exchange Debenture Indenture in any Person having an
aggregate fair market value (measured on the date each such Investment was made
and without giving effect to subsequent changes in value), when taken together
with all other Investments made pursuant to this clause (g) that are at the time
outstanding, not to exceed $12.0 million.
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"Permitted Liens" means (i) Liens securing Indebtedness under the New
Credit Facility that was permitted by the terms of the Exchange Debenture
Indenture to be incurred; (ii) Liens in favor of NEHC; (iii) Liens on property
of a Person existing at the time such Person is merged into or consolidated with
NEHC or any Restricted Subsidiary of NEHC; provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with NEHC; (iv) Liens on property existing at the time of acquisition thereof by
NEHC or any Restricted Subsidiary of NEHC, provided that such Liens were in
existence prior to the contemplation of such acquisition; (v) Liens to secure
the performance of statutory obligations, surety or appeal bonds, performance
bonds or other obligations of a like nature incurred in the ordinary course of
business; (vi) Liens existing on the date of the Exchange Debenture Indenture;
(vii) Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (viii) Liens incurred in the ordinary course
of business of NEHC or any Restricted Subsidiary of NEHC with respect to
obligations that do not exceed $7.0 million at any one time outstanding and that
(a) are not incurred in connection with the borrowing of money or the obtaining
of advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of business
by NEHC or such Restricted Subsidiary and (ix) Liens on assets of Unrestricted
Subsidiaries that (A) secure Non-Recourse Debt of Unrestricted Subsidiaries or
(B) are incurred in connection with a Receivables Transaction.
"Permitted Refinancing Indebtedness" means any Indebtedness of NEHC or any
of its Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of NEHC or any of its Restricted Subsidiaries; provided that: (i)
except for Indebtedness used to extend, refinance, renew, replace defease or
refund the New Credit Facility, the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses incurred in connection
therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Exchange Debentures, such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and is subordinated in
right of payment to, the Exchange Debentures on terms at least as favorable to
the Holders of Exchange Debentures as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by NEHC or
by the Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Principals" means Holberg Industries, Inc., John V. Holten, Orkla, Nebco
Evans Distributors, Inc. and DLJ Merchant Banking, L.P.
"Public Equity Offering" means a public offering of Equity Interests (other
than Disqualified Stock) of (i) NEHC; or (ii) Holberg.
"Receivables" means, with respect to any Person or entity, all of the
following property and interests in property of such Person or entity, whether
now existing or existing in the future or hereafter acquired or arising: (i)
accounts, (ii) accounts receivable incurred in the ordinary course of business,
including without limitation, all rights to payment created by or arising from
sales of goods, leases of goods or the rendition of services no matter how
evidenced, whether or not earned by performance, (iii) all rights to any goods
or merchandise represented by any of the foregoing after creation of the
foregoing, including, without limitation, returned or repossessed goods, (iv)
all reserves and credit balances with respect to any such accounts receivable or
account debtors, (v) all letters of credit, security, or guarantees for any of
the foregoing, (vi) all insurance policies or reports relating to any of the
foregoing, (vii) all collection or deposit accounts relating to
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any of the foregoing, (viii) all proceeds of the foregoing and (ix) all books
and records relating to any of the foregoing.
"Receivables Subsidiary" means an Unrestricted Subsidiary exclusively
engaged in Receivables Transactions and activities related thereto; provided,
however, that (i) at no time shall NEHC and its Subsidiaries have more than one
Receivables Subsidiary and (ii) all Indebtedness or other borrowings of such
Unrestricted Subsidiary shall be Non-Recourse Debt.
"Receivables Transaction" means (i) the sale or other disposition to a
third party of Receivables or an interest therein, or (ii) the sale or other
disposition of Receivables or an interest therein to a Receivables Subsidiary
followed by a financing transaction in connection with such sale or disposition
of such Receivables (whether such financing transaction is effected by such
Receivables Subsidiary or by a third party to whom such Receivables Subsidiary
sells such Receivables or interests therein); provided that in each of the
foregoing, NEHC or its Subsidiaries receive at least 80% of the aggregate
principal amount of any Receivables financed in such transaction.
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (B) or trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
"Reorganization Securities" means securities distributed to the Holders of
the Exchange Debentures in an Insolvency or Liquidation Proceeding pursuant to a
plan of reorganization consented to by each class of the Senior Debt, but only
if all of the terms and conditions of such securities (including, without
limitation, term, tenor, interest, amortization, subordination, standstills,
covenants and defaults), are at least as favorable (and provide the same
relative benefits) to the holders of Senior Debt and to the holders of any
security distributed in such Insolvency or Liquidation Proceeding on account of
any such Senior Debt as the terms and conditions of the Exchange Debentures and
the Exchange Debenture Indenture are, and provide to the holders of Senior Debt.
"Representative" means the trustee, agent or representative for any Senior
Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Debt" means (i) all Indebtedness outstanding under the New Credit
Facility, including any Guarantees thereof and all Hedging Obligations with
respect thereto, (ii) all Indebtedness represented by the Senior Discount Notes,
(iii) any other Indebtedness permitted to be incurred by NEHC or its
Subsidiaries under the terms of the Exchange Debenture Indenture, unless the
instrument under which such Indebtedness is incurred expressly provides that it
is on a parity with or subordinated in right of payment to the Exchange
Debentures and (iv) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Debt will not
include (w) any liability for federal, state, local or other taxes owed or owing
by NEHC, (x) any Indebtedness of NEHC to any of its Subsidiaries or other
Affiliates, (y) any trade payables or (z) any Indebtedness that is incurred in
violation of the Exchange Debenture Indenture.
"Senior Discount Notes" means NEHC's 12 3/8% Senior Discount Notes due 2007
issued pursuant to the Senior Discount Note Indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
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"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with NEHC or any Restricted Subsidiary of NEHC
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to NEHC or such Restricted Subsidiary than those that
might be obtained at the time from Persons who are not Affiliates of NEHC; (c)
is a Person with respect to which neither NEHC nor any of its Restricted
Subsidiaries has any direct or indirect obligation (x) to subscribe for
additional Equity Interests or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels of
operating results; (d) has not guaranteed or otherwise directly or indirectly
provided credit support for any Indebtedness of NEHC or any of its Restricted
Subsidiaries; and (e) has at least one director on its board of directors that
is not a director or executive officer of NEHC or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director or
executive officer of NEHC or any of its Restricted Subsidiaries. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "Certain Covenants -- Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Exchange Debenture
Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred
by a Restricted Subsidiary of NEHC as of such date (and, if such Indebtedness is
not permitted to be incurred as of such date under the covenant described under
the caption "Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock," NEHC shall be in default of such covenant). The Board of
Directors of NEHC may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of NEHC of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant described
under the caption "Certain Covenants -- Incurrence of Indebtedness and Issuance
of Preferred Stock," and (ii) no Default or Event of Default would be in
existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
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ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Certificate of
Designations, form of Indenture for the Exchange Debentures and Registration
Rights Agreement without charge by writing to Nebco Evans Holding Company, 545
Steamboat Road, Greenwich, Connecticut 06830; Attention: Controller.
BOOK-ENTRY, DELIVERY AND FORM
For purposes of the following description of the book-entry, delivery and
form provisions of the Preferred Stock and underlying Exchange Debentures,
references to "Global New Certificates" and "New Securities", as the case may
be, shall refer to the Preferred Stock on and prior to the Exchange Date and the
Exchange Debentures after the Exchange Date.
Shares of New Preferred Stock initially being issued in exchange for shares
of Old Preferred Stock generally will be represented by one or more
fully-registered global certificates without interest coupons (collectively,
"Global New Certificates"). Notwithstanding the foregoing, shares of Old
Preferred Stock held in certificated form will be exchanged solely for shares of
New Preferred Stock in certificated form as discussed below. The Global New
Certificate will be deposited upon issuance with DTC, in New York, New York, and
registered in the name of DTC or its nominee, in each case for credit to an
account of a direct or indirect participant as described below. Except as set
forth below, the Global New Certificate may be transferred, in whole and not in
part, only to another nominee of the DTC or to a successor of the DTC or its
nominee. See "-- Exchange of Book-Entry New Preferred Stock for Certificated New
Preferred Stock."
Shares of New Preferred Stock may be presented for registration of transfer
and exchange at the offices of the Registrar.
Depository Procedures
DTC has advised NEHC that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of Participants. The Participants include securities brokers and
dealers (including the Initial Purchaser), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the "Indirect Participants").
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or Indirect Participants. The
ownership interest and transfer of ownership interest of each actual purchaser
of each security held by or on behalf of DTC are recorded on the records of the
Participants and Indirect Participants.
DTC has also advised NEHC that pursuant to procedures established by it,
(i) upon deposit of the Global New Certificates, DTC will credit the accounts of
Participants designated by the Initial Purchaser with portions of the principal
amount of Global New Certificates and (ii) ownership of such interests in the
Global New Certificates will be shown on, and the transfer ownership thereof
will be effected only through, records maintained by DTC (with respect to
Participants) or by Participants and the Indirect Participants (with respect to
other owners of beneficial interests in the Global New Certificates).
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NEW
CERTIFICATES WILL NOT HAVE SHARES OF NEW PREFERRED STOCK REGISTERED IN THEIR
NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF SHARES OF NEW PREFERRED STOCK IN
CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR HOLDERS
THEREOF UNDER THE CERTIFICATE OF DESIGNATIONS OR EXCHANGE DEBENTURE INDENTURE,
AS THE CASE MAY BE, FOR ANY PURPOSE.
Payments in respect of the principal and premium and Liquidated Damages, if
any, and interest on Global New Certificates registered in the name of DTC or
its nominee will be payable by the Transfer Agent or Trustee to DTC or its
nominee in its capacity as the registered holder. Under the terms of the
Certificate of Designations or Exchange Debenture Indenture, as the case may be,
NEHC and the Transfer Agent or Trustee, as the case may be, will treat the
persons in whose names the shares of New Preferred Stock,
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including the Global New Certificates, are registered as the owners thereof for
the purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, none of NEHC, the Transfer Agent or Trustee nor any
agent of NEHC or the Transfer Agent or Trustee has or will have any
responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial ownership interests in the Global New Certificates, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership interests
in the Global New Certificates or (ii) any other matter relating to the actions
and practices of DTC or any of its Participants or Indirect Participants.
DTC has advised NEHC that its current practice, upon receipt of any payment
in respect of securities such as the New Preferred Stock, is to credit the
accounts of the relevant Participants with the payment on the payment date, in
amounts proportionate to their respective holdings in principal amount of
beneficial interests in the relevant security such as the Global New
Certificates as shown on the records of DTC. Payments by Participants and the
Indirect Participants to the beneficial owners of shares of New Preferred Stock
will be governed by standing instructions and customary practices and will not
be the responsibility of DTC, the Trustee or NEHC. Neither NEHC nor the Transfer
Agent or Trustee, as the case may be, will be liable for any delay by DTC or its
Participants in identifying the beneficial owners of shares of New Preferred
Stock, and NEHC and the Transfer Agent or Trustee, as the case may be, may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee as the registered owner of shares of New Preferred Stock for all
purposes.
DTC has advised NEHC that it will take any action permitted to be taken by
a holder of shares of New Preferred Stock only at the direction of one or more
Participants to whose account DTC interests in the Global New Certificates are
credited and only in respect of such portion of the aggregate liquidation
preference of New Preferred Stock or aggregate principal amount, of the Exchange
Debentures, as the case may be, as to which such Participant or Participants
have given direction. However, if there is an Event of Default under the New
Preferred Stock or Exchange Debentures, as the case may be, DTC reserves the
right to exchange Global New Certificates for legended New Preferred Stock or
Exchange Debentures, as the case may be, in certificated form, and to distribute
such New Preferred Stock or Exchange Debentures, as the case may be, to its
Participants.
The information in this section concerning DTC and its book-entry system
has been obtained from sources that NEHC believes to be reliable, but NEHC takes
no responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global New Certificates among Participants in DTC, it is
under no obligation to perform or to continue to perform such procedures, and
such procedures may be discontinued at any time. None of NEHC, the Initial
Purchaser or the Trustee will have any responsibility for the performance by DTC
or its Participants or indirect Participants of its obligations under the rules
and procedures governing their operations.
Exchange of Book-Entry New Securities for Certificated New Securities
A Global New Certificate is exchangeable for definitive New Securities in
registered certificated form if (i) DTC (x) notifies NEHC that it is unwilling
or unable to continue as depositary for the Global New Certificate and NEHC
thereupon fails to appoint a successor depositary or (y) has ceased to be a
clearing agency registered under the Exchange Act, (ii) NEHC, at its option,
notifies the Transfer Agent or Trustee, as the case may be, in writing that it
elects to cause the issuance of the New Securities in certificated form or (iii)
there shall have occurred and be continuing to occur a Default or an Event of
Default with respect to the New Securities. In addition, beneficial interests in
a Global New Certificate may be exchanged for certificated New Securities upon
request but only upon at least 20 days' prior written notice given to the
Transfer Agent or Trustee, as the case may be, by or on behalf of DTC in
accordance with customary procedures. In all cases, certificated New Securities
delivered in exchange for any Global New Certificate or beneficial interest
therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures).
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Shares of New Preferred Stock in definitive form will be issued (i) in the
Exchange Offer solely in exchange for certificated shares of Old Preferred Stock
or (ii) following the Exchange Offer, upon the resale, pledge or other transfer
of any shares of New Preferred Stock or interest therein to any person or entity
that does not participate in the Depository. The exchange of certificated shares
of Old Preferred Stock in the Exchange Offer may be made only by presentation of
the shares of Old Preferred Stock, duly endorsed, together with a duly completed
Letter of Transmittal and other required documentation as described under "The
Exchange Offer -- Procedures for Tendering" and "-- Guaranteed Delivery
Procedures." Transfers of certificated shares of New Preferred Stock may be made
only by presentation of shares of New Preferred Stock, duly endorsed, to the
Transfer Agent for registration of transfer on the register maintained by the
Transfer Agent for such purposes.
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
CERTIFICATED NEW SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global New Certificate may, upon request to the Transfer Agent or Trustee,
as the case may be, exchange such beneficial interest for New Securities in the
form of Certificated New Securities. Upon any such issuance, the Transfer Agent
or Trustee, as the case may be, is required to register such Certificated New
Securities in the name of, and cause the same to be delivered to, such person or
persons (or the nominee of any thereof). In addition, if (i) NEHC notifies the
Transfer Agent or Trustee, as the case may be, in writing that the DTC is no
longer willing or able to act as a depositary and NEHC is unable to locate a
qualified successor within 90 days or (ii) NEHC, at its option, notifies the
Transfer Agent or Trustee, as the case may be, in writing that it elects to
cause the issuance of New Securities in the form of Certificated New Securities
under the Certificate of Designations or Exchange Debenture Indenture, as the
case may be, then, upon surrender by the holder of the Global New Certificate,
New Securities in such form will be issued to each person that the Global New
Certificate holder and the DTC identify as being the beneficial owner of the
related New Securities.
Neither NEHC, the Transfer Agent nor the Trustee will be liable for any
delay by the Global New Certificate holder or the DTC in identifying the
beneficial owners of New Securities and NEHC and the Transfer Agent or the
Trustee, as the case may be, may conclusively rely on, and will be protected in
relying on, instructions from the Global New Certificate holder or the DTC for
all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Certificate of Designation or the Exchange Debenture Indenture, as
applicable, will require that payments in respect of the securities represented
by the Global New Certificates (including dividends, principal, premium, if any,
interest and Liquidated Damages, if any) be made by wire transfer of immediately
available next day funds to the accounts specified by the Global New Certificate
holder. With respect to certificated New Securities, NEHC will make all payments
of dividends, principal, premium, if any, interest and Liquidated Damages, if
any, by wire transfer of immediately available funds to the accounts specified
by the holders thereof or, if no such account is specified, by mailing a check
to each such holder's registered address. NEHC expects that secondary trading in
the certificated New Securities will also be settled in immediately available
funds.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF PREFERRED STOCK
The following is a description of certain Federal income tax consequences
to the original holders of Preferred Stock. The description is based on
currently existing provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations thereunder, current administrative rulings
and court decisions, all of which are subject to change (possibly on a
retroactive basis) and any such change could affect the continuing validity of
this description. The Federal income tax description set forth below may not be
applicable to certain classes of taxpayers subject to special tax treatment
under the Code, including insurance companies, securities dealers, financial
institutions, foreign persons, and persons who hold shares of Preferred Stock as
part of a straddle, hedge or conversion transaction. Holders of Preferred Stock
are urged to consult their tax advisors as to their respective personal tax
situations including the applicability and effect of state, local, foreign and
other tax laws. The discussion below assumes that the shares of Preferred Stock
are capital assets in the hands of any holders.
Tax Treatment of Cash Distributions and Distributions of Additional Shares
of Preferred Stock
The distribution of additional shares of Preferred Stock ("Distribution
Shares") on the shares of Preferred Stock sold pursuant to this Offering will be
subject to tax as described in the immediately following paragraph.
Pursuant to Code section 301(c)(1), holders of Preferred Stock will
recognize ordinary income upon the receipt of a dividend in cash or in
Distribution Shares, in both cases to the extent of NEHC's current or
accumulated earnings and profits. In the case of a holder that is a U.S.
corporation, such holder will generally be entitled to a dividends received
deduction under Code section 243 equal to 70% of the amount of such ordinary
income, subject to the conditions and limitations in the Code. The amount of the
distribution for purposes of Code section 301(c) will equal the amount of cash
and the fair market value of the Distribution Shares distributed. Pursuant to
Code section 301(c)(2) and (3), a distribution of cash or Distribution Shares in
an amount in excess of NEHC's current and accumulated earnings and profits will
be a tax-free return of capital to the extent of a holder's tax basis in the
shares of Preferred Stock, and thereafter, capital gain. Any such capital gain
will be long-term capital gain if the holder held the shares of Preferred Stock
for more than one year. In the case of an individual holder of Preferred Stock,
such capital gain will be subject to tax at a maximum rate of 28% if the
holder's holding period is more than one year but not more than 18 months and at
a maximum rate of 20% if the holder's holding period is more than 18 months.
Pursuant to Code section 305(c) and the Treasury Department regulations
thereunder, if the liquidation preference of a Distribution Share is greater
than its issue price by more than a de minimis amount, the difference between
the liquidation preference and the issue price would be treated as a
constructive distribution or series of constructive distributions of additional
shares of Preferred Stock to which Code section 301(c) applies (as described in
the immediately preceding paragraph) and would be taken into account by the
holder over the period from the issue date to the mandatory redemption date of
the Preferred Stock. The issue price of the Distribution Shares will be the fair
market value of such shares on their date of issue. The difference between the
issue price and liquidation preference of a Distribution Share will be more than
de minimis if it is at least equal to the product of 0.25% times the liquidation
preference times the number of complete years from the issue date until the
mandatory redemption date of the Preferred Stock. Holders would take into
account the constructive distribution under "principles similar to the
principles" applicable to debt instruments issued with original issue discount.
While the regulations under Code section 305(c) do not expressly provide how to
apply those principles to constructive distributions of preferred stock, NEHC
believes the so-called "constant yield method" will apply to accrue the
difference between issue price and liquidation preference of a Distribution
Share.
Generally, under the "constant yield method", the amount of the
constructive distribution to be taken into account under Code section 301(c)
will equal the increase in the adjusted issue price of a Distribution Share for
each accrual period. For this purpose, the increase in the adjusted issue price
for any accrual period shall be an amount equal to the excess, if any, of (a)
the product of (i) the adjusted issue price of a Distribution Share at the
beginning of such accrual period and (ii) the yield to maturity (determined on
the
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basis of compounding at the close of each accrual period and properly adjusted
for the length of the accrual period) over (b) the sum of the amounts actually
distributed on a Distribution Share during such accrual period. For this
purpose, the adjusted issue price of a Distribution Share at the beginning of
any accrual period is the sum of the issue price of a Distribution Share plus
the adjustments made to such issue price for all periods before the first day of
such accrual period.
Code section 1059 requires a corporate stockholder to reduce its basis (but
not below zero) in shares of Preferred Stock by the "nontaxed portion" of any
"extraordinary dividend" if the holder has not held its Preferred Stock for more
than two years as of the date the amount or payment of such dividend is agreed
to, announced or declared, whichever is earliest. Generally, the nontaxed
portion of an extraordinary dividend is the amount excluded from income under
Code section 243 (relating to the dividends received deduction described above).
An extraordinary dividend on the Preferred Stock would include a dividend that
(i) equals or exceeds 5% of the holder's adjusted tax basis in the Preferred
Stock, treating all dividends having an ex-dividend date within an 85-day period
as one dividend, or (ii) exceeds 20% of the holder's adjusted tax basis in the
Preferred Stock, treating all dividends having an ex-dividend date within a
365-day period as one dividend. In determining whether a dividend paid is an
extraordinary dividend, a holder may elect to use the fair market value of the
Preferred Stock rather than its basis for purposes of applying the 5% (or 20%)
limitation, if the stockholder is able to establish to the satisfaction of the
Secretary of the Treasury such fair market value as of the day before the
ex-dividend date. An extraordinary dividend would also include any amount
treated as a dividend in the case of a redemption of the Preferred Stock that is
not pro rata as to all stockholder, without regard to the period the holder held
the Preferred Stock. If any part of the nontaxed portion of an extraordinary
dividend has not been applied to reduce basis as a result of the limitation on
reducing basis below zero, the amount thereof will be treated as gain from the
sale or exchange of Preferred Stock in the year in which the extraordinary
dividend is received.
Redemption for Cash
If NEHC redeems the holder's shares of Preferred Stock for cash, the
following would be applicable. Under the rules of Code section 302 a redemption
of shares of Preferred Stock by NEHC for cash will be treated as a distribution
taxable as a dividend to redeeming stockholders to the extent of NEHC's current
or accumulated earnings and profits unless the redemption (i) results in a
"complete redemption" of the stockholder's interest in NEHC (within the meaning
of Code section 302(b)(3)), (ii) is "substantially disproportionate" (within the
meaning of Code section 302(b)(2)) with respect to the holder or (iii) is "not
essentially equivalent to a dividend" (within the meaning of Code section
302(b)(1)). In determining whether any of the Code section 302(b) tests have
been met, shares of common stock and of any other class of stock of NEHC will be
taken to account along with shares of Preferred Stock. Moreover, shares
considered to be owned by the holder by reason of the constructive ownership
rules of the Code, as well as shares actually owned, will be taken into account.
If any of the foregoing tests are met, then, except with respect to declared and
unpaid dividends, if any, the redemption of shares of Preferred Stock for cash
will result in taxable gain or loss equal to the difference between the amount
of cash received and the holder's tax basis in the redeemed shares. Any such
gain or loss will be capital gain or loss and will be long-term capital gain or
loss if the shareholder's holding period exceeds one year. In the case of an
individual, any such capital gain will be taxed at a maximum rate of 28% if the
holder's holding period is more than one year but not more than 18 months and at
a maximum rate of 20% if the holder's holding period is more than 18 months.
Based on a published Internal Revenue Service ruling, the redemption of a
shareholder's Preferred Stock for cash will be treated as "not essentially
equivalent to a dividend" if, taking into account the constructive ownership
rules, (a) the holder's relative stock interest in NEHC is minimal, (b) the
holder exercises no control over NEHC's affairs and (c) there is a reduction in
the holder's proportionate interest in NEHC.
Receipt of Exchange Debentures
An exchange of Preferred Stock for Exchange Debentures at the option of
NEHC will be subject to the same general rules as a redemption for cash,
including the rules for treating the redemption as a dividend or as a sale or
exchange. If the exchange of Preferred Stock for Exchange Debentures is treated
as a dividend, the
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amount of the dividend would be the fair market value of the Exchange Debentures
(to the extent of NEHC's current or accumulated earnings and profits). If the
exchange of Preferred Stock is not treated as a dividend, the exchanging
shareholder would recognize gain or loss equal to the difference between the
fair market value of Exchange Debentures and the shareholder's adjusted tax
basis in the Preferred Stock. If neither the Preferred Stock nor the Exchange
Debentures are regularly traded on an established securities market, gain
realized on the exchange of Preferred Stock for Exchange Debentures may qualify
for installment-sale treatment.
If the amount received in a redemption of Preferred Stock is treated as a
distribution which may be taxable as a dividend as opposed to consideration
received in a sale or exchange, the holder's adjusted tax basis in the redeemed
Preferred Stock will be transferred to any remaining stockholdings of such
holder in NEHC. If the shareholder does not retain any stock ownership in the
Company, it is unclear whether the shareholder will be permitted to transfer
such basis to any Exchange Debentures received in the redemption or will lose
such basis entirely. Under Section 1059 of the Code, the term "extraordinary
dividend" includes any redemption of stock that is treated as a dividend and
that is not pro rata as to all stockholders, including shares of common stock,
irrespective of the holding period. Consequently, to the extent an exchange of
Preferred Stock for Exchange Debentures or cash constitutes a distribution
taxable as a dividend, it may constitute an "extraordinary dividend" to a
corporate shareholder and be subject to the rules described above.
Original Issue Discount
If the shares of Preferred Stock are exchanged for Exchange Debentures at a
time when the stated redemption price at maturity of such Exchange Debentures
exceeds their issue price by an amount equal to or greater than 0.25% of the
stated redemption price at maturity multiplied by the number of complete years
to maturity, the Exchange Debentures will be treated as having original issue
discount ("OID") equal to the entire amount of such excess. If the Exchange
Debentures are traded on an established securities market within the meaning of
Section 1273(b)(3) of the Code, the issue price of the Exchange Debentures will
be their fair market value as of the issue date. Similarly, if the Preferred
Stock, but not the Exchange Debentures issued and exchanged therefor, is traded
on an established securities market within the meaning of Section 1273(b)(3) of
the Code at the time of the exchange, then the issue price of each Exchange
Debenture should be the fair market value of the Preferred Stock at the time of
the exchange. If neither the Preferred Stock nor the Exchange Debentures are
traded on an established securities market, and absent any "potentially abusive
situation," the issue price of the Exchange Debentures will be their stated
principal amount or, in the event the Exchange Debentures do not bear "adequate
stated interest" within the meaning of Section 1274 of the Code, their "imputed
principal amount" as determined under Section 1274 of the Code using the
applicable federal rate (the "AFR") in effect as of the date of the exchange.
The "stated redemption price at maturity" of the Exchange Debentures will
equal the total of all payments under the Exchange Debentures, other than
payments of "qualified stated interest." "Qualified stated interest" generally
is stated interest that is unconditionally payable in cash or other property
(other than Exchange Debentures) at least annually at a single fixed rate.
Therefore, because NEHC has the option to pay interest on the Exchange
Debentures in additional Exchange Debentures, the interest on the Exchange
Debentures will not be qualified stated interest. Accordingly, the sum of all
interest payable pursuant to the stated interest rate on the Exchange Debentures
over the entire term will be treated as OID and includible in gross income by
the holders under a constant-yield method, and the receipt of stated interest on
the Exchange Debentures will not be taxable to the holders for federal income
tax purposes.
An additional Exchange Debenture (a "PIK Debenture") issued in payment of
interest with respect to an initially issued Exchange Debenture (an "Initial
Debenture") will not be considered a payment made on the Initial Debenture and
will be aggregated with the Initial Debenture for purposes of computing and
accruing OID on the Initial Debenture. As between the Initial Debenture and the
PIK Debenture, NEHC will allocate the adjusted issue price of the Initial
Debenture between the Initial Debenture and the PIK Debenture in proportion to
their respective principal amounts. That is, upon the issuance of a PIK
Debenture with respect to an Initial Debenture, NEHC intends to treat the
Initial Debenture and the PIK Debenture derived from the Initial Debenture as
initially having the same adjusted issue price and inherent amount of
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<PAGE> 99
OID per dollar of principal amount. The Initial Debenture and the PIK Debenture
derived therefrom will be treated as having the same yield to maturity. Similar
treatment will be applied when PIK Debentures are issued on PIK Debentures.
If NEHC were found to have had an intention to call the Exchange Debentures
before maturity, any gain realized on a sale, exchange or redemption of Exchange
Debentures prior to maturity would be considered ordinary income to the extent
of any unamortized OID for the period remaining to the stated maturity of the
Exchange Debentures. NEHC cannot predict whether it would have an intention to
call the Exchange Debentures before their maturity at the time, if ever, it
issues the Exchange Debentures.
Taxation of Stated Interest and Original Issue Discount on Exchange
Debentures
Each holder of an Exchange Debenture will be required to include in gross
income an amount equal to the sum of the "daily portions" of the OID for all
days during the taxable year on which such holder holds the Exchange Debenture.
The daily portions of OID required to be included in a holder's gross income in
a taxable year will be determined under a constant-yield method by allocating to
each day during the taxable year on which the holder holds the Exchange
Debenture on pro rata portion of the OID thereon which is attributable to the
"accrual period" in which such day is included. The amount of the OID
attributable to each accrual period will be the product of the "adjusted issue
price" of the Exchange Debenture at the beginning of such accrual period
multiplied by the "yield to maturity" of the Exchange Debenture (properly
adjusted for the length of the accrual period). The adjusted issue price of an
Exchange Debenture at the beginning of an accrual period is the original issue
price of the Exchange Debenture increased by the aggregate amount of OID that
has accrued in all prior accrual periods and reduced by any cash payments
previously made on the Exchange Debenture. The "yield to maturity" is the
discount rate that, when used in computing the present value of all principal
and interest payments to be made under the Exchange Debenture, produces an
amount equal to the issue price of the Exchange Debenture. An "accrual period"
may be of any length and may vary in length over the term of the debt
instrument, provided that each accrual period is no longer than one year and
each scheduled payment of principal or interest occurs on either the final day
or the first day of an accrual period.
All interest on the Exchange Debentures will be taxed as OID under the rule
discussed above, and payments of stated interest will not be taxable to the
holders.
Bond Premium on Exchange Debentures
If the shares of Preferred Stock are exchanged for Exchange Debentures at a
time when the issue price of such Exchange Debentures exceeds the amount payable
at the maturity date (or earlier redemption date, if appropriate) of the
Exchange Debentures, such excess will be deductible, subject to certain
limitations with respect to individuals, by the holder of such Exchange
Debentures as amortizable bond premium over the term of the Exchange Debentures
(taking into account earlier call dates, as appropriate), under a yield-to-
maturity formula, but only if an election by the taxpayer under the section 171
of the Code is in effect or is made. To the extent the excess is deducted as
amortizable bond premium, the holder's adjusted tax basis in the Exchange
Debentures will be reduced. An election under section 171 of the Code is
available only if the Exchange Debentures are held as capital assets. Such
election applies to all debt obligations (i) owned by the taxpayer at the
beginning of the first taxable year to which the election applies or (ii)
subsequently acquired by the taxpayer, and may only be revoked with the consent
of the Secretary of the Treasury. Under the Code, the amortizable bond premium
will be treated as an offset to OID on the Exchange Debentures rather than as a
separate deduction item unless otherwise provided in future regulations.
Redemption or Sale of Exchange Debentures
Generally, any redemption or sale of Exchange Debentures by a holder would
result in taxable gain or loss equal to the difference between the amount of
cash received (except to the extent that cash received is attributable to
accrued interest) and the holder's tax basis in the Exchange Debentures. The tax
basis of a holder who received an Exchange Debenture in exchange for Preferred
Stock will generally be equal to the
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initial basis of the Exchange Debenture on the date the Exchange Debenture is
issued, plus any OID on the Exchange Debenture included in the holder's income
prior to sale or redemption of the Exchange Debenture, reduced by any
amortizable bond premium applied against the holder's income prior to sale or
redemption of the Exchange Debenture and by any cash payments made on the
Exchange Debenture. Such gain or loss would be capital gain or loss and would be
long-term capital gain or loss if the holding period exceeded one year. In the
case of an individual holder, any such capital gain would be taxed at a maximum
rate of 28% if such holder's holding period in the Exchange Debentures is more
than one year but not more than 18 months and at a maximum rate of 20% if such
holder's holding period is more than 18 months. However, if NEHC were found to
have an intention at the time the Exchange Debentures were issued to call them
before maturity, the gain would be ordinary income to the extent of any
unamortized OID.
High Yield Discount Obligations
Sections 163(e) and 163(i) of the Code provide rules that affect the tax
treatment of certain high-yield discount obligations ("HYDOs"). The Exchange
Debentures may constitute HYDOs if their yield-to-maturity exceeds by five
percentage points or more than the AFR for instruments with a similar maturity
in effect for the calendar month in which the Exchange Debentures are issued. If
the Exchange Debentures are HYDOs, NEHC may not deduct any OID that accrues with
respect to the Exchange Debentures until it pays such amount in cash.
In addition, to the extent that the Exchange Debentures' yield-to-maturity
exceeds the relevant AFR by more than six percentage points, then (i) a portion
of such interest corresponding to the yield in excess of six percentage points
above the AFR will not be deductible by NEHC at any time and (ii) a corporate
holder may be entitled to treat the portion of the interest that is not
deductible by NEHC as a dividend, which may then qualify for the
dividends-received deduction provided by Section 243 of the Code (subject to
applicable conditions and limitations). In such event, corporate holders of
Exchange Debentures should consult with their tax advisors as to the
applicability of the dividends-received deduction. It is not possible to
determine at the present time whether an Exchange Debenture will be treated as a
HYDO.
Backup Withholding
Under section 3406 of the Code and applicable Treasury regulations, a
Holder of Preferred Stock or Exchange Debentures may be subject to backup
withholding at the rate of 31% with respect to "reportable payments," which
include dividends or interest paid on, or the proceeds of a sale, exchange or
redemption of, Preferred Stock or Exchange Debentures, as the case may be. The
payor will be required to deduct and withhold the prescribed amounts if (i) the
payee fails to furnish a taxpayer identification number ("TIN") to the payor in
the manner required by the Code and applicable Treasury regulations, (ii) the
Internal Revenue Service notifies the payor that the TIN furnished by the payee
is incorrect, (iii) there has been a "notified payee underreporting" described
in section 3406(c) of the Code, or (iv) there has been a failure of the payee to
certify under penalty of perjury that the payee is not subject to withholding
under section 3406(a)(l)(C) of the Code. If any one of the events listed above
occurs, NEHC will be required to withhold an amount equal to 31% from any
dividend payment made with respect to Preferred Stock, any payment of interest
or principal pursuant to the terms of the Exchange Debentures or any payment of
proceeds of a redemption of Preferred Stock or Exchange Debentures, as the case
may be, to a holder. Amounts paid as backup withholding do not constitute an
additional tax and will be credited against the holder's federal income tax
liabilities, so long as the required information is provided to the Internal
Revenue Service.
NEHC will furnish annually to the Internal Revenue Service and to record
holders of the Preferred Stock (other than with respect to certain exempt
holders) information relating to dividends paid during the calendar year.
NEHC will furnish annually to the Internal Revenue Service and to record
holders of the Exchange Debentures (other than with respect to certain exempt
holders) information relating to the stated interest and the OID, if any,
accruing during the calendar year. Such information will be based on the amount
of OID that would have accrued to a holder who acquired the Exchange Debentures
on original issue.
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Subsequent Purchasers
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquire the Preferred Stock or the Exchange Debentures other
than through purchasing the Preferred Stock at the time of original issuance at
the issue price, including those provisions of the Code relating to the
treatment of "market discount." For example, the market discount provisions of
the Code may require a subsequent purchaser of an Exchange Debenture at a market
discount to treat all or a portion of any gain recognized upon sale or other
disposition of the Exchange Debenture as ordinary income and to defer a portion
of any interest expense that would otherwise be deductible on any indebtedness
incurred or maintained to purchase or carry such Exchange Debenture until the
holder disposes of the Exchange Debenture in a taxable transaction.
As a further example, a holder of an Exchange Debenture who purchases such
Exchange Debenture for an amount that is greater than its adjusted issue price
but equal to or less than the sum of all payments payable on the Exchange
Debenture after the purchase date (other than payments, if any, of qualified
stated interest) will be considered to have purchased such Exchange Debenture at
an "acquisition premium." Under the acquisition premium rules, the amount of OID
which such holder must include in income with respect to such Exchange Debenture
for any taxable year will be reduced by the portion of such acquisition premium
properly allocable to such year.
EACH PROSPECTIVE HOLDER OF PREFERRED STOCK OR EXCHANGE DEBENTURES SHOULD
CONSULT HIS OWN TAX ADVISOR TO DETERMINE THE FEDERAL, STATE, LOCAL AND ANY OTHER
TAX CONSEQUENCES TO SUCH HOLDER OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
PREFERRED STOCK OR EXCHANGE DEBENTURES, INCLUDING THE APPLICABILITY AND EFFECT
OF ANY FEDERAL, STATE, LOCAL OR FOREIGN INCOME TAX LAWS AND ANY RECENT OR
PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS.
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PLAN OF DISTRIBUTION
This Prospectus is to be used by DLJ in connection with offers and sales of
shares of New Preferred Stock in market-making transactions effected from time
to time. DLJ may act as a principal or agent in such transactions, including as
agent for the counterparty when acting as principal or as agent for both
counterparties, and may receive compensation in the form of discounts and
commissions, including from both counterparties when it acts as agent for both.
Such sales will be made at prevailing market prices at the time of sale, at
prices related thereto or at negotiated prices.
DLJMB, an affiliate of DLJ, and certain of its affiliates beneficially own
approximately 36.1% of the common stock of NEHC. Peter T. Grauer, a principal of
DLJ, is a member of the Board of Directors of NEHC and the Company; Benoit
Jamar, a principal of DLJ, is a member of the Board of Directors of NEHC and the
Company. Further, DLJ Capital Funding, Inc., an affiliate of DLJ, is acting as
documentation agent in connection with the New Credit Facility for which it
received certain customary fees and expenses. In addition, DLJ received a merger
advisory fee of $4.0 million in cash from the Company after consummation of the
Transactions. DLJ has informed NEHC that it does not intend to confirm sales of
the New Preferred Stock to any accounts over which it exercises discretionary
authority without the prior specific written approval of such transactions by
the customer.
NEHC has been advised by DLJ that, subject to applicable laws and
regulations, DLJ currently intend to make a market in the New Preferred Stock
following completion of the Exchange Offer. However, DLJ is not obligated to do
so and any such market-making may be interrupted or discontinued at any time
without notice. In addition, such market-making activity will be subject to the
limits imposed by the Securities Act and the Exchange Act. There can be no
assurance that an active trading market will develop or be sustained. See "Risk
Factors -- Trading Market for the New Preferred Stock."
DLJ has, from time to time, provided investment banking and other financial
advisory services to NEHC and the Company in the past for which they have
received customary compensation, including fees received in connection with the
Offering of the Senior Discount Notes, and may provide such services and
financial advisory services to NEHC and the Company in the future. DLJ acted as
purchasers in connection with the initial sale of the Notes and received an
underwriting discount of approximately $8.75 million in connection therewith.
See "Certain Relationships and Related Party Transactions."
DLJ and NEHC have entered into the Registration Rights Agreement with
respect to the use by DLJ of this Prospectus. Pursuant to such agreement, NEHC
agreed to bear all registration expenses incurred under such agreement, and NEHC
agreed to indemnify the Initial Purchasers against certain liabilities,
including liabilities under the Securities Act.
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LEGAL MATTERS
Certain legal matters in connection with the New Preferred Stock offered
hereby were passed upon for NEHC by Wachtell, Lipton, Rosen & Katz, New York,
New York.
EXPERTS
The consolidated financial statements of NEHC at December 28, 1996 and
December 27, 1997 and for each of the three years in the period ended December
27, 1997 appearing in this Prospectus and in the Registration Statement, and the
financial statement schedule for each of the three years in the period ended
December 27, 1997 included in the Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein and in the Registration Statement, and are included
herein in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of PFS (A Division of PepsiCo, Inc. Held For Sale)
as of December 27, 1995 and December 25, 1996 and for each of the years in the
three-year period ended December 25, 1996 appearing in this Prospectus and in
the Registration Statement have been audited by KPMG Peat Marwick LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated statements of operations, stockholders' equity, and cash
flows of AmeriServ Food Company for each of the two years in the period ended
December 30, 1995 appearing in this Prospectus and in the Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of ProSource, Inc. as of December 28, 1996 and
December 27, 1997 and for each of the years in the three-year period ended
December 27, 1997 appearing in this Prospectus and in the Registration Statement
have been audited by KPMG Peat Marwick LLP, independent auditors, as set forth
in their report thereon appearing elsewhere herein, and in the Registration
Statement and are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
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DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Accounts Receivable Program........... 58
AFR................................... 115
AmeriServ............................. 7
AmeriServe............................ 7
AmeriServe Funding.................... 58
Applicable Reserve Ratio.............. 59
Bank of America NT&SA................. 58
Banks................................. 58
Base Amount........................... 59
Calculation Date...................... 102
Carrying Cost Receivables Reserve..... 59
Certificate of Designations........... 63
Certificate of Incorporation.......... 21
Class A Common Stock.................. 53
Class B Common Stock.................. 53
Code.................................. 113
Commission............................ 5
Company............................... 7
control............................... 99
Covenant Defeasance................... 96
Credit Facility....................... 59
Default............................... 101
Depositor............................. 27
Depositary............................ 3
Designated Senior Debt................ 101
DGCL.................................. 59
Distribution Agreement................ 6
Distribution Shares................... 111
Dividend Payment Date................. 64
DLJ................................... 3
DLJMB................................. 53
DLJMBII............................... 56
DTC................................... 3
Effectiveness Target Date............. 111
Eligible Institution.................. 25
Evans................................. 20
Exchange Act.......................... 5
Exchange Agent........................ 2
Exchange Date......................... 15
Exchange Debentures................... 2
Exchange Debenture Indenture.......... 83
Exchange Offer........................ 1
Exchange Offer Prospectus............. 1
Expiration Date....................... 2
Existing Preferred Stock.............. 7
Global New Certificates............... 108
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Guarantors............................ 59
Holberg............................... 20
HWPI.................................. 6
HYDOs................................. 117
Incorporated.......................... 53
Indentures............................ 7
Indirect Participants................. 108
Initial Debenture..................... 115
Initial Purchaser..................... 3
Insolvency or Liquidation
Proceedings......................... 103
IRS................................... 30
Issue Date............................ 13
Junior Securities..................... 64
Legal Defeasance...................... 96
Letter of Transmittal................. 1
Lien.................................. 103
Liquidated Damages.................... 11
Liquidation Preference................ 63
Mandatory Redemption Date............. 63
Market Making Prospectus.............. 1
Merger Agreement...................... 7
Named Executive Officers.............. 50
NEBCO................................. 20
NEBCO EVANS........................... 20
NED................................... 39
NEHC.................................. 1
Net Eligible Receivables.............. 59
New Preferred Stock................... 1
Offering.............................. 2
OID................................... 115
Old NEHC Notes........................ 56
Old Preferred Stock................... 1
Parity Securities..................... 64
Participants.......................... 108
Participating Broker-Dealer........... 118
Payment Blockage Period............... 85
Payment Default....................... 95
Payment Notice........................ 85
PepsiCo............................... 6
Permitted Debt........................ 71
Permitted Liens....................... 105
PFS................................... 6
PFS Acquisition....................... 6
PIK Debenture......................... 115
Post.................................. 7
Post Holdings......................... 55
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Preferred Stock....................... 1
Preferred Stock Contribution.......... 45
ProSource............................. 7
ProSource Acquisition................. 7
Receivables........................... 58
Record Date........................... 64
Registration Default.................. 111
Registration Rights Agreement......... 1
Registration Statement................ 5
Reorganization Securities............. 106
Representative........................ 106
Restricted Payments................... 88
Revolving Credit Facility............. 59
SEC................................... 5
Securities Act........................ 1
Senior Convertible Preferred.......... 58
Senior Debt........................... 106
</TABLE>
<TABLE>
<CAPTION>
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<S> <C>
Senior Discount Note Indenture........ 6
Senior Discount Notes................. 6
Senior Discount Notes Offering........ 57
Senior Note Indenture................. 7
Senior Notes.......................... 7
Senior Subordinated Notes............. 6
Senior Subordinated Note Indenture.... 6
Shelf Registration Statement.......... 14
SKU's................................. 43
Subsidiary Guarantors................. 6
TIN................................... 117
Transfer Agent........................ 64
Transfer Restricted Securities........ 111
Tricon................................ 6
Tricon Subsidiaries................... 6
Trust................................. 58
Voting Rights Triggering Event........ 65
</TABLE>
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INDEX TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
NEBCO EVANS HOLDING COMPANY
Unaudited Pro Forma Consolidated Balance Sheet as of
December 27, 1997...................................... P-2
Notes to Unaudited Pro Forma Consolidated Balance Sheet as
of December 27, 1997................................... P-3
Unaudited Pro Forma Consolidated Statement of Operations
for the Fiscal Year 1997............................... P-4
Notes to Unaudited Pro Forma Consolidated Statement of
Operations for Fiscal Year 1997........................ P-5
</TABLE>
P-1
<PAGE> 107
NEBCO EVANS HOLDING COMPANY
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following sets forth (i) the Unaudited Pro Forma Consolidated Balance
Sheet of Nebco Evans Holding Company after giving effect to the Preferred Stock
Offering and the ProSource Acquisition, as if such transactions had been
consummated on December 27, 1997 and (ii) the Unaudited Pro Forma Consolidated
Statement of Operations of Nebco Evans Holding Company after giving effect to
the PFS Acquisition and related transactions (the "Transactions") and the
ProSource Acquisition, as if such transactions had been consummated at the
beginning of fiscal year 1997. The Unaudited Pro Forma Consolidated Financial
Statements of NEHC do not purport to present the financial position or results
of operations of NEHC had the transactions assumed herein occurred on the dates
indicated, nor are they necessarily indicative of the results of operations
which may be expected to occur in the future.
NEBCO EVANS HOLDING COMPANY
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 27, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA FOR PREFERRED
ADJUSTMENT PRO FORMA STOCK
FOR PREFERRED PRO FORMA ADJUSTMENTS FOR OFFERING AND
HISTORICAL STOCK FOR PREFERRED HISTORICAL PROSOURCE PROSOURCE
NEHC OFFERING(1) STOCK OFFERING PROSOURCE ACQUISITION(2) ACQUISITION
---------- ------------- -------------- ---------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 231,450 $ 94,360 $ 325,810 $ 12,501 $(156,900) $ 181,411
Accounts receivable................ 43,625 -- 43,625 226,332 (226,332) 43,625
Undivided interest in accounts
receivable trust................. 154,371 -- 154,371 -- 51,332 205,703
Allowance for doubtful accounts.... (15,566) -- (15,566) (4,085) -- (19,651)
Inventories........................ 150,148 -- 150,148 160,621 -- 310,769
Other current assets............... 29,937 -- 29,937 15,624 (7,190) 38,371
---------- --------- ---------- -------- --------- ----------
Total current assets............. 593,965 94,360 688,325 410,993 (339,090) 760,228
Property and equipment, net.......... 142,138 -- 142,138 59,961 (49,961) 152,138
Other assets:
Intangible assets, net............. 737,870 -- 737,870 39,883 (39,883) 1,006,991
269,121
Other.............................. 4,817 -- 4,817 37,264 (28,802) 13,279
---------- --------- ---------- -------- --------- ----------
$1,478,790 $ 94,360 $1,573,150 $548,101 $(188,615) $1,932,636
========== ========= ========== ======== ========= ==========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of
long-term debt................... $ 5,127 $ -- $ 5,127 $ -- $ -- $ 5,127
Accounts payable................... 345,603 -- 345,603 277,953 -- 623,556
Accrued liabilities................ 101,219 -- 101,219 27,012 -- 128,231
---------- --------- ---------- -------- --------- ----------
Total current liabilities........ 451,949 -- 451,949 304,965 -- 756,914
Non-current liabilities.............. 38,430 -- 38,430 4,521 50,000 92,951
Long-term debt:
Existing debt...................... -- -- -- 174,200 (174,200) --
8 7/8% Senior Notes due 2006....... 350,000 -- 350,000 -- -- 350,000
10 1/8% Senior Subordinated Notes
due 2007......................... 500,000 -- 500,000 -- -- 500,000
12 3/8% Senior Discount Notes due
2007............................. 58,200 -- 58,200 -- -- 58,200
Other.............................. 35,409 -- 35,409 -- -- 35,409
---------- --------- ---------- -------- --------- ----------
Total long-term debt............. 943,609 -- 943,609 174,200 (174,200) 943,609
---------- --------- ---------- -------- --------- ----------
Total liabilities.............. 1,433,988 -- 1,433,988 483,686 (124,200) 1,793,474
---------- --------- ---------- -------- --------- ----------
11 1/4% Senior Redeemable
Exchangeable Preferred Stock....... -- 250,000 240,000 -- -- 240,000
(10,000)
Stockholders' equity (deficit):
Preferred.......................... 133,355 (131,005) 2,350 -- -- 2,350
Common............................. (88,553) (1,875) (103,188) 64,415 (64,415) (103,188)
(10,161)
(2,599)
---------- --------- ---------- -------- --------- ----------
Total stockholders' equity
(deficit)........................ 44,802 (145,640) (100,838) 64,415 (64,415) (100,838)
---------- --------- ---------- -------- --------- ----------
$1,478,790 $ 94,360 $1,573,150 $548,101 $(188,615) $1,932,636
========== ========= ========== ======== ========= ==========
</TABLE>
See accompanying notes to unaudited pro forma consolidated balance sheet.
P-2
<PAGE> 108
NEBCO EVANS HOLDING COMPANY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 27, 1997
(IN THOUSANDS)
(1) Represents the following:
<TABLE>
<S> <C>
Proceeds from the Preferred Stock Offering.................. $250,000
========
Use of proceeds:
Repurchase of Existing Preferred Stock................. $131,005
Dividend on Senior Preferred Stock..................... 1,875
Accretion of Existing Preferred Stock to face value.... 2,599
Premium of 7.5% on redemption of Existing Preferred
Stock................................................. 10,161
For general corporate purposes including contributions
to capital of Ameriserve.............................. 94,360
Estimated fees and expenses............................ 10,000
--------
$250,000
========
</TABLE>
(2) Represents the following estimated adjustments to reflect the ProSource
Acquisition (the final purchase price allocation will be based upon a final
determination of the fair values of the net assets acquired):
<TABLE>
<S> <C>
Cash purchase price of equity............................... $142,700
Repayment of existing ProSource indebtedness................ 174,200
Fees and expenses........................................... 15,000
--------
Total purchase price........................................ $331,900
========
Sources of purchase price:
Excess cash............................................ $156,900
Sale of accounts receivable............................ 175,000
--------
Total sources............................................... 331,900
--------
Purchase price allocated as follows:
Historical net assets of ProSource..................... 64,415
Write-down of property and equipment in duplicate
facilities............................................ (49,961)
Additional liabilities................................. (50,000)
Elimination of deferred income taxes -- current........ (7,190)
Elimination of deferred income taxes -- long term...... (28,802)
Repayment of existing ProSource indebtedness........... 174,200
Elimination of historical intangible assets............ (39,883)
--------
Subtotal.......................................... 62,779
--------
Excess of cost over fair value of net assets acquired....... $269,121
========
</TABLE>
The additional liabilities of $50,000 represent accruals for estimated
costs to be incurred by the Company related to the termination of redundant
administrative and operating employees, lease termination costs in connection
with the closing of facilities which will not be used by the Company and certain
other costs to exit ProSource activities.
P-3
<PAGE> 109
NEBCO EVANS HOLDING COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA ADJUSTMENTS
ADJUSTMENTS PRO FORMA FOR
HISTORICAL HISTORICAL HISTORICAL FOR FOR HISTORICAL PROSOURCE
NEHC PFS HWPI TRANSACTIONS TRANSACTIONS PROSOURCE ACQUISITION
---------- ---------- ---------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $3,508,332 $1,498,345 $ 250 $ -- $5,006,927 $3,901,165 $ --
Cost of goods sold.......... 3,159,357 1,342,659 -- -- 4,502,016 3,591,368 --
---------- ---------- ------- -------- ---------- ---------- -------
Gross profit................ 348,975 155,686 250 -- 504,911 309,797 --
---------- ---------- ------- -------- ---------- ---------- -------
Operating expenses:
Distribution, selling and
administrative.......... 272,016 112,131 (415) (5,550)(1) 370,082 290,849 --
(8,100)(2)
Depreciation.............. 17,663 8,814 186 (1,400)(3) 25,263 8,823 (6,800)(8)
Amortization.............. 16,830 -- 3 9,426(6) 26,259 2,408 (2,408)(9)
6,728(9)
Impairment, restructuring
and other unusual
charges................. 52,449 -- -- -- 52,449 -- --
---------- ---------- ------- -------- ---------- ---------- -------
Total operating expenses.... 358,958 120,945 (226) (5,624) 474,053 302,080 (2,480)
---------- ---------- ------- -------- ---------- ---------- -------
Operating income (loss)..... (9,983) 34,741 476 5,624 30,858 7,717 2,480
Interest expense, net....... (53,384) (8,041) (587) (33,423)(4) (95,435) (9,193) 9,193(11)
Loss on sale of accounts
receivable................ (6,757) -- -- (8,993)(5) (15,750) -- (12,250)(10)
---------- ---------- ------- -------- ---------- ---------- -------
Income (loss) before income
taxes..................... (70,124) 26,700 (111) (36,792) (80,327) (1,476) (577)
Provision (credit) for
income taxes.............. 1,030 9,924 -- (10,954)(7) -- (485) 485(12)
---------- ---------- ------- -------- ---------- ---------- -------
Income (loss) before
extraordinary item........ $ (71,154) $ 16,776 $ (111) $(25,838) $ (80,327) $ (991) $(1,062)
========== ========== ======= ======== ========== ========== =======
<CAPTION>
PRO FORMA
FOR
TRANSACTIONS
AND PROSOURCE
ACQUISITION
----------------
<S> <C>
Net sales................... $8,908,092
Cost of goods sold.......... 8,093,384
----------
Gross profit................ 814,708
----------
Operating expenses:
Distribution, selling and
administrative.......... 660,931
Depreciation.............. 27,286
Amortization.............. 32,987
Impairment, restructuring
and other unusual
charges................. 52,449
----------
Total operating expenses.... 773,653
----------
Operating income (loss)..... 41,055
Interest expense, net....... (95,435)
Loss on sale of accounts
receivable................ (28,000)
----------
Income (loss) before income
taxes..................... (82,380)
Provision (credit) for
income taxes.............. --
----------
Income (loss) before
extraordinary item........ $ (82,380)
==========
</TABLE>
See accompanying notes to unaudited pro forma consolidated statement of
operations.
P-4
<PAGE> 110
NEBCO EVANS HOLDING COMPANY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(1) Represents net cost reductions in accordance with the terms of the PFS
Asset Purchase Agreement for the following items:
<TABLE>
<CAPTION>
FISCAL
1997
-------
<S> <C>
Reduction in lease expense for existing PFS facilities being
retained by PepsiCo, Inc. ................................ $ 4,100
Net reduction in data processing costs charged by PepsiCo,
Inc. to PFS under the terms of a one year data processing
service contract.......................................... 4,100
Reduction of employee retirement expense due to the
termination of pension and retirement plans of PepsiCo,
Inc., net of amounts to be paid under AmeriServe's
plans..................................................... 1,900
Compensation of certain PFS employees retained by
PepsiCo, Inc. ............................................ 1,000
-------
Net cost savings............................................ 11,100
Less amount included in historical AmeriServe............... 5,550
-------
$ 5,550
=======
</TABLE>
Management Information System (MIS) costs for fiscal 1996 for PFS
aggregated $13,700, which included $5,100 of allocated costs for use of the
PepsiCo, Inc. data processing facilities. The Company plans to integrate
the MIS Systems of both businesses, which will eliminate PFS's reliance on
the PepsiCo, Inc. data processing facilities and result in all of the
Company's distribution centers operating under the same computer systems
and operating policies and practices. Annual MIS cost savings are expected
to be $6,600, which includes $2,500 due to the reduction of MIS personnel
as discussed in Note (2) below.
(2) Represents the net reduction in costs in accordance with the Company's
business plan to integrate PFS:
<TABLE>
<CAPTION>
FISCAL
1997
-------
<S> <C>
Payroll reductions for the elimination of duplicative
administrative personnel.................................. $ 3,800
Reduction in warehouse facilities and operating personnel... 1,800
Reduction of MIS costs...................................... 2,500
-------
Net cost savings............................................ $ 8,100
=======
</TABLE>
In addition, there are $6,000 of anticipated cost savings that have not
been reflected in the pro forma statement of operations because they are
not directly attributable to the acquisition of the PFS business but result
from actions taken by the Company in the third quarter of 1997 to
restructure existing AmeriServe operations. The restructuring charge taken
by the Company in the third quarter of 1997 was $31,200 (composed of
$12,400 related to impairment of assets, $14,800 related to future lease
terminations and employee displacements and $4,000 related to current
integration costs associated with a previous acquisition). The Company has
also identified $28,800 of synergistic cost savings related primarily to
transportation and insurance which also are not included in the pro forma
statement of operations.
(3) Represents reduction of $2,800 annually in depreciation expense (less
$1,400 in historical AmeriServe) as a result of the closure of certain
distribution centers related to the PFS Acquisition.
P-5
<PAGE> 111
NEBCO EVANS HOLDING COMPANY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(4) Represents the change in interest expense related to the Transactions:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT FISCAL
OF DEBT 1997
--------- --------
<S> <C> <C>
Recording of pro forma interest:
8 7/8% Senior Notes due 2006.............................. $350,000 $ 31,063
10 1/8% Senior Subordinated Notes due 2007................ 500,000 50,625
Letters of credit......................................... 12,000 300
Capital leases at 9.5%.................................... 37,043 3,519
Other debt................................................ 3,493 345
--------
Cash interest expense..................................... 85,852
12 3/8% Senior Discount Notes due 2007.................... 55,000 7,017
Amortization of deferred financing costs.................. 2,566
--------
Total interest expense...................................... 95,435
Less: historical interest................................... (62,012)
--------
Pro forma interest adjustment............................... $ 33,423
========
</TABLE>
(5) Represents the discount of $15,750 annually (less $6,757 in historical
AmeriServe) on the sale of accounts receivable pursuant to the Accounts
Receivable Program ($225,000 at a rate of 7.00%).
(6) Represents the amortization of intangible assets incurred in connection
with the PFS Acquisition of $20,438 annually (less $11,012 in historical
AmeriServe).
(7) Represents adjustments to eliminate income tax expense due to proforma
interest expense and loss on sale of receivables resulting in a pro forma
loss for the period.
(8) Represents the reduction in depreciation expense resulting from the
writedown of property and equipment in duplicative facilities.
(9) Represents the elimination of historical amortization and the recording of
amortization of goodwill incurred in connection with the ProSource
Acquisition assuming a 40-year amortization period.
(10) Represents the discount of $12,250 on the sale of the accounts receivable
pursuant to the expected financing of the accounts receivable
securitization in connection with the ProSource Acquisition ($175,000 at a
rate of 7.00%).
(11) Represents the elimination of historical ProSource interest resulting from
repayment of indebtedness.
(12) Represents the adjustment to eliminate income tax benefit for ProSource
which will not be recognized on a pro forma basis.
P-6
<PAGE> 112
INDEX TO HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
NEBCO EVANS HOLDING COMPANY
Report of Ernst & Young LLP, Independent Auditors......... F-2
Consolidated Balance Sheets as of December 28, 1996 and
December 27, 1997...................................... F-3
Consolidated Statements of Operations for each of the
three fiscal years in the period ended December 27,
1997................................................... F-4
Consolidated Statements of Stockholders' Equity for each
of the three fiscal years in the period ended December
27, 1997............................................... F-5
Consolidated Statements of Cash Flows for each of the
three fiscal years in the period ended December 27,
1997................................................... F-6
Notes to Consolidated Financial Statements................ F-7
PFS
Report of KPMG Peat Marwick LLP, Independent Auditors..... F-22
Balance Sheets as of December 27, 1995 and December 25,
1996, and as of June 11, 1997 (unaudited).............. F-23
Statements of Income for each of the years in the three
year period ended December 25, 1996, and for the six
month periods ended June 12, 1996 and June 11, 1997
(unaudited)............................................ F-24
Statements of Divisional Equity for each of the years in
the three year period ended December 25, 1996, and for
the six month period ended June 11, 1997 (unaudited)... F-25
Statements of Cash Flows for each of the years in the
three year period ended December 25, 1996, and for the
six month periods ended June 12, 1996 and June 11, 1997
(unaudited)............................................ F-26
Notes to Financial Statements............................. F-27
AMERISERV FOOD COMPANY
Report of Ernst & Young LLP, Independent Auditors......... F-32
Consolidated Statements of Operations for each of the two
fiscal years in the period ended December 30, 1995..... F-33
Consolidated Statements of Stockholders' Equity (Deficit)
for each of the two fiscal years in the period ended
December 30, 1995...................................... F-34
Consolidated Statements of Cash Flows for each of the two
fiscal years in the period ended December 30, 1995..... F-35
Notes to Consolidated Financial Statements................ F-36
PROSOURCE, INC.
Independent Auditors Report............................... F-42
Consolidated Balance Sheets as of December 28, 1996 and
December 27, 1997...................................... F-43
Consolidated Statements of Operations for each of the
three fiscal years in the period ended December 27,
1997................................................... F-44
Consolidated Statements of Stockholders' Equity for each
of the three fiscal years in the period ended December
27, 1997............................................... F-45
Consolidated Statements of Cash Flows for each of the
three fiscal years in the period ended December 27,
1997................................................... F-46
Notes to Consolidated Financial Statements................ F-47
</TABLE>
F-1
<PAGE> 113
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Nebco Evans Holding Company
We have audited the accompanying consolidated balance sheets of Nebco Evans
Holding Company (NEHC) as of December 28, 1996 and December 27, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 27, 1997. These
financial statements are the responsibility of NEHC's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NEHC at
December 28, 1996 and December 27, 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 27, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
March 24, 1998
F-2
<PAGE> 114
NEBCO EVANS HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,224 $ 231,450
Accounts receivable....................................... 85,810 43,625
Undivided interest in accounts receivable trust........... -- 154,371
Allowance for doubtful accounts........................... (5,336) (15,566)
Inventories............................................... 52,246 150,148
Due from affiliate........................................ 3,793 8,066
Prepaid expenses and other current assets................. 8,437 21,871
-------- ----------
Total current assets.............................. 147,174 593,965
Property and equipment, net................................. 35,772 142,138
Other assets:
Intangible assets, net.................................... 126,212 737,870
Note receivable from Holberg.............................. 3,516 3,516
Other noncurrent assets................................... 2,272 1,301
-------- ----------
$314,946 $1,478,790
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 3,389 $ 5,127
Accounts payable.......................................... 98,700 345,603
Accrued liabilities....................................... 19,276 101,219
-------- ----------
Total current liabilities......................... 121,365 451,949
Long-term debt.............................................. 136,196 943,609
Subordinated loans.......................................... 24,859 --
Other noncurrent liabilities................................ 14,007 38,430
Commitments
Stockholders' equity:
13 1/2% Senior exchangeable preferred stock, $.01 par
value per share; 5,000,000 shares authorized, 2,400,000
shares outstanding..................................... -- 59,186
8% Senior preferred stock, $.01 par value per share; 300
shares authorized, 235 shares outstanding, $2,374
liquidation value...................................... 2,350 2,350
15% Junior exchangeable preferred stock, $.01 par value
per share; 5,000,000 shares authorized, 2,200,000
shares outstanding..................................... -- 56,819
Junior nonconvertible preferred stock, $.01 par value per
share; 600 shares authorized and outstanding, $16,875
liquidation value...................................... 15,000 15,000
Class A voting common stock, $.01 par value per share;
30,000 shares authorized, 6,508 shares outstanding..... -- --
Class B nonvoting common stock, $.01 par value per share;
20,000 shares authorized, 1,733 shares outstanding..... -- --
Additional paid-in capital................................ 7,522 4,889
Accumulated deficit....................................... (6,353) (93,442)
-------- ----------
Total stockholders' equity........................ 18,519 44,802
-------- ----------
$314,946 $1,478,790
======== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 115
NEBCO EVANS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................................. $400,017 $1,389,601 $3,508,332
Cost of goods sold.................................... 359,046 1,249,135 3,159,357
-------- ---------- ----------
Gross profit.......................................... 40,971 140,466 348,975
Distribution, selling and administrative expenses..... 35,396 117,581 289,679
Amortization of intangible assets..................... 1,299 4,849 16,830
Impairment, restructuring and other unusual charges... -- -- 52,449
-------- ---------- ----------
Operating income (loss)............................... 4,276 18,036 (9,983)
Other income (expense):
Interest expense, net............................... (3,936) (16,423) (54,016)
Loss on sale of accounts receivable................. -- -- (6,757)
Interest income -- affiliates....................... 749 528 632
Minority interest................................... -- (2,345) --
-------- ---------- ----------
(3,187) (18,240) (60,141)
-------- ---------- ----------
Income (loss) before income taxes and extraordinary
items............................................... 1,089 (204) (70,124)
Provision for income taxes............................ 583 1,300 1,030
-------- ---------- ----------
Income (loss) before extraordinary items.............. 506 (1,504) (71,154)
Extraordinary loss.................................... -- -- (15,935)
-------- ---------- ----------
Net income (loss)..................................... $ 506 $ (1,504) $ (87,089)
======== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 116
NEBCO EVANS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
8%
SENIOR JUNIOR
13 1/2% PREFERRED 15% PREFERRED
SENIOR STOCK JUNIOR STOCK ADDITIONAL
PREFERRED $10,000 PREFERRED $25,000 PREFERRED COMMON PAID-IN ACCUMULATED
STOCK SERIES STOCK SERIES STOCK STOCK CAPITAL DEFICIT
--------- --------- --------- --------- --------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994...................... $ -- $ -- $ -- $ -- $ 15,000 $ 6 $ 4,852 $ (2,653)
Dividends:
Preferred stock......... -- -- -- -- -- -- -- (2,494)
Common stock............ -- -- -- -- -- -- (6,086) (208)
Contribution of capital... -- -- -- -- -- -- 1,234 --
Net income................ -- -- -- -- -- -- -- 506
------- ------ ------- ------- -------- --- ------- --------
BALANCE, DECEMBER 30,
1995...................... -- -- -- -- 15,000 6 -- (4,849)
Formation of NEHC......... -- -- -- 15,000 (15,000) (6) 6 --
Issuance of 235 shares of
preferred stock......... -- 2,350 -- -- -- -- -- --
Issuance of common stock
warrants................ -- -- -- -- -- -- 7,516 --
Net loss.................. -- -- -- -- -- -- -- (1,504)
------- ------ ------- ------- -------- --- ------- --------
BALANCE, DECEMBER 28,
1996...................... -- 2,350 -- 15,000 -- -- 7,522 (6,353)
Issuance of preferred
stock and warrants...... 57,300 -- 55,000 -- -- -- 2,700 --
Preferred stock
dividends............... 1,785 -- 1,819 -- -- -- (3,604) --
Preferred stock
accretion............... 101 -- -- -- -- -- (101) --
Loss on transfer of
subsidiary from Holberg
to NEHC................. -- -- -- -- -- -- (1,628) --
Net loss.................. -- -- -- -- -- -- -- (87,089)
------- ------ ------- ------- -------- --- ------- --------
BALANCE, DECEMBER 27,
1997...................... $59,186 $2,350 $56,819 $15,000 $ -- $-- $ 4,889 $(93,442)
======= ====== ======= ======= ======== === ======= ========
<CAPTION>
TOTAL
-------
<S> <C>
BALANCE, DECEMBER 31,
1994...................... $17,205
Dividends:
Preferred stock......... (2,494)
Common stock............ (6,294)
Contribution of capital... 1,234
Net income................ 506
-------
BALANCE, DECEMBER 30,
1995...................... 10,157
Formation of NEHC......... --
Issuance of 235 shares of
preferred stock......... 2,350
Issuance of common stock
warrants................ 7,516
Net loss.................. (1,504)
-------
BALANCE, DECEMBER 28,
1996...................... 18,519
Issuance of preferred
stock and warrants...... 115,000
Preferred stock
dividends............... --
Preferred stock
accretion............... --
Loss on transfer of
subsidiary from Holberg
to NEHC................. (1,628)
Net loss.................. (87,089)
-------
BALANCE, DECEMBER 27,
1997...................... $44,802
=======
</TABLE>
See accompanying notes.
F-5
<PAGE> 117
NEBCO EVANS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 506 $ (1,504) $ (87,089)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 2,762 10,372 34,493
Gain on sale of property.................................. -- (4,652) --
Interest accreted on subordinated loans................... -- 4,193 5,513
Minority interest in subsidiary........................... -- 2,345 --
Impairment of property, equipment and other assets........ -- -- 12,404
Extraordinary loss -- noncash portion..................... -- -- 2,156
Contribution of capital................................... 1,234 -- --
Other..................................................... 179 -- --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable..................................... (1,645) (5,510) 151,390
Undivided interest in accounts receivable trust......... -- -- (154,371)
Inventories............................................. (5) (5,657) (14,090)
Prepaid expenses and other current assets............... (3,070) 823 (13,578)
Accounts payable........................................ 5,035 7,030 74,663
Accrued liabilities..................................... (393) (7,083) 42,908
Noncurrent liabilities.................................. -- 1,669 (4,402)
Other................................................... (98) 2,125 182
-------- -------- ----------
Net cash provided by operating activities................... 4,505 4,151 50,179
-------- -------- ----------
INVESTING ACTIVITIES
Businesses acquired, net of cash acquired................... -- (96,765) (851,019)
Capital expenditures........................................ (2,496) (12,701) (23,300)
Proceeds from disposals of property and equipment........... 22 9,699 --
Amounts received from affiliate............................. 28,969 11,121 20,485
Amounts paid to affiliate................................... (30,659) (14,291) (23,878)
Net increase in deposits with affiliates.................... (315) (2,480) (2,355)
Expenditures for intangible and other assets................ (1,095) -- --
-------- -------- ----------
Net cash used in investing activities....................... (5,574) (105,417) (880,067)
-------- -------- ----------
FINANCING ACTIVITIES
Proceeds from issuance of subordinated loans................ -- 22,484 --
Proceeds from issuance of warrants.......................... -- 7,516 2,700
Proceeds from issuance of long-term debt.................... -- -- 1,110,000
Proceeds from sale of accounts receivable................... -- -- 225,000
Proceeds from issuance of preferred stock................... -- -- 112,300
Debt financing fees incurred................................ -- -- (26,325)
Net increase (decrease) in borrowings under revolving line
of credit................................................. 4,635 116,708 (77,374)
Repayments of long-term debt................................ (4,016) (43,793) (287,187)
-------- -------- ----------
Net cash provided by financing activities................... 619 102,915 1,059,114
-------- -------- ----------
Net increase (decrease) in cash and cash equivalents........ (450) 1,649 229,226
Cash and cash equivalents at beginning of year.............. 1,025 575 2,224
-------- -------- ----------
Cash and cash equivalents at end of year.................... $ 575 $ 2,224 $ 231,450
======== ======== ==========
Supplemental cash flow information:
Cash paid during the year for:
Interest................................................ $ 3,622 $ 10,683 $ 24,468
Income taxes, net of refunds............................ 322 1,256 2,668
Businesses acquired:
Fair value of assets acquired........................... $ -- $210,357 $1,102,103
Cash paid............................................... -- (96,765) (851,019)
-------- -------- ----------
Liabilities assumed..................................... $ -- $113,592 $ 251,084
======== ======== ==========
Supplemental noncash investing and financing activities:
Payment of dividends to reduce deposits and advances with
Holberg and affiliate................................... $ (8,788) $ -- $ --
Property and equipment purchased with capital leases
(included in long-term debt)............................ -- $ 13,363 22,029
</TABLE>
See accompanying notes.
F-6
<PAGE> 118
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Nebco Evans Holding Company (NEHC) is the parent company of AmeriServe Food
Distribution, Inc. (the Company) and Holberg Warehouse Properties, Inc. (HWPI).
The Company accounts for substantially all of NEHC's assets and operations.
HWPI's operations consist entirely of the ownership of two warehouse facilities
occupied by the Company. The Company is a foodservice distributor specializing
in distribution to chain restaurants. The Company distributes a wide variety of
food items as well as paper goods, cleaning and other supplies and equipment.
The Company's major customers are franchisers and/or franchisees in the
Pizza Hut, Taco Bell, KFC, Arby's, Burger King, Wendy's and Dairy Queen
restaurant systems. The Company services approximately 25,500 restaurants, the
vast majority of which are in the United States. The Company also operates
foodservice distribution businesses in Canada and Mexico, which are not material
to the consolidated financial statements of the Company.
NEHC is an indirect subsidiary of Holberg Industries, Inc. (Holberg).
Holberg is a privately held diversified service company with subsidiaries
operating within the food distribution and parking services industries in North
America.
Principles of Consolidation
The consolidated financial statements include the accounts of NEHC and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Fiscal Year
NEHC has a 52- or 53-week fiscal year ending on the last Saturday of the
calendar year. The fiscal years ended December 30, 1995 (fiscal 1995), December
27, 1996 (fiscal 1996) and December 27, 1997 (fiscal 1997) are 52-week periods.
Cash and Cash Equivalents
Cash equivalents represent funds temporarily invested (with original
maturities not exceeding three months) as part of NEHC's and the Company's
active management of working capital. Cash and cash equivalents are stated at
cost, which approximates market value.
Inventories
Inventories, which consist of purchased goods held for sale, are stated at
the lower of cost (determined on a first-in, first-out basis) or net realizable
value.
Property and Equipment
Property and equipment are stated at cost, except for assets that have been
impaired. Depreciation is computed over the estimated useful lives of the
assets, using either the straight-line or double-declining balance method.
Amortization of leasehold improvements is recorded over the respective lease
terms or useful lives of the assets, whichever is shorter. Amortization of
leasehold improvements and assets under capital
F-7
<PAGE> 119
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
leases is included in depreciation expense. Useful lives for amortization and
depreciation calculations are as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 5-40 years
Delivery and automotive equipment........................... 3-9 years
Warehouse equipment......................................... 5-12 years
Furniture, fixtures and equipment........................... 5-10 years
</TABLE>
Goodwill and Other Intangible Assets
Costs in excess of the net identifiable assets of businesses acquired are
amortized on a straight-line basis over 40 years. Assembled workforce, customer
lists and other intangible assets acquired in business acquisitions, deferred
financing costs and other intangibles are being amortized using primarily the
straight-line method over their respective estimated useful lives, which
generally range from 3 to 40 years.
Impairment of Long-Lived Assets
Property and equipment, goodwill and other intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the sum of the expected undiscounted
cash flows is less than the carrying value of the related asset or group of
assets, a loss will be recognized for the difference between the fair value and
carrying value of the asset or group of assets. Such analyses necessarily
involve significant judgment.
Computer Software
Costs of computer software developed or obtained for internal use are
capitalized and amortized on a straight-line basis over the estimated useful
life of the software (generally 3-8 years). Business process reengineering costs
associated with implementation of new software are expensed as incurred.
Revenue Recognition
Revenue from the sale of products is recognized upon shipment to the
customer.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes
NEHC accounts for income taxes in accordance with Statement of Financial
Accounting Standards (Statement) No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax assets or liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as net operating loss carryforwards. Because of prior operating
losses in certain taxable entities, a valuation allowance has been established
to offset the entire amount of the net deferred tax assets.
Effective July 1997, NEHC and its subsidiaries will file consolidated
federal income tax returns. Prior to that date, NEHC and the Company were part
of the Holberg consolidated group for income tax purposes. The
F-8
<PAGE> 120
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company made tax sharing payments to Holberg, under a tax sharing agreement, for
those entities within the Company's subgroup that had taxable income.
Recently Issued Accounting Standards
Accounting standards issued in 1997 included Statement No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and losses)
as part of a full set of financial statements, and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information." Statement
No. 131 establishes standards for reporting information about a company's
operating segments and related disclosures about its products, services,
geographic areas of operations and major customers. Both statements will be
adopted by NEHC in 1998. The adoption of these statements will not impact NEHC's
results of operations, cash flows or financial position.
Reclassifications
Certain amounts previously presented in the financial statements of prior
years have been reclassified to conform to the current year presentation.
2. ACQUISITIONS
On January 25, 1996, the Company acquired the common and preferred stock of
AmeriServ Food Company (AmeriServ), a foodservice distributor specializing in
distribution of food products and supplies to chain restaurants. AmeriServ
reported net sales of $939.1 million for its fiscal year ended December 30,
1995. The total cash outlay for the acquisition, including all direct costs, was
$92.9 million. Of this amount, $44 million related to the retirement of all of
AmeriServ's existing bank debt and accrued interest, which occurred concurrently
with the closing of the purchase transaction. The transaction was financed by
the Company through borrowings under a new credit agreement and issuance of $30
million of preferred stock to NEHC. NEHC issued $30 million of subordinated
notes and warrants to fund the purchase of the Company's preferred stock.
The acquisition has been accounted for under the purchase method;
accordingly, its results are included in the consolidated financial statements
from the acquisition date. The excess of the purchase price over the net assets
acquired was $85 million and has been recorded as goodwill, which is being
amortized on a straight-line basis over 40 years.
The following unaudited pro forma results of operations for the year ended
December 30, 1995 assume the acquisition of AmeriServ occurred at the beginning
of the fiscal year (in thousands):
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Net sales................................................ $1,224,200
Net loss................................................. (7,134)
</TABLE>
In connection with the acquisition of AmeriServ, NEHC and the Company each
acquired a minority interest in the Harry H. Post Company (Post), also a
foodservice distributor to chain restaurants. In November 1996, the Company sold
its interest in Post to NEHC in exchange for $2.5 million in NEHC preferred
stock. Through certain transactions in 1996 and 1997, NEHC acquired the
remaining outstanding common stock of Post. In July 1997, NEHC transferred its
investment in Post to the Company in exchange for the NEHC preferred stock. The
transactions between NEHC and the Company had no impact on the consolidated
statements of operations. Post generated net sales of $119.4 million for its
fiscal year ended December 28, 1996. The results of Post are included in the
consolidated financial statements of NEHC from the AmeriServ acquisition date.
F-9
<PAGE> 121
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 11, 1997, the Company acquired the U.S. and Canadian operations of
PFS, a Division of PepsiCo, Inc. (PFS), in an asset purchase transaction for
approximately $842 million in cash, including direct costs. PFS posted net sales
of $3.4 billion for the fiscal year ended December 25, 1996. Financing of the
acquisition included an equity contribution of $130 million by NEHC and other
transactions as described in Notes 6 and 7. PFS is engaged in the distribution
of food products, supplies and equipment to franchised and company-owned
restaurants in the Pizza Hut, Taco Bell and KFC systems, which were spun-off by
PepsiCo, Inc. on October 6, 1997 and are now operating as TRICON Global
Restaurants, Inc. (Tricon).
The effective date of the acquisition was June 11, 1997, the end of PFS'
second quarter. The acquisition has been accounted for under the purchase
method; accordingly, its results are included in the consolidated financial
statements from the effective date of the acquisition. The purchase price was
allocated based on the estimated fair values of identifiable intangible and
tangible assets acquired and liabilities assumed at the acquisition date, as
follows (in millions):
<TABLE>
<S> <C>
Accounts receivable......................................... $322.3
Inventories................................................. 83.1
Property and equipment...................................... 71.5
Goodwill.................................................... 562.7
Identifiable intangible assets.............................. 36.9
Other assets................................................ 1.4
Accounts payable............................................ (168.6)
Accrued liabilities......................................... (38.8)
Restructuring reserves...................................... (23.0)
Other noncurrent liabilities................................ (5.9)
------
$841.6
======
</TABLE>
The restructuring reserves of $23 million were included in the purchase
price allocation above in connection with the business plan to consolidate the
operations of PFS and the Company. The reserves consist principally of accruals
for costs related to the displacement of employees ($6.4 million) and lease
termination costs associated with the closures of duplicative PFS warehouses
($15.7 million). There were no material charges against the restructuring
reserves as of December 27, 1997. See Note 3 for additional discussion.
The following unaudited pro forma results of operations for fiscal 1996 and
1997 assume the acquisition of PFS and related transactions occurred at the
beginning of each period presented (in thousands):
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Net sales................................... $4,875,479 $5,006,927
Loss before extraordinary items............. (69,378) (79,240)
Net loss.................................... (85,313) (95,175)
</TABLE>
This pro forma information does not purport to be indicative of the results
that actually would have been obtained if the combined operations had been
conducted during the periods presented and is not intended to be a projection of
future results.
On October 29, 1997, the Company acquired the stock of a food distribution
business in Mexico for approximately $8 million in cash. The business
distributes food products and supplies to franchised and company-owned
restaurants, primarily in Mexico, in Tricon's Pizza Hut and KFC systems. The
acquisition has been accounted for under the purchase method. The operating
results of the business are not material to the consolidated results of the
Company.
F-10
<PAGE> 122
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. IMPAIRMENT, RESTRUCTURING AND OTHER UNUSUAL CHARGES
Included in "Impairment, restructuring and other unusual charges" in the
accompanying consolidated statements of operations for fiscal 1997 are the
following (in millions):
<TABLE>
<S> <C>
Impairment of property, equipment and other assets.......... $12.4
Accrued restructuring expense, principally exit costs for
future lease terminations and employee severance.......... 13.4
One-time indirect costs incurred in connection with the PFS
acquisition, principally bridge financing fees and costs
to implement the Accounts Receivable Program (Note 7)..... 13.6
Costs incurred in integrating acquisitions, and other
unusual items............................................. 13.0
-----
$52.4
=====
</TABLE>
The noncash impairment charge and the accrued restructuring expense reflect
actions to be taken with respect to the Company's existing facilities as a
result of the PFS acquisition. During the third quarter of 1997, management
performed an extensive review of the existing and recently acquired PFS
operations with the objective of developing a business plan for the
restructuring and consolidation of the organizations. The business plan, which
was approved by the Company's Board of Directors late in the third quarter,
identified a number of actions designed to improve the efficiency and
effectiveness of the combined entity's warehouse and transportation network and
operations support infrastructure.
These actions, which are expected to be completed by mid-1999, include
construction of new strategically located warehouse facilities, closures of
certain existing warehouse facilities and expansions of others, dispositions of
property and equipment, conversion of computer systems, reductions in workforce
and relocation of the Company's headquarters from Brookfield, Wisconsin to
Dallas, Texas.
There were no material charges against the restructuring accrual as of
December 27, 1997.
The costs incurred in fiscal 1997 in integrating the AmeriServ and PFS
acquisitions included start-up costs of new warehouse facilities and employee
relocation and other expenses to realign the operations support infrastructure.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Land............................................. $ 1,479 $ 3,833
Buildings and improvements....................... 10,115 44,612
Delivery and automotive equipment................ 17,422 86,879
Warehouse equipment.............................. 4,803 11,359
Furniture, fixtures and equipment................ 12,213 17,393
Construction in progress......................... 2,412 5,538
-------- --------
48,444 169,614
Less accumulated depreciation and amortization... 12,672 27,476
-------- --------
$ 35,772 $142,138
======== ========
</TABLE>
F-11
<PAGE> 123
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Goodwill, less accumulated amortization of $5,341 and
$15,849............................................... $103,877 $661,570
Assembled workforce, customer lists, deferred financing
costs and other intangibles, less accumulated
amortization of $8,371 and $9,861..................... 22,335 76,300
-------- --------
$126,212 $737,870
======== ========
</TABLE>
6. LONG-TERM DEBT AND SUBORDINATED LOANS
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
8 7/8% Senior Notes due 2006............................. $ -- $350,000
10 1/8% Senior Subordinated Notes due 2007............... -- 500,000
12 3/8% Senior Discount Notes due 2007................... -- 58,200
Revolving credit facilities under credit agreements...... 77,374 --
Term loans under Credit Agreement........................ 45,000 --
Other notes payable...................................... 6,034 3,493
-------- --------
128,408 911,693
Capital lease obligations (see Note 13).................. 11,177 37,043
-------- --------
139,585 948,736
Less current portion (capital lease obligations only in
1997)................................................. 3,389 5,127
-------- --------
$136,196 $943,609
======== ========
Subordinated loans......................................... $ 24,859 $ --
======== ========
</TABLE>
The weighted average interest rate on the amounts outstanding under credit
agreements at December 28, 1996 was 7.99%.
In January 1996, in connection with the AmeriServ acquisition (see Note 2),
the Company refinanced its borrowings under a new Credit Agreement. The credit
facility provided for term loans of $45 million (amended to $50 million in March
1997) and up to $85 million under a revolving credit facility (amended to $100
million in March 1997). Interest rates on these borrowings were indexed to
certain key variable rates.
Also, in January 1996, NEHC received $30 million in exchange for $22.5
million of 12 1/2% subordinated notes due 2006 and warrants, valued at $7.5
million, to purchase shares of Class A and Class B common stock (see Note 15).
Interest on the subordinated notes was accreted, increasing the carrying value.
In connection with the PFS acquisition, on July 11, 1997, the Company
issued $500 million principal amount of 10 1/8% Senior Subordinated Notes due
July 15, 2007 in a private placement not requiring registration under the
Securities Act of 1933, as amended, and entered into a new credit facility
providing for term loans totaling $205 million and a revolving credit facility
of up to $150 million that expires on June 30, 2003. A portion of the proceeds
was used to repay all outstanding borrowings of $133.8 million (including
accrued interest) under the previous Credit Agreement. A portion of the proceeds
was also used to repay outstanding borrowings of $12,557,000 under a revolving
line of credit agreement that Post had entered into
F-12
<PAGE> 124
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with a financial institution. The amount outstanding under Post's revolving
credit facility was $8,274,000 at December 28, 1996.
In addition, on July 11, 1997, NEHC received $55 million in proceeds upon
issuance, in a private placement not requiring registration under the Securities
Act of 1933, as amended, of $100,387,000 principal amount of 12 3/8% Senior
Discount Notes due July 15, 2007. A portion of the proceeds was used to redeem
the 12 1/2% subordinated notes with a carrying value of $26.8 million and a
principal amount of $33.4 million (with accretion of interest).
On October 15, 1997, the Company issued $350 million principal amount of
8 7/8% Senior Notes due October 15, 2006 in a private placement not requiring
registration under the Securities Act of 1933, as amended, and used a portion of
the proceeds to repay the $205 million principal amount of term loans and the
accrued interest thereon of $1.3 million.
In connection with the early extinguishment of debt on July 11 and October
15, 1997, NEHC recorded an extraordinary loss of $15.9 million, which represents
the unamortized balance of deferred financing costs and unaccreted interest
associated with the repaid indebtedness of the Company and NEHC. Because of
NEHC's net operating loss carryforward position, the charge was recorded without
tax benefit.
Effective December 12, 1997, the Company and NEHC completed offers to
exchange all the outstanding Senior Subordinated Notes due 2007, the Senior
Notes due 2006 and the Senior Discount Notes due 2007 with new notes with
substantially identical terms that are registered under the Securities Act of
1933, as amended.
Interest on the Company's Senior Subordinated Notes and the Senior Notes
(collectively, the Notes) is payable semiannually. The Notes are fully,
unconditionally, jointly and severally guaranteed by the Company's operating
subsidiaries. The Notes contain covenants that limit the Company from incurring
additional indebtedness and issuing preferred stock, restrict dividend payments,
limit transactions with affiliates and certain other transactions. The Senior
Subordinated Notes are subordinated to all existing and future senior
indebtedness of the Company but rank equally in right of payment with any future
senior subordinated indebtedness of the Company.
Under certain provisions and covenants of the Notes issued by the Company
and the Company's Credit Agreement, the Company's ability to pay dividends is
limited. Substantially all of the Company's net assets of approximately $98
million are restricted under these provisions and covenants.
Interest on the Senior Discount Notes is accreted to the principal amount
until 2002, at which time interest is payable semiannually. The notes rank
equally to all existing and future senior indebtedness of NEHC but rank senior
to all subordinated indebtedness of NEHC. The notes are effectively subordinated
to all indebtedness of the Company.
On March 6, 1998, NEHC issued Senior Redeemable Exchangeable Preferred
Stock that is exchangeable into 11 1/4% Subordinated Exchange Debentures due
2008. See Note 17.
As of March 15, 1998, there have been no borrowings under the Company's
$150 million revolving credit facility; however, available borrowings are
reduced for letters of credit outstanding ($13.5 million at that date). A
commitment fee of .25% to .50% per annum is payable on the unused portion of the
revolving credit facility. The covenants contained in the revolving credit
facility restrict the payment of dividends, capital expenditures and certain
other transactions and require the Company to maintain leverage, fixed charge
and interest coverage ratios.
In early 1996, the Company entered into interest rate swap agreements to
modify interest on a portion of the outstanding borrowings under the Credit
Agreement. Under these agreements, the Company received
F-13
<PAGE> 125
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
variable rates and paid fixed rates. Details of these swap agreements at
December 28, 1996 and December 27, 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Notional amount.................................... $60 million $60 million
Weighted average receive rate...................... 5.63% 5.80%
Weighted average pay rate.......................... 5.52% 5.52%
</TABLE>
The swap agreements were terminated in February 1998 with a net insignificant
gain.
7. ACCOUNTS RECEIVABLE PROGRAM
In July 1997, the Company entered into a five-year Accounts Receivable
Program (the Program)to provide additional financing capacity. Under the
Program, the Company established a consolidated wholly owned subsidiary,
AmeriServe Funding Corporation (Funding), which is a special purpose
bankruptcy-remote entity that acquires, on a daily basis, substantially all of
the trade receivables generated by the Company and its subsidiaries. The
purchases by Funding are financed through the sale of the receivables to
AmeriServe Master Trust (the Trust) and the issuance of a series of certificates
by the Trust representing undivided interests in the assets of the Trust. As of
December 27, 1997, the Company had transferred $379.4 million of accounts
receivable to Funding in exchange for $225 million in cash, and an undivided
interest in the Trust of $154.4 million.
In accordance with the provisions of Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
the transactions have been recorded as a sale of receivables to a qualified
special purpose entity. The ongoing cost associated with the Program, which
represents the return to investors in the certificates, is reported in the
accompanying consolidated statements of operations as "Loss on sale of accounts
receivable." The interest rate on the certificates at December 27, 1997 was
6.94%. The Company has accounted for its investment in Funding as a
held-to-maturity security in accordance with Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
In a transaction expected to be completed in April 1998, the current series
of certificates issued by the Trust will be restructured, resulting in
additional capital to the Company under the program of approximately $50
million.
The accompanying consolidated balance sheets reflect an allowance for
doubtful accounts at December 27, 1997 that relates, in large part, to accounts
receivable representing the undivided interest in the Trust. The Company's
accounts receivable generally are unsecured.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying consolidated balance
sheets for cash and cash equivalents, accounts receivable, investment in
accounts receivable trust, accounts payable and accrued liabilities approximate
fair value because of their short-term maturities. The carrying amounts reported
for long-term debt at December 28, 1996 approximate fair value because the
majority of the instruments carry variable rates of interest. The carrying
amounts and fair values of long-term debt at December 27, 1997 are as follows
(in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
8 7/8% Senior Notes.................................... $350,000 $350,000
10 1/8% Senior Subordinated Notes...................... 500,000 515,000
12 3/8% Senior Discount Notes.......................... 58,200 65,252
</TABLE>
Related party financial instruments are recorded at cost.
F-14
<PAGE> 126
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. GUARANTOR SUBSIDIARIES
The Company's operating subsidiaries fully, unconditionally, jointly and
severally guarantee the Senior Subordinated Notes and the Senior Notes discussed
in Note 6.
The guarantor subsidiaries are direct or indirect wholly owned subsidiaries
of the Company. The Company and the guarantor subsidiaries conduct substantially
all of the operations of the Company and its subsidiaries on a consolidated
basis. Separate financial statements of the guarantor subsidiaries are not
separately presented because, in the opinion of management, such financial
statements are not material to investors.
The only significant subsidiary of the Company that is not a guarantor
subsidiary is Funding, which is a wholly owned special purpose bankruptcy-remote
subsidiary. Funding has no operating revenues or expenses, and its only asset is
an undivided interest in an accounts receivable trust (the Trust -- see Note 7).
Funding's interest in the Trust is junior to the claims of the holders of
certificates issued by the Trust. Accordingly, as creditors of the Company, the
claims of the holders of the Senior Subordinated Notes and Senior Notes against
the accounts receivable held in the Trust are similarly junior to the claims of
holders of the certificates issued by the Trust.
On the first day of fiscal 1998, two of the Company's operating
subsidiaries, AmeriServ and Post, were effectively merged with and into the
Company. Accordingly, the following summarized combined financial information
(in accordance with Rule 1-02(bb) of Regulation S-X) at December 27, 1997 and
for the year then ended is for the guarantor subsidiaries of the Company
remaining after the mergers (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 7,901
Current liabilities......................................... 5,666
Noncurrent assets........................................... 52,085
Noncurrent liabilities...................................... 13,530
Net sales................................................... $135,640
Operating income............................................ 1,288
Net income.................................................. 1,027
</TABLE>
10. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal................................. $ 437 $1,100 $ 515
State................................... 98 200 299
Foreign................................. -- -- 95
------ ------ ------
535 1,300 909
Deferred (foreign in 1997)................ 48 -- 121
------ ------ ------
$ 583 $1,300 $1,030
====== ====== ======
</TABLE>
F-15
<PAGE> 127
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the federal statutory rate of 34% to income (loss) before income taxes and
extraordinary loss, as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Provision (benefit) at statutory rate..... $ 370 $ (69) $(23,842)
State income taxes, net of federal tax
benefit................................. 66 129 197
Foreign income taxes, net of federal tax
benefit................................. -- -- 143
Nondeductible goodwill.................... 167 758 891
Increase in valuation allowance........... -- -- 23,571
Other..................................... (20) 482 70
-------- ------ --------
Provision for income taxes................ $ 583 $1,300 $ 1,030
======== ====== ========
</TABLE>
The components of deferred income tax assets and liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment........................... $ 369 $ --
Intangible assets other than nondeductible
goodwill...................................... 8,499 43,980
-------- --------
Total deferred tax liabilities........... 8,868 43,980
Deferred income tax assets:
Allowances and reserves.......................... 3,516 14,658
Property and equipment........................... -- 4,758
Accrued liabilities.............................. 10,521 34,793
Federal net operating loss carryforwards......... 10,971 39,558
-------- --------
25,008 93,767
Valuation allowance for deferred tax assets...... (16,140) (49,787)
-------- --------
Total deferred tax assets................ 8,868 43,980
-------- --------
Net deferred tax asset............................. $ -- $ --
======== ========
</TABLE>
As of December 27, 1997, and, giving effect to the merger into the Company
of Post and AmeriServ, NEHC has net operating loss carryforwards of
approximately $102 million. NEHC has not yet determined whether it incurred a
change in control on July 11, 1997 under Section 382 of the Internal Revenue
Code. Under that Section, after a change of control, the amount of such net
operating loss carryforwards that may be used annually during the permitted
carryforward period is limited.
The net operating loss carryforwards will expire between 2006 and 2012.
Because of uncertainty as to whether any benefit will be realized from the use
of such losses and other deferred tax assets, a valuation reserve has been
provided to offset any deferred tax assets in excess of deferred tax
liabilities. As of the date of its acquisition by the Company, AmeriServ had net
operating losses and other deferred tax benefits (the Acquired Tax Attributes)
of $49 million, which were entirely offset by a valuation reserve. Goodwill will
be reduced to the extent of any tax benefit realized from the Acquired Tax
Attributes.
F-16
<PAGE> 128
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have sponsored 401(k) retirement savings
plans covering substantially all employees. The Company has matched the
contributions of participating employees in accordance with the provisions of
the plans. In August 1997, the various plans were merged into a single plan that
was enhanced as of January 1, 1998.
Under the enhanced plan, eligible employees may contribute up to 18% of
eligible compensation, subject to limits imposed by law. The Company matches 50%
of the first 4% of compensation contributed by employees and 25% of additional
amounts contributed up to 6%. The Company will make additional contributions for
eligible employees of 0.8% to 2.0% of eligible compensation, depending on years
of service. Company contributions have certain vesting schedules, with all such
contributions vesting after 5 years of service. The Company may also elect to
make a discretionary contribution that would be allocated to employees based on
a predetermined formula.
Company contributions expensed under the plans approximated $109,000,
$515,000 and $961,000 in fiscal 1995, 1996 and 1997, respectively.
12. RELATED-PARTY TRANSACTIONS
With respect to related party assets and liabilities presented in the
accompanying consolidated balance sheets, the current amounts due from/to
affiliate represent interest-bearing advances to Holberg which are made in the
normal course of business as part of the cash management strategy of Holberg;
the note receivable from Holberg bears interest at 5% and is due January 1,
2007.
Prior to 1996, the Company participated in a self-insured casualty
(including workers' compensation and auto liability) and group health risk
program with an affiliate of Holberg, which determined the insurance expense to
be allocated to the Company. In fiscal 1995, the affiliate paid $1,128,000 of
casualty insurance and $378,000 of health insurance expenses of the Company.
These payments have been charged to operations and are reflected as contributed
capital in the accompanying consolidated financial statements. In connection
with the insurance program, the Company has deposits with an affiliate for
insurance collateral purposes of $2,480,000 and $4,835,000 at December 28, 1996
and December 27, 1997, respectively. These amounts are included in prepaid
expenses and other current assets in the accompanying consolidated balance
sheets.
Interest income from Holberg and an affiliate of approximately $749,000,
$528,000 and $632,000 in fiscal 1995, 1996 and 1997, respectively, represents
interest on the advances and note receivable from Holberg and interest on the
insurance deposits with an affiliate, less debt guarantee fees to Holberg of
$180,000 in 1995.
In 1997, distribution, selling and administrative expenses include
$4,000,000 in management fees to Holberg.
The Company leases a warehouse and office facility in Waukesha, Wisconsin
from an affiliated partnership owned by certain former shareholders of an
acquired company for approximately $810,000 per year through May 31, 2008.
13. LEASE COMMITMENTS
The Company has noncancelable commitments under both capital and long-term
operating leases, primarily for office and warehouse facilities and
transportation and office equipment. Many leases provide for rent escalations,
purchase and renewal options, contingent rentals based on miles driven and
payment of executory costs by the Company. Rent expense was approximately
$5,709,000, $15,384,000 and $15,786,000 (including contingent rentals) in fiscal
1995, 1996 and 1997, respectively.
F-17
<PAGE> 129
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment include the following amounts under capital leases
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Land $ -- $ 692
Buildings and improvements -- 6,891
Delivery and automotive equipment 9,876 28,778
Warehouse equipment -- 2,227
Furniture, fixtures and equipment 3,487 3,312
------- -------
13,363 41,900
Less accumulated amortization 1,831 6,456
------- -------
Property and equipment under capital leases, net $11,532 $35,444
======= =======
</TABLE>
The following is a schedule of aggregate future minimum lease payments
(excluding contingent rentals) required under terms of the aforementioned leases
at December 27, 1997 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR ENDING LEASES LEASES
------------------ ------- ---------
<S> <C> <C>
1998.................................................... $ 8,935 $ 13,658
1999.................................................... 8,275 13,896
2000.................................................... 7,262 12,528
2001.................................................... 6,452 12,302
2002.................................................... 5,704 11,393
Thereafter.............................................. 21,168 69,835
------- --------
Total................................................... 57,796 $133,612
========
Less amount representing interest....................... 20,753
-------
Present value of net minimum lease commitments.......... $37,043
=======
</TABLE>
14. CONCENTRATION OF CREDIT RISK
On a pro forma basis, assuming the inclusion of PFS and Post for the full
year, Tricon accounted for approximately 40% of the Company's 1997 sales. No
other customer accounted for more than 10% of 1997 pro forma sales. Tricon is
the franchiser of, and through its subsidiaries operates restaurants within, the
Pizza Hut, Taco Bell and KFC systems. One customer, a franchiser, accounted for
approximately 11% of 1996 reported net sales.
In connection with the PFS acquisition, the Company was assigned and
assumed a sales and distribution agreement dated May 1997 between PFS and the
Pizza Hut, Taco Bell and KFC businesses. The agreement provides that the Company
is the exclusive distributor of a substantial majority of products purchased by
the domestic Tricon-owned restaurants for a five-year period beginning July 12,
1997, subject to certain service performance standards. The agreement also
covers restaurants sold to certain franchisees within the five-year period.
F-18
<PAGE> 130
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Including sales to franchiser-owned and franchised restaurants, the
Company's sales to the following restaurant concepts as an approximate
percentage of total pro forma sales were (including PFS for all of 1997 and Post
for all of 1996 and 1997):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Pizza Hut................................................... -- 28%
Taco Bell................................................... -- 28%
KFC......................................................... 9% 13%
Wendy's..................................................... 35% 11%
Burger King................................................. 17% 5%
</TABLE>
15. STOCKHOLDERS' EQUITY
At December 27, 1997, the authorized capital of NEHC consisted of 5,000,000
shares of 13 1/2% senior exchangeable preferred stock at a par value of $.01 per
share; 300 shares of 8% senior convertible, nonvoting preferred stock with a
liquidation preference of $10,000 per share and cumulative dividends at a rate
of $800 per share; 5,000,000 shares of 15% junior exchangeable preferred stock
at a par value of $.01 per share; 600 shares of junior nonconvertible preferred
stock with a liquidation preference of $25,000 per share and cumulative
dividends at a rate of $1,563 per share; 30,000 shares of Class A voting common
stock at a par value of $.01 per share; and 20,000 shares of Class B nonvoting
common stock at a par value of $.01 per share. Accumulated dividends in arrears
at December 27, 1997 are $1,875,000.
In connection with the formation of NEHC on January 25, 1996, NEHC issued
the Class A and Class B common stock and the junior preferred stock, $25,000
series. The 8% senior preferred stock was issued in November 1996 to the
minority owner of Post to increase NEHC's ownership interest in Post (see Note
2). In connection with the AmeriServ acquisition in January 1996 and the
issuance of the 12 1/2% subordinated notes (see Note 6), NEHC issued warrants,
valued at $7.5 million, to purchase up to an aggregate of 1,389 shares of Class
A common stock and 370 shares of Class B common stock. The warrants expire in
2006.
In connection with the acquisition of PFS, NEHC received proceeds of $115
million upon issuance in July 1997 of the 13 1/2% senior exchangeable preferred
stock, the 15% junior preferred stock and warrants, valued at $2.7 million, to
purchase up to an aggregate of 2,904 shares of the Class A common stock. The
warrants expire in 2009. See Note 17 for transactions subsequent to fiscal 1997.
F-19
<PAGE> 131
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. CONDENSED UNCONSOLIDATED FINANCIAL STATEMENTS
Provided below are the condensed unconsolidated financial statements of
NEHC (parent company only).
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Condensed balance sheets:
Cash and cash equivalents................................ $ -- $ 320
Due from affiliate....................................... 4,700 5,046
Investment in subsidiaries............................... 51,851 176,500
--------- --------
$ 56,551 $181,866
========= ========
Accounts payable......................................... $ 3,820 $ 188
Due to affiliate......................................... 4,700 --
Subordinated loans....................................... 24,859 58,199
Stockholders' equity..................................... 23,172 123,479
--------- --------
$ 56,551 $181,866
========= ========
Condensed statements of income:
Selling, general and administrative expenses............. $ -- $ 177
Interest expense......................................... 4,194 5,821
Extraordinary loss....................................... -- 6,562
--------- --------
$ (4,194) $(12,560)
========= ========
Condensed statements of cash flows:
Net cash used in operating activities...................... $ -- $(11,007)
--------- --------
Investing activities:
Business acquired, net of cash acquired.................. -- (1,500)
Investment in subsidiary................................. (30,000) (130,000)
--------- --------
Net cash used in investing activities...................... (30,000) (131,500)
--------- --------
Financing activities:
Proceeds from issuance of preferred stock and warrants... -- 115,000
Proceeds from issuance of subordinated loans and
warrants.............................................. 30,000 --
Proceeds from issuance of long-term debt................. -- 55,000
Repayment of debt........................................ -- (27,173)
--------- --------
30,000 142,827
--------- --------
Net increase in cash and cash equivalents.................. -- 320
Cash and cash equivalents at beginning of year............. -- --
--------- --------
Cash and cash equivalents at end of year................... $ -- $ 320
========= ========
</TABLE>
17. SUBSEQUENT EVENTS
On January 29, 1998, the Company entered into a definitive merger agreement
pursuant to which the Company will acquire all of the approximately 9.4 million
outstanding shares of ProSource, Inc. (ProSource) for $15.00 per share in cash.
The Company will also refinance the existing indebtedness of ProSource of
approximately $174 million. The transaction is expected to close in the second
quarter of 1998. ProSource, which reported sales of $3.9 billion for its fiscal
year ended December 27, 1997, is in the foodservice distribution business,
specializing in quick-service and casual dining chain restaurants. ProSource
services
F-20
<PAGE> 132
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately 12,700 restaurants, principally in the United States, in such
chains as Burger King, Red Lobster, Olive Garden, TGI Friday's, Long John
Silver's, Chili's, Sonic, Chick-fil-A, Wendy's and TCBY.
On March 6, 1998, NEHC received proceeds of $250 million upon issuance of
2,500,000 shares of 11 1/4% Senior Redeemable Exchangeable Preferred Stock
(Preferred Stock) due 2008, with a liquidation preference of $100 per share, in
transactions not requiring registration under the Securities Act of 1933, as
amended. Approximately $148 million of proceeds from the issuance were used to
repurchase all NEHC's outstanding 13 1/2% senior exchangeable preferred stock,
$25,000 series junior nonconvertible preferred stock and 15% junior exchangeable
preferred stock. Dividends on the Preferred Stock are payable quarterly in cash
or in additional shares of Preferred Stock, at NEHC's option. The Preferred
Stock is exchangeable into 11 1/4% Subordinated Exchange Debentures due 2008, at
NEHC's option, subject to certain conditions, on any scheduled dividend payment
date.
F-21
<PAGE> 133
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Management of PFS
(A Division of PepsiCo, Inc. Held for Sale):
We have audited the accompanying balance sheets of PFS (A Division of
PepsiCo, Inc. Held for Sale) as of December 27, 1995 and December 25, 1996, and
the related statements of income, divisional equity, and cash flows for each of
the years in the three-year period ended December 25, 1996. These financial
statements are the responsibility of the management of PFS. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of PFS as of December 27, 1995
and December 25, 1996, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 25, 1996, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Dallas, Texas
April 18, 1997
F-22
<PAGE> 134
PFS (A DIVISION OF PEPSICO, INC. HELD FOR SALE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 25, JUNE 11,
1995 1996 1997
------------ ------------ ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 203 $ 1,625 $ 32
Receivables:
Franchisees and licensees, net of allowance for
doubtful accounts of $11,941 in 1995 and $7,733 in
1996............................................... 115,004 117,729 132,679
Affiliates............................................ 206,658 162,485 191,006
Inventories........................................... 101,767 94,418 86,068
Prepaid expenses and other current assets............. 1,877 4,690 5,915
Deferred income taxes (note 7)........................ 10,105 10,629 9,975
-------- -------- --------
Total current assets............................... 435,614 391,576 425,675
Property and equipment, net (notes 3 and 6)............. 80,351 87,017 82,460
Other assets............................................ 323 328 320
-------- -------- --------
$516,288 $478,921 $508,455
======== ======== ========
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable -- trade............................. $196,695 $170,611 $200,026
Accrued liabilities (note 7).......................... 79,512 79,728 71,395
Advances from Parent and affiliates, net (note 4)..... 122,957 108,257 125,282
-------- -------- --------
Total current liabilities.......................... 399,164 358,596 396,703
Other liabilities and deferred credits (notes 6 and
9).................................................... 23,449 22,400 20,568
Deferred income taxes (note 7).......................... 5,096 4,520 3,545
Divisional equity (note 4).............................. 88,579 93,405 87,639
Commitments (note 6)....................................
-------- -------- --------
$516,288 $478,921 $508,455
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 135
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED TWENTY-FOUR WEEKS ENDED
------------------------------------------ -----------------------
DECEMBER 28, DECEMBER 27, DECEMBER 25, JUNE 12, JUNE 11,
1994 1995 1996 1996 1997
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
(53 WEEKS) (52 WEEKS) (52 WEEKS) (UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales:
Affiliates (note 4)............... $2,378,963 $2,463,464 $2,292,423 $1,058,666 $ 957,528
Franchisees and licensees......... 905,874 999,988 1,136,201 497,003 544,425
---------- ---------- ---------- ---------- ----------
3,284,837 3,463,452 3,428,624 1,555,669 1,501,953
Less discounts and allowances..... 5,000 4,508 6,538 3,194 3,608
---------- ---------- ---------- ---------- ----------
Net sales...................... 3,279,837 3,458,944 3,422,086 1,552,475 1,498,345
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales and operating....... 3,155,422 3,331,866 3,297,381 1,498,587 1,443,274
General and administrative (notes
4, 6 and 8).................... 37,515 47,606 44,962 21,564 20,330
---------- ---------- ---------- ---------- ----------
3,192,937 3,379,472 3,342,343 1,520,151 1,463,604
---------- ---------- ---------- ---------- ----------
Income from operations......... 86,900 79,472 79,743 32,324 34,741
Interest expense to Parent (note
4)................................ 12,934 17,613 15,566 7,102 8,041
---------- ---------- ---------- ---------- ----------
Income before income taxes..... 73,966 61,859 64,177 25,222 26,700
Provision for income taxes (note
7)................................ 28,874 23,844 24,597 9,928 9,924
---------- ---------- ---------- ---------- ----------
Net income..................... $ 45,092 $ 38,015 $ 39,580 $ 15,294 $ 16,776
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 136
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
STATEMENTS OF DIVISIONAL EQUITY
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Divisional equity at December 29, 1993...................... $100,146
Transfers to Advances from Parent and affiliates, net (note
4)........................................................ (59,531)
Net income.................................................. 45,092
--------
Divisional equity at December 28, 1994...................... 85,707
Transfers to Advances from Parent and affiliates, net (note
4)........................................................ (35,143)
Net income.................................................. 38,015
--------
Divisional equity at December 27, 1995...................... 88,579
Transfers to Advances from Parent and affiliates, net (note
4)........................................................ (34,754)
Net income.................................................. 39,580
--------
Divisional equity at December 25, 1996...................... 93,405
Transfers to Advances from Parent and affiliates, net (note
4) (unaudited)............................................ (22,542)
Net income (unaudited)...................................... 16,776
--------
Divisional equity at June 11, 1997 (unaudited).............. $ 87,639
========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE> 137
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED TWENTY-FOUR WEEKS ENDED
------------------------------------------ -----------------------
DECEMBER 28, DECEMBER 27, DECEMBER 25, JUNE 12, JUNE 11,
1994 1995 1996 1996 1997
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
(53 WEEKS) (52 WEEKS) (52 WEEKS) (UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows -- operating activities:
Net income....................... $ 45,092 $ 38,015 $ 39,580 $ 15,294 $ 16,776
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization................ 17,053 18,764 19,830 8,819 8,814
Loss on sale of property and
equipment................... 1,788 2,324 1,065 72 (209)
Deferred income taxes......... (6,800) (3,075) (1,100) (274) (321)
Change in assets and
liabilities:
Receivables................. (22,614) (22,051) 41,448 (6,769) (43,471)
Inventories................. 4,839 (5,046) 7,349 8,429 8,350
Accounts payable............ 9,524 (2,347) (26,084) (8,519) 29,415
Accrued liabilities......... 13,105 (4,672) 216 (11,278) (8,333)
Other....................... 2,730 7,668 (3,867) (4,877) (3,049)
-------- -------- -------- -------- --------
Net cash provided by
operating activities... 64,717 29,580 78,437 897 7,972
-------- -------- -------- -------- --------
Cash flows -- investing activities:
Additions to property and
equipment..................... (21,310) (25,245) (28,771) (14,214) (12,291)
Transfers of property and
equipment to affiliates....... -- -- -- -- 7,338
Proceeds from sale of property
and equipment................. 1,047 857 1,210 1,032 905
-------- -------- -------- -------- --------
Net cash used for
investing activities... (20,263) (24,388) (27,561) (13,182) (4,048)
-------- -------- -------- -------- --------
Cash flows -- financing activities
-- (repayment of)/ additions to
advances from Parent and
affiliates, net.................. (44,360) (5,163) (49,454) 12,661 (5,517)
-------- -------- -------- -------- --------
Net increase (decrease) in cash.... 94 29 1,422 376 (1,593)
Cash at beginning of period........ 80 174 203 203 1,625
-------- -------- -------- -------- --------
Cash at end of period.............. $ 174 $ 203 $ 1,625 $ 579 $ 32
======== ======== ======== ======== ========
</TABLE>
During 1994, 1995, and 1996 PFS made the following transfers to Parent
through the intercompany account:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
State income tax.............................. $ 4,135 $ 3,808 $ 3,475
======= ======= =======
Federal income tax............................ $18,876 $19,887 $18,800
======= ======= =======
Interest on advances.......................... $12,994 $17,613 $15,566
======= ======= =======
Divisional equity reclassifications........... $59,531 $35,143 $34,754
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 138
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 27, 1995 AND DECEMBER 25, 1996
(IN THOUSANDS)
(1) GENERAL AND BASIS OF PRESENTATION
PFS (A Division of PepsiCo, Inc. Held for Sale) ("PFS") operates as a
division of PepsiCo, Inc. ("Parent") and has no separate legal status or
existence. In January 1997, the Parent announced its intent to spin off its
restaurant business. Concurrent with this announcement, the Parent also
announced that it would explore the possible sale of PFS. The accompanying
financial statements present the business of PFS which is being held for sale.
Accordingly, they include only the assets, liabilities and results of operations
of the PFS business to be sold. The principal nature of this business is to
provide food, equipment, and supply items primarily to Taco Bell, Pizza Hut and
KFC restaurants, which restaurants are either owned or franchised by the Parent
in both the United States and Canada. The Division also has other transactions
with the Parent and affiliates of the Parent ("Affiliates") (notes 4, 5, 7, 8
and 9). PFS' fiscal year ends on the last Wednesday in December and, as a
result, a fifty-third week is added every five or six years. The fiscal year
ended December 28, 1994 consisted of 53 weeks.
The financial statements of the Company as of June 11, 1997 and for the
periods ended June 12, 1996 and June 11, 1997 are unaudited, but in the opinion
of management reflect all adjustments (consisting only of normal recurring
accruals) which are necessary for a fair statement of the results of the interim
periods presented. Results for interim periods are not necessarily indicative of
the results to be expected for a full year or for periods which have been
previously reported.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Inventories
Inventories are valued at the lower of cost, as determined by the first-in,
first-out ("FIFO") method, or net realizable value.
(b) Income Taxes
PFS is included in the consolidated federal income tax return of the
Parent. For financial reporting purposes, federal income taxes are computed on a
separate return basis. State income taxes are computed at a composite rate (6.3%
in 1994 and 5.8% in 1995 and 1996) based upon actual taxes incurred by the
Parent on behalf of the Division.
PFS accounts for income taxes using the asset and liability method. Under
the asset and liability method of accounting for income taxes, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(c) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization are calculated on a straight-line basis over the
estimated useful lives of the assets, generally 3 to 10 years.
F-27
<PAGE> 139
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(d) Use of Estimates
The preparation of the 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.
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 27, 1995 and December 25, 1996 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Land................................................... $ 756 $ 756
Transportation equipment............................... 81,741 87,039
Warehouse and office equipment......................... 33,654 38,916
Buildings and leasehold improvements................... 38,490 46,651
Construction in progress............................... 2,656 2,937
Leased computer and material handling equipment........ 5,712 5,750
-------- --------
163,009 182,049
Less accumulated depreciation and amortization......... 82,658 95,032
-------- --------
$ 80,351 $ 87,017
======== ========
</TABLE>
(4) RELATED PARTY TRANSACTIONS
The Parent provides certain corporate general and administrative services
to PFS, including legal, treasury and benefits administration, among others. The
Company estimates the costs of these services to be approximately $1,100 based
on management's assessment of the relative benefit received from the Parent for
each of the years 1994, 1995 and 1996. The Company believes this method is
reasonable and inclusion of such costs would not have material impact on the
accompanying financial statements.
Transactions with the Parent include utilization of cash management
services under which net cash balances of PFS are transferred to or provided by
the Parent daily. In addition, the Parent provides payments under its incentive
compensation plans to certain key employees of PFS.
In 1994, 1995 and 1996, respectively, approximately 29%, 28% and 27% of the
gross sales of PFS were to restaurants owned by Pizza Hut, Inc., 31%, 31% and
28% of gross sales were to restaurants owned by Taco Bell Corp., and 13%, 11%
and 12% of gross sales were to restaurants owned by KFC Corporation.
PFS and the Parent have agreed to reclassify amounts between advances and
divisional equity in order to maintain a preestablished debt to equity ratio, as
defined, as part of the agreements between PFS and Pizza Hut, Inc. and its
franchisees.
Advances from Parent and Affiliates bear interest at the prime rate (8.25%
at December 25, 1996) and are not subject to stated repayment terms.
Accordingly, such advances are classified as current liabilities in the
accompanying balance sheets. The carrying amount of Advances from the Parent and
Affiliates at December 27, 1995 and December 25, 1996 approximates the fair
value since the borrowings bear interest at current market rates.
F-28
<PAGE> 140
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) PROFIT LIMITATION
"Gross profit" and "net pretax profit" on certain sales of PFS to Pizza Hut
restaurants, as defined in the agreements with Pizza Hut, Inc. and its
franchisees, are limited to amounts not to exceed 14% and 2.5% of sales,
respectively. Such limitations apply only to sales of food, paper products, and
similar restaurant supplies and exclude other nonfood items such as furnishings,
interior and exterior decor items, and equipment. As a result of the profit
limitation, sales are reported net of $3,039, $4,449 and $5,249 in 1994, 1995
and 1996, respectively, for distributions to Pizza Hut, Inc. and its
franchisees.
(6) LEASE COMMITMENTS
PFS occupies warehouse and office facilities under noncancellable operating
lease agreements expiring at various dates through 2006. Most of the leases
contain renewal options for periods ranging from one to five years, with rentals
generally equal to those stated for the initial term of the lease.
PFS also rents transportation equipment under operating leases which
provide for both short-term and long-term rentals.
Rental expense for the years ended December 28, 1994, December 27, 1995 and
December 25, 1996 is summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Transportation equipment:
Fixed rentals............................... $ 336 $ 409 $ 442
Variable rentals............................ 2,173 1,776 1,059
Warehouse and office space.................... 8,110 8,531 10,252
Equipment..................................... 3,993 2,773 2,947
------- ------- -------
$14,612 $13,489 $14,700
======= ======= =======
</TABLE>
The future minimum rental commitments as of December 25, 1996 for all
noncancellable operating transportation, warehouse, office, and other equipment
leases are as follows:
<TABLE>
<S> <C>
1997........................................................ $10,783
1998........................................................ 9,493
1999........................................................ 8,110
2000........................................................ 6,986
2001........................................................ 7,020
Thereafter.................................................. 17,027
-------
$59,419
=======
</TABLE>
F-29
<PAGE> 141
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PFS leases computer equipment and material handling equipment under capital
lease arrangements. The minimum lease payments as of December 25, 1996 for the
remainder of the lease periods are as follows:
<TABLE>
<S> <C>
1997........................................................ $692
1998........................................................ 118
----
Total minimum lease payments................................ 810
Less amount representing interest........................... 22
----
Present value of net minimum lease payments................. 788
Less current obligations.................................... 673
----
Long-term obligations....................................... $115
====
</TABLE>
Included in property and equipment as of December 25, 1996 are assets
recorded under capital leases as follows:
<TABLE>
<S> <C>
Computer and material handling equipment.................... $ 5,750
Less accumulated amortization............................... 5,114
-------
$ 636
=======
</TABLE>
(7) INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal..................................... $29,875 $24,227 $23,127
State....................................... 5,799 2,692 2,570
Deferred:
Federal..................................... (5,780) (2,639) (846)
State....................................... (1,020) (436) (254)
------- ------- -------
$28,874 $23,844 $24,597
======= ======= =======
</TABLE>
The differences between the statutory and effective federal income tax
rates are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Statutory federal rate........................ 35% 35% 35%
State income tax, net of federal benefit...... 4 4 4
------- ------- -------
Effective rate........................... 39% 39% 39%
======= ======= =======
</TABLE>
Federal income taxes currently payable to the Parent of $35,714 at December
27, 1995 and $36,441 at December 25, 1996 are included in accrued liabilities in
the accompanying balance sheets.
The primary components of deferred taxes result from accelerated
depreciation methods, bad debt provisions and the deferral of certain expenses
related to postretirement benefits for tax purposes.
(8) RETIREMENT PLANS
PFS participates in two defined benefit noncontributory pension plans for
salaried and nonsalaried employees (the "Plans") which are administered directly
or indirectly by the Parent. Substantially all
F-30
<PAGE> 142
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
employees of the Division are covered by these Plans. PFS's participation is
accounted for as a multiemployer plan.
Generally, benefits for salaried and nonsalaried employees are based on
years of service and the employees' highest consecutive five-year average annual
earnings. The Parent funds the Plans in amounts not less than the minimum
statutory funding requirements nor more than the maximum amount which can be
deducted for federal income tax purposes by the Parent. The Plans' assets
consist principally of equity securities, government and corporate debt
securities, and other fixed income obligations. Capital stock of the Parent
accounted for approximately 24% and 22% of the total market value of the
domestic Parent sponsored Plans' assets for 1995 and 1996.
PFS was allocated pension expense of $1,211, $1,174 and $2,374 in 1994,
1995 and 1996, respectively.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
PFS participates in a postretirement benefit plan administered by the
Parent. The plan provides postretirement health care and life insurance benefits
to eligible retired U.S. employees. Employees who have 10 years of service and
attain age 55 while in service with the Division are eligible to participate in
the postretirement benefit plan. The plan in effect through 1994 was largely
noncontributory and was not funded. PFS accrues the cost of postretirement
benefits over the years employees provide services to the date of their full
eligibility for such benefits.
Postretirement benefit expense amounted to $919, $481 and $1,047 in 1994,
1995 and 1996, respectively. The liability for postretirement benefits of $8,967
at December 25, 1995 and $9,962 at December 27, 1996 is included in other
liabilities and deferred credits in the accompanying balance sheets.
Effective in 1994, certain features of the plan were amended to expand
retiree cost-sharing provisions and limit the Division's share of future
increases in health care costs.
F-31
<PAGE> 143
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
AmeriServ Food Company
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of AmeriServ Food Company (the Company) for
the years ended December 31, 1994 and December 30, 1995. 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. 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 financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of the Company for the years ended December 31, 1994 and December 30, 1995, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
March 22, 1996
F-32
<PAGE> 144
AMERISERV FOOD COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................... $873,309 $939,096
Operating expenses:
Cost of sales, including delivery and warehouse
expenses............................................... 841,408 907,597
Selling, general, and administrative...................... 19,314 20,209
Depreciation.............................................. 2,778 2,768
Amortization of goodwill and covenants not to compete..... 888 677
Losses of divested operations............................. 313 --
-------- --------
Total operating expenses.......................... 864,701 931,251
-------- --------
Income from operations...................................... 8,608 7,845
Other expense:
Interest expense.......................................... 6,442 7,465
Interest expense, related parties......................... 226 216
Amortization of financing costs........................... 236 302
Other expense, net........................................ 28 1,472
-------- --------
Income (loss) before minority interest...................... 1,676 (1,610)
Minority interest........................................... 4 (2)
-------- --------
Income (loss) before income taxes........................... 1,680 (1,612)
Income tax provision........................................ 108 270
-------- --------
Income (loss) before extraordinary items.................... 1,572 (1,882)
Extraordinary gain on early extinguishment of debt.......... 312 --
-------- --------
Net income (loss)........................................... $ 1,884 $ (1,882)
======== ========
</TABLE>
See accompanying notes.
F-33
<PAGE> 145
AMERISERV FOOD COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON ADDITIONAL
STOCK PAID-IN ACCUMULATED
PAR VALUE CAPITAL DEFICIT TOTAL
--------- ---------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at January 1, 1994...................... $25 $ 8,742 $(17,032) $(8,265)
Contribution of dividend promissory notes and
accrued interest to equity................. -- 5,678 -- 5,678
Accretion of redemption value of Series A
Redeemable Preferred Stock................. -- -- (1,125) (1,125)
Net income.................................... -- -- 1,884 1,884
--- ------- -------- -------
Balance at December 31, 1994.................... 25 14,420 (16,273) (1,828)
One for ten reverse stock split............... (22) 22 -- --
Accretion of redemption value of Series A
Redeemable Preferred Stock................. -- -- (675) (675)
Net loss...................................... -- -- (1,882) (1,882)
--- ------- -------- -------
Balance at December 30, 1995.................... $ 3 $14,442 $(18,830) $(4,385)
=== ======= ======== =======
</TABLE>
See accompanying notes.
F-34
<PAGE> 146
AMERISERV FOOD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 1,884 $ (1,882)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation.............................................. 2,778 2,768
Amortization of goodwill and covenants not to compete..... 888 677
Amortization of financing costs........................... 236 302
Other non-cash expenses................................... -- 1,079
Deferred income tax provision............................. (347) 45
Provision for doubtful accounts........................... 410 181
Minority interest......................................... (4) 2
Extraordinary gain........................................ (312) --
Changes in operating assets and liabilities:
Accounts and other receivables......................... (3,116) (664)
Inventories............................................ (5,929) (2,880)
Prepaid expenses and other............................. (1,272) (730)
Accounts payable....................................... 10,143 7,228
Accrued liabilities.................................... 67 (844)
--------- ---------
Net cash provided by operating activities................... 5,426 5,282
INVESTING ACTIVITIES
Acquisitions of businesses.................................. (1,625) --
Capital expenditures for property, plant, and equipment..... (1,263) (3,030)
Proceeds from sale of property, plant, and equipment........ 71 112
Other....................................................... 190 (229)
--------- ---------
Net cash used in investing activities....................... (2,627) (3,147)
FINANCING ACTIVITIES
Borrowings under line of credit agreements.................. 929,724 960,744
Repayments under line of credit agreements.................. (933,505) (958,785)
Proceeds from long-term debt................................ 5,896 --
Repayments of long-term debt................................ (6,855) (3,617)
Maturity of certificates of deposit......................... 1,620 --
Proceeds from issuance of Series A Redeemable Preferred
Stock..................................................... 2,000 --
Other....................................................... (1,335) (490)
--------- ---------
Net cash used in financing activities....................... (2,455) (2,148)
--------- ---------
Net increase (decrease) in cash............................. 344 (13)
Cash at beginning of year................................... 502 846
--------- ---------
Cash at end of year......................................... $ 846 $ 833
========= =========
Supplemental disclosure of cash flow information -- Cash
paid for interest......................................... $ 6,526 $ 7,097
</TABLE>
See accompanying notes.
F-35
<PAGE> 147
AMERISERV FOOD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1994 AND DECEMBER 30, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Disposition
AmeriServ Food Company (the Company or AmeriServ) was formed in September
1989 and was majority owned by J. Lewis Partners, L.P. (Lewis Partners). On
January 26, 1996, all of the Company's outstanding stock (common and preferred)
was acquired by AmeriServe Food Distribution, Inc. (formerly NEBCO EVANS
Distribution, Inc.) (NEBCO). In conjunction with the acquisition, the Company's
revolving line of credit, its term notes payable to five co-lenders, and its
note to Signal Capital Corporation were paid off. The Company continues to
operate as a wholly-owned subsidiary of NEBCO with NEBCO providing any working
capital needed for the Company's operations.
The consolidated financial statements of the Company include the accounts
of the Company and the following subsidiaries:
<TABLE>
<CAPTION>
SUBSIDIARY OWNERSHIP
---------- ---------
<S> <C>
Post Holding Company and subsidiary (Post).................. 50%
Delta Transportation, Ltd. (Delta).......................... 100%
</TABLE>
The Company was formed through a series of acquisitions. Interstate
Distributors, Inc. (IDI), and The Sonneveldt Company (Sonneveldt) represent
holding companies formed for the purpose of acquiring the respective operating
subsidiaries. Lewis Partners acquired a 70% ownership interest in Sonneveldt and
an 81% ownership interest in IDI on December 19, 1988, and August 1, 1989,
respectively. In 1989, Lewis Partners transferred its ownership interests in
these two entities to the Company in exchange for shares of the Company's common
stock. Concurrent with the transfer of Lewis Partners' ownership interests in
the subsidiaries to the Company, the Company acquired the remaining 30% minority
interest in Sonneveldt by exchanging shares of the Company's common stock for
the minority interest holders' shares of Sonneveldt. The Company acquired Post
Holding Company (Post) in 1989, First Choice Food Distributors, Inc. (FCF), in
1990, Alpha Distributors, Ltd., Delta Transportation, Ltd., and Omega
Distributions Services, Ltd. (collectively Alpha), and Food Service Systems
(FSS) in 1991. The Company merged FSS into IDI in December 1992.
On January 11, 1994, the Company completed a series of transactions
including a private equity offering, a corporate restructuring, and a
refinancing of the majority of the Company's debt. As a part of these
transactions, the Company purchased the 19% minority interest in IDI, and
simultaneously merged all of its subsidiaries into AmeriServ, except Post and
Delta Transportation, Ltd. (Delta), which were not merged for regulatory
reasons.
Nature of Operations
The Company, through its divisions and subsidiaries, is a system
foodservice distributor specializing in distribution to chain restaurants. The
Company distributes a wide variety of items, including fresh and frozen meat and
poultry, frozen foods, canned and dry goods, fresh and pre-processed produce,
beverages, dairy products, paper goods, cleaning and other supplies and small
equipment. At December 30, 1995, the Company served approximately 4,300
restaurant locations within 38 different restaurant chains (or "concepts") in 38
states, Mexico and the Caribbean from 14 distribution centers in the United
States.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-36
<PAGE> 148
AMERISERV FOOD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Upon consolidation, all intercompany accounts,
transactions, and profits have been eliminated.
Fiscal Year
The Company's fiscal year is the 52- or 53-week period ending on the
Saturday closest to December 31. The fiscal years ended December 31, 1994
(fiscal 1994) and December 30, 1995 (fiscal 1995) are 52-week periods.
Inventories
Merchandise inventories are valued at the lower of cost (first-in,
first-out method) or market.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the assets, using either the straight-line or
double-declining balance method. Amortization of leasehold improvements is
recorded over the respective lease terms or useful lives, whichever are shorter;
and assets recorded under capital leases are amortized over the respective lease
terms. Amortization of capital leases is included in depreciation expense.
Useful lives for amortization and depreciation calculations are as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 5 -- 40 years
Delivery and automotive equipment........................... 5 -- 9 years
Warehouse equipment......................................... 5 -- 12 years
Furniture, fixtures, and equipment.......................... 5 -- 10 years
</TABLE>
Other Assets
Goodwill represents the excess of the purchase prices over the fair values
of net assets of acquired businesses and is amortized over 40 years using the
straight-line method. On January 11, 1994, the Company purchased the remaining
minority interest in IDI resulting in additional goodwill of $1,160. The
carrying value of goodwill is reviewed if the facts and circumstances suggest it
may be impaired. If this review indicates that goodwill may not be recoverable,
as determined based on the estimated future undiscounted cash flows of the
entity acquired over the remaining amortization period, the Company's carrying
value of the goodwill is reduced by the estimated shortfall.
The costs of covenants not to compete, incurred in connection with
acquisitions, are being amortized over the lives of the respective covenants
(three to five years) using the straight-line method. Deferred financing costs
are being amortized over the terms of the respective agreements, generally three
to five years, using the straight-line method, which does not differ
significantly from the interest method.
Federal Income Taxes
The Company and its subsidiaries (excluding Post) file a consolidated
federal income tax return. Under federal tax regulations, Post is required to
file a separate consolidated federal income tax return.
Losses of Divested Operations
In fiscal 1994, the Company incurred losses of $313, consisting of costs
incurred to close the two remaining FSS distribution facilities. The majority of
these expenses were related to operating, legal,
F-37
<PAGE> 149
AMERISERV FOOD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
severance, and shut-down costs associated with the decision to close these
facilities. The closing and divesting of these operations was deemed necessary
due to continued operating losses with respect to these two facilities.
Other Expenses, Net
In fiscal 1995, other expense, net, of $1,472 in the consolidated statement
of operations, included expenses of $827 related to an attempted public offering
of the Company's common stock, and an accrual of $600 representing payments due
under contract to two former owners of a company acquired by AmeriServ in 1988.
As the two former owners are no longer involved in the business, these amounts
have been written off.
2. LEASES
The Company leases warehouse facilities and certain transportation
equipment under operating leases expiring at various dates through 1999. Minimum
annual rental commitments under noncancelable operating leases are as follows at
December 30, 1995:
<TABLE>
<S> <C>
1996........................................................ $ 8,233
1997........................................................ 7,509
1998........................................................ 6,604
1999........................................................ 5,134
2000........................................................ 3,700
Thereafter 5,887
-------
$37,067
=======
</TABLE>
Rent expense for fiscal 1994 and 1995 was approximately $9,363 and $11,243,
respectively. Under certain truck leases, various subsidiaries of the Company
are obligated to pay contingent rentals based on miles driven each period.
The Madison, Wisconsin, warehouse facility lease grants the Company an
option to purchase the warehouse facility at any time during the initial or
extended lease terms for $6,000. Additionally, the lease grants the lessors a
put option to require the Company to purchase the warehouse facility for $6,000
should the Company either default on future monthly rental payments or fail to
exercise, or not be entitled under the terms of the lease to exercise, any of
its options to extend the initial 10-year term of the lease.
The Company leases operating facilities and certain delivery and warehouse
equipment under capital lease agreements. The leases are for various terms
through 2002, with interest payable at rates ranging from 10 to 12.75%. The
facilities are leased from a partnership, which is partially owned by
stockholders of the Company. Payments representing principal on the facility
leases totaled $133 and $150 in fiscal 1994 and 1995, respectively. The Company
is required to pay real estate and other occupancy costs under the leases.
3. STOCK COMPENSATION PLAN
In 1991, the Company adopted a Stock Compensation Plan (the Plan), which
became effective on December 31, 1991. The Plan covers the issuance of incentive
and nonqualified stock options and restricted stock grants to directors and key
employees of the Company and its subsidiaries. The Plan is administered by a
committee (the Committee) appointed by the Company's Board of Directors. The
Committee generally has the authority to fix the terms and numbers of options to
be granted and to determine the employees or other parties who will receive the
options and the grants. The number of shares that may be issued under the Plan
shall not exceed 56. Incentive stock options granted by the Committee shall
expire on the date determined by the Committee, but in no event shall any
incentive stock option expire later than 10 years after the grant date. The
exercise price per share for shares issued pursuant to the exercise of incentive
stock options shall not be
F-38
<PAGE> 150
AMERISERV FOOD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
less than the fair market value of common stock at the time of the grant of the
option. All options granted will expire between January 1, 2002, and January 11,
2004.
Common share stock options outstanding at December 31, 1994, and December
30, 1995, are as follows adjusted for a 1 for 10 reverse stock split effective
September 1, 1995 (in thousands except per share data):
<TABLE>
<CAPTION>
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
--------- --------------- -----------
<S> <C> <C> <C>
Outstanding at December 31, 1994.... 23 $53.33 -- $93.33 23
Outstanding at December 30, 1995.... 24 $53.33 -- $93.33 24
</TABLE>
4. INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Current:
Federal.......................................... $ 72 $ --
State............................................ 383 289
----- ----
Total current...................................... 455 289
Deferred:
Federal.......................................... (347) (19)
----- ----
Total deferred..................................... (347) (19)
----- ----
$ 108 $270
===== ====
</TABLE>
A reconciliation of the Company's income tax provision calculated at
federal statutory rates to the provision for income taxes reported is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Federal statutory tax rate (34%) applied to income
(loss) before taxes.............................. $ 571 $(548)
Net operating losses not benefited................. -- 267
Benefit of net operating loss carryovers........... (827) --
AMT credit not benefited........................... 72 --
State income taxes................................. 383 289
Tax return settlements............................. (347) --
Amortization of goodwill........................... 124 124
Meals and entertainment............................ 97 119
Other.............................................. 35 19
----- -----
$ 108 $ 270
===== =====
</TABLE>
At December 30, 1995, the Company has consolidated net operating loss
carryforwards of $8,707 for federal income tax purposes that expire in years
2004 through 2009. Additionally, at December 30, 1995, Post has net operating
loss carryforwards of $1,360, which are available to offset Post's separate
taxable income. The Company establishes a valuation allowance for its deferred
tax assets until, based on available evidence, it is more likely than not that a
portion or all of the deferred tax assets will be realized.
F-39
<PAGE> 151
AMERISERV FOOD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Section 382 of the 1986 Internal Revenue Code provides for limitations on
the utilization of net operating loss carryovers subsequent to certain ownership
changes. If the Company experiences an ownership change, as defined under
Section 382, the availability of its net operating loss carryovers may be
limited.
5. OTHER RELATED PARTY TRANSACTIONS
The Company and its subsidiaries incurred monitoring and acquisition fees
of $415 to Lewis Partners for management advisory, investment banking, and
acquisition services during both fiscal 1994 and 1995.
6. CAPITAL STOCK
Effective November 10, 1994, the Board of Directors approved a
three-for-four reverse stock split and effective September 1, 1995, the Board of
Directors approved a one-for-ten reverse stock split. All references to stock
related data has been restated to reflect the effect of the splits.
The Board of Directors of the Company is authorized, without action by the
stockholders, to divide authorized preferred stock into one or more series and
to fix, for each series, the number of shares, powers, designations,
preferences, relative rights, qualifications, limitations, and restrictions. The
Company is authorized to issue 500 shares of Preferred Stock with a par value of
$0.01. The Company issued 45 shares of $.01 par value non-voting preferred
shares designated as Series A Redeemable Preferred Stock for $4,500. The
Preferred Stock is convertible into shares of common stock at a rate of 2.5
shares of common for each share of Series A Redeemable Preferred Stock. The
holders of shares of Series A Redeemable Preferred Stock are entitled to receive
dividends as declared by the Board of Directors from time to time. The Series A
Redeemable Preferred Stock is redeemable in whole at any time or from time to
time in part, at the option of the Company, at a redemption price of $125.00 per
share, with such redemption price increasing by 12% per year commencing on
January 1, 1995, and being increased by a per share amount equal to any then
declared but unpaid dividends. The redemption of the Series A Redeemable
Preferred Stock is mandatory on December 31, 2003, or earlier in the event of an
initial public offering, sale of the Company or merger, consolidation, or other
form of business combination in which the Company is not the surviving entity.
In the event of any form of liquidation of the Company, the holders of the
Series A Redeemable Preferred Stock hold preference over all other forms of
capital stock at an amount equal to $100.00 per share with the amount increasing
by 12% per year compounded annually. Commencing on January 1, 1995, this amount
is further increased by a per share amount equal to any then declared but unpaid
dividends.
Under the terms of an agreement with two of the Company's stockholders, the
Company must obtain an affirmative vote by at least one of the directors, if
any, nominated by each of the two stockholders and Lewis Partners, prior to the
consummation of any of the following events: (i) the issuance by the Company or
any subsidiary of any shares of its capital stock or other equity securities or
options, rights, or warrants; (ii) a transfer, as defined, by the Company of any
of the shares of capital stock of Post currently owned by it; (iii) the approval
of any amendments to the Certificate of Incorporation of the Company or its
subsidiaries; (iv) the merger, consolidation, liquidation, or dissolution of the
Company or any of its subsidiaries or the sale or other disposition of all, or
substantially all, of the assets of the Company or its subsidiaries; (v) the
declaration or payment of any dividend on or distribution to holders of the
common equity stock of the Company or any subsidiary that is not wholly owned by
the Company; or (vi) the amendment, modification, supplementation, or
termination of various agreements currently in effect or hereinafter to be
executed by the stockholders.
In connection with the acquisition of Sonneveldt and the related financing
obtained, a warrant was issued to Signal Capital Corporation to purchase 25% of
the common stock of the Company's former subsidiary for an aggregate exercise
price of $0.25. The warrant was exercisable upon issuance. As a part of the
refinancing and restructuring completed January 11, 1994 (Note 9), the warrant
was purchased by the Company for $100.
F-40
<PAGE> 152
AMERISERV FOOD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. CONCENTRATIONS OF CREDIT RISK
The Company and its subsidiaries perform periodic credit evaluations of its
customers' financial conditions and generally do not require collateral.
Franchiser-owned and franchisee-owned stores of three national limited-menu
concepts accounted for approximately 40%, 10%, and 10% in 1994 and 40%, 11%, and
10% in fiscal 1995 of the Company's consolidated revenues. One customer
represented approximately 15% and 14% of consolidated revenues for fiscal 1994
and 1995, respectively.
8. EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have two benefit plans, the AmeriServ
401(k) Savings Plan and The Sonneveldt Company 401(k) Plan. The AmeriServ 401(k)
Plan covers all hourly and salaried employees of AmeriServ and its subsidiaries,
except those covered in The Sonneveldt Plan. The Sonneveldt Company 401(k) Plan
covers all hourly warehouse and transportation employees of a former subsidiary,
The Sonneveldt Company. Under the plans, participants may elect to defer up to
15% of compensation, and the Company matches a portion of the participant's
salary deferral, up to plan-specified maximums. The Company's contributions to
the plans totaled $389 and $323 in fiscal 1994 and 1995, respectively.
9. REFINANCING
On January 11, 1994, the Company entered into a series of transactions that
resulted in capital contributions of $10,178, the refinancing of a majority of
the Company's debt, and the restructuring of the Company's corporate
organization.
The Company issued 45 shares of Series A Redeemable Preferred Stock for
$4,500 (Note 6). The consideration for these shares was a combination of cash
and the contribution of the Company's $2,500 promissory note payable to Lewis
Partners. Additionally, the stockholders of the Company, as a group, contributed
the $5,000 balance of the dividend promissory notes, together with accrued
interest of $678 thereon, to the Company in the form of additional paid-in
capital.
In fiscal 1994, the Company recognized a $313 extraordinary gain as a
result of the refinancing of its revolving credit notes payable and certain term
notes payable. The Company purchased the warrants in a subsidiary from one
lender for less than book value, generating a $275 gain, prepaid a note
obtaining a $263 discount in exchange for early extinguishment, and repaid
several issues of debt before the due date resulting in $225 in prepayment
penalties.
The corporate structure of the Company was also simplified with the merger
of all the Company's subsidiaries, except Post and Delta, into the Company. The
mergers were also consummated on January 11, 1994.
F-41
<PAGE> 153
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 28, 1996 and December 27, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 27, 1997.
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 27, 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 27, 1997, in conformity with generally accepted
accounting principles.
As discussed in Note 13 to the consolidated financial statements, the
Company changed its method of capitalization of business process reengineering
activities in the fourth quarter of 1997.
KPMG PEAT MARWICK LLP
Miami, Florida
February 20, 1998
F-42
<PAGE> 154
PROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1996 AND DECEMBER 27, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,763 $ 12,501
Accounts receivable, net of allowance for doubtful
accounts of $2,334 and $4,085 respectively............. 219,340 222,247
Inventories............................................... 144,040 160,621
Deferred income taxes, net................................ 10,914 7,190
Prepaid expenses and other current assets................. 7,373 8,434
-------- --------
Total current assets.............................. 384,430 410,993
Property and equipment, net................................. 49,637 59,961
Intangible assets, net...................................... 41,436 39,883
Deferred income taxes, net.................................. 16,100 28,802
Other assets................................................ 12,121 8,462
-------- --------
Total assets...................................... $503,724 $548,101
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $254,907 $277,953
Accrued liabilities....................................... 42,475 27,012
Current portion of long-term debt......................... 1,500 --
-------- --------
Total current liabilities......................... 298,882 304,965
Long-term debt, less current portion........................ 111,084 174,200
Other noncurrent liabilities................................ 15,243 4,521
-------- --------
Total liabilities................................. 425,209 483,686
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; Authorized 10,000,000
shares; none issued.................................... -- --
Class A common stock, $.01 par value; Authorized
50,000,000 shares; issued and outstanding 3,400,000
shares and 3,496,499 shares, respectively.............. 34 35
Class B common stock, $.01 par value; Authorized
10,000,000 shares; issued and outstanding 5,963,856
shares and 5,856,756 shares, respectively.............. 60 58
Additional paid-in capital................................ 105,256 104,934
Accumulated deficit....................................... (26,901) (40,580)
Accumulated foreign-currency translation adjustments...... 66 (32)
-------- --------
Total stockholders' equity........................ 78,515 64,415
-------- --------
Total liabilities and stockholders' equity........ $503,724 $548,101
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE> 155
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 30, 1995,
DECEMBER 28, 1996 AND DECEMBER 27, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.............................................. $3,461,837 $4,125,054 $3,901,165
Cost of sales.......................................... 3,193,270 3,806,811 3,591,368
---------- ---------- ----------
Gross profit...................................... 268,567 318,243 309,797
Operating expenses, including management fees to Onex
of $808, $729 and $0, respectively................... 255,216 301,295 302,080
Loss on impairment of long-lived assets................ -- 15,733 --
Restructuring and contract-termination charges......... 711 28,466 --
---------- ---------- ----------
Income (loss) from operations..................... 12,640 (27,251) 7,717
Interest expense, including interest to Onex of $1,738,
$1,888 and $0, respectively.......................... (14,678) (14,824) (11,745)
Interest income........................................ 1,339 1,694 2,552
---------- ---------- ----------
Loss before income taxes, extraordinary items and
cumulative effect of a change in accounting
principle....................................... (699) (40,381) (1,476)
Income tax benefit (provision)......................... (85) 15,410 485
---------- ---------- ----------
Loss before extraordinary items and cumulative
effect of a change in accounting principle...... (784) (24,971) (991)
Extraordinary (loss) gain on early retirement of debt,
net of income tax benefit (provision) of $502, $(397)
and $4,073, respectively............................. (772) 610 (6,262)
Cumulative effect of a change in accounting principle,
net of income tax benefit of $3,293.................. -- -- (6,426)
---------- ---------- ----------
Net loss.......................................... $ (1,556) $ (24,361) $ (13,679)
========== ========== ==========
Net loss per common share (basic and diluted):
Loss before extraordinary items and cumulative effect
of a change in accounting principle.................. $ (0.18) $ (4.30) $ (0.11)
Extraordinary items, net............................... (0.17) 0.10 (0.67)
Cumulative effect of a change in accounting principle,
net.................................................. -- -- (0.69)
---------- ---------- ----------
Net loss per common share......................... $ (0.35) $ (4.20) $ (1.47)
========== ========== ==========
Weighted average number of shares...................... 4,489,906 5,804,319 9,331,845
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE> 156
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 30, 1995,
DECEMBER 28, 1996 AND DECEMBER 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
FOREIGN-
COMMON STOCK ADDITIONAL CURRENCY
----------------- PAID-IN ACCUMULATED TRANSLATION
CLASS A CLASS B CAPITAL DEFICIT ADJUSTMENTS TOTAL
------- ------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 25, 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)
Net loss.......................... -- -- -- (1,556) -- (1,556)
Foreign-currency translation
adjustments.................... -- -- -- -- 71 71
--- --- -------- -------- ---- --------
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)
Net loss.......................... -- -- -- (24,361) -- (24,361)
Foreign-currency translation
adjustments.................... -- -- -- -- (5) (5)
--- --- -------- -------- ---- --------
Balance, December 28, 1996.......... 34 60 105,256 (26,901) 66 78,515
Issuance of 33,799 Class A shares
under the Employee Stock
Purchase Plan.................. -- -- 204 -- -- 204
Acquisition and retirement of
44,400 Class B shares.......... -- (1) (554) -- -- (555)
Conversion of 62,700 Class B
shares into 62,700 Class A
shares......................... 1 (1) -- -- -- --
Compensation expense accrued under
the 1997 Directors Stock Option
Plan........................... -- -- 28 -- -- 28
Net loss.......................... -- -- -- (13,679) -- (13,679)
Foreign-currency translation
adjustments.................... -- -- -- -- (98) (98)
--- --- -------- -------- ---- --------
Balance, December 27, 1997.......... $35 $58 $104,934 $(40,580) $(32) $ 64,415
=== === ======== ======== ==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE> 157
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1995,
DECEMBER 28, 1996 AND DECEMBER 27, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (1,556) $(24,361) $ (13,679)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 12,693 10,937 11,231
Bad debt expense........................................ 1,845 1,682 2,275
Loss (gain) on early retirement of debt................. 1,274 (1,007) 10,335
Cumulative effect of a change in accounting principle... -- -- 9,719
Deferred income tax benefit............................. (1,749) (14,085) (8,978)
Loss on impairment of long-lived assets................. -- 15,733 --
Noncash contract-termination charges.................... -- 5,224 --
Gain on sales of property and equipment................. (184) (154) (655)
Changes in operating assets and liabilities, net of
effects of companies acquired..........................
(Increase) decrease in accounts receivable............ (13,441) 9,067 (5,182)
(Increase) decrease in inventories.................... 7,706 (3,608) (16,581)
Increase in prepaid expenses and other assets......... (1,208) (13,854) (3,949)
Increase in accounts payable.......................... 43,518 12,262 23,046
(Decrease) increase in accrued and other noncurrent
liabilities.......................................... 1,099 23,450 (25,952)
--------- -------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES........................................ 49,997 21,286 (18,370)
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (5,683) (19,987) (29,997)
Proceeds from sales of property and equipment............. 362 154 1,786
Payment for purchase of net assets acquired............... (170,279) -- --
--------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES.............. (175,600) (19,833) (28,211)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt to Onex...................... (2,085) (15,000) --
Repayments of long-term debt to others.................... (78,938) (30,269) (112,584)
Borrowings on long-term debt from Onex.................... 18,750 -- --
Borrowings on long-term debt from others, net............. 160,616 -- 174,200
Fees incurred in conjunction with long-term debt.......... -- -- (4,644)
Proceeds from issuance of common stock to Onex............ 26,500 7,000 --
Proceeds from issuance of common stock to others.......... 2,085 37,464 --
Payments to acquire and retire treasury stock............. (222) (205) (555)
--------- -------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES........................................ 126,706 (1,010) 56,417
--------- -------- ---------
Effect of exchange-rate changes on cash..................... 71 (5) (98)
--------- -------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......... 1,174 438 9,738
Cash and cash equivalents at beginning of year.............. 1,151 2,325 2,763
--------- -------- ---------
Cash and cash equivalents at end of year.................... $ 2,325 $ 2,763 $ 12,501
========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:............................
Interest to Onex........................................ $ 41 $ 2,927 $ --
========= ======== =========
Interest to others...................................... $ 12,291 $ 16,435 $ 10,938
========= ======== =========
Income taxes, net of refunds............................ $ 993 $ -- $ --
========= ======== =========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In October 1997, the Company issued 33,799 Class A common shares to employees
under the 1997 Employee Stock Purchase Plan at $6.035 per share in exchange for
accrued compensation totaling $204.
During 1997, the Company recognized $28 of compensation expense associated with
the 1997 Directors Stock Option Plan.
See accompanying notes to consolidated financial statements.
F-46
<PAGE> 158
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND DECEMBER 27, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) The Business
ProSource, Inc. (the "Company") provides foodservice distribution services
to chain restaurants in North America and provides purchasing and logistics
services to the foodservice market. The Company's 3,400 associates serve
approximately 12,700 restaurants, consisting primarily of Burger King, Red
Lobster, Long John Silver's, Olive Garden, TGIFriday's, Chick-fil-A, Chili's,
Sonic, TCBY and Wendy's restaurant concepts, from 34 distribution centers and
its Corporate Support Center in Coral Gables, Florida.
The Company operates through ProSource Services Corporation ("PSC"), a
wholly owned subsidiary, and PSC's four main wholly-owned operating
subsidiaries, ProSource Distribution Services Limited ("ProSource Canada"),
BroMar Services, Inc. ("BroMar"), ProSource Receivables Corporation ("PRC"), and
PSD Transportation Services, Inc. ("PSD"). PSC commenced operations in July
1992. PRC and PSD commenced operations during fiscal 1997. The consolidated
financial statements include the results of the operations of PSC, PRC and PSD
from their inception and the results of operations of ProSource Canada and
BroMar, which were formed or acquired by the Company in connection with 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.
(b) Principles 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) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Cash and Cash Equivalents
Cash on hand and in banks and short-term securities with maturities of
three months or less when purchased are considered cash and cash equivalents.
(e) 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%, 32% and 34% of inventories in 1995,
1996, and 1997, respectively.
F-47
<PAGE> 159
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the related assets. Amortization of leasehold
improvements is computed using the straight-line method over the shorter of the
lease term or estimated useful lives of the related assets.
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:
<TABLE>
<S> <C>
Goodwill........................................... 40 years
Noncompete agreements.............................. 5 years
Customer lists..................................... 12 years
</TABLE>
Goodwill represents the excess of cost over fair value of net assets
acquired. The Company periodically evaluates the recoverability of recorded
costs for goodwill based upon estimations of future undiscounted related
operating income from the acquired companies. Should the Company determine it
probable that future estimated undiscounted related operating income from any of
its acquired companies will be less than the carrying amount of the associated
goodwill, an impairment of goodwill would be recognized, and goodwill would be
reduced to the amount estimated to be recoverable. The Company believes that no
material impairment existed at December 28, 1996 and December 27, 1997.
(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 up to certain retention limits under its workers'
compensation (except for a period during 1996-1997), 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 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 28, 1996
and December 27, 1997, the estimated accrued liabilities related to workers'
compensation were approximately $4.4 million and $3.3 million, respectively, net
of a discount of approximately $1.6 million and $1.0 million, respectively.
(j) Net Loss Per Common Share
In February 1997, Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" was issued. SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform with the requirements of
SFAS No. 128.
F-48
<PAGE> 160
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(k) Income Taxes
The Company and its wholly-owned domestic subsidiaries file consolidated
federal and state tax returns in the United States. Separate foreign tax returns
are filed for the Company's Canadian subsidiary. The Company follows the asset
and liability method of accounting for income taxes prescribed by SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities. The effect on deferred taxes of a change in
tax rates is recognized in income in the year that includes the enactment date.
(l) Translation of Foreign Currency
The accounts of ProSource Canada are translated into U.S. dollars in
accordance with SFAS No. 52, "Foreign Currency Translation." Consequently, all
balance sheet accounts are translated at the current exchange rate. Income and
expense accounts are translated at the average exchange rates in effect during
the year. Adjustments resulting from the translation are included in accumulated
foreign-currency translation adjustments as a component of stockholders' equity.
(m) Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and display of comprehensive income and its components. In June
1997, the FASB also issued Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about a company's operating segments and related
disclosures about its products, services, geographic areas of operations and
major customers. Both statements will be adopted by the Company in 1998.
Management believes the adoption of these statements will not materially impact
the Company's results of operations, cash flows or financial position.
(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 debt approximate fair value because they
are variable-rate instruments that reprice monthly.
(o) Reclassifications
Certain amounts previously presented in the financial statements of prior
years have been reclassified to conform to the current year presentation.
2. BUSINESS COMBINATIONS
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 previous revolving
credit facility, a $9 million note payable to Martin-Brower (net of a discount
to reflect a constant interest rate), $18.5 million
F-49
<PAGE> 161
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in notes payable to Onex, and the issuance of 2,650,000 shares of the Company's
Class B 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 goodwill 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.
3. RESTRUCTURING, TERMINATION 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, which was approved by
its Board of Directors, to consolidate and integrate its corporate and network
operations, including the closing of 19 distribution facilities under lease
agreements and 11 owned distribution facilities. As a result, in the first
quarter of 1996, the Company accrued restructuring charges of $10.9 million,
primarily related to the termination of the existing facility leases and
employee related costs. The Company began the integration of some of these
facilities, including communications to its employees and its customers in 1996.
During 1997, the Company undertook a thorough evaluation of each specific
facility's return on investment and alternative uses. As a result, the Company
now intends to close 10 distribution facilities currently leased and 9
distribution facilities currently owned. The Company expects to complete the
plan in stages through the year 2002. During 1996 and 1997, the Company paid in
the aggregate $2.8 million and $1.7 million, respectively, in costs primarily
related to facility leases and relocation costs. In addition, during 1997 the
Company reclassified $3.4 million to acquisition related liabilities. As of
December 27, 1997, the Company had approximately $3.0 million of accrued unpaid
restructuring charges. Management believes that the remaining accrued
restructuring charges are adequate to complete its plans.
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 consisted 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 $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 buildings
(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.
The Company discontinued 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 the
termination of this agreement. During 1997, the Company paid and charged in the
aggregate $9.1 million in costs primarily related to lease costs in connection
with idle equipment and warehouse space and costs associated with rerouting the
Company's transportation fleet required as a result of the loss of the Arby's
business. In addition, the Company reclassified approximately $1.2 million to
the
F-50
<PAGE> 162
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allowance for doubtful accounts receivable to reserve against outstanding Arby's
accounts receivable. As of December 27, 1997, the Company had approximately $0.3
million of accrued unpaid termination charges which management believes will be
paid during 1998.
4. PROPERTY AND EQUIPMENT
Property and equipment and related depreciable lives were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, DEPRECIABLE
1996 1997 LIVES
------------ ------------ --------------
<S> <C> <C> <C>
Land........................................ $ 3,636 $ 3,662 --
Buildings and improvements.................. 16,413 17,092 15 to 40 years
Warehouse and transportation equipment...... 24,465 25,592 3 to 10 years
1 1/2 to 5
Computer software........................... 4,262 7,391 years
Leasehold improvements...................... 4,384 8,966 3 to 13 years
Office equipment............................ 7,261 8,209 3 to 7 years
Projects in progress........................ 11,760 18,456 --
------- -------
72,181 89,368
Less accumulated depreciation and
amortization.............................. 22,544 29,407
------- -------
Property and equipment, net................. $49,637 $59,961
======= =======
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Goodwill................................................... $41,298 $41,298
Identifiable intangibles................................... 3,870 3,870
------- -------
45,168 45,168
Less accumulated amortization.............................. 3,732 5,285
------- -------
Intangible assets, net..................................... $41,436 $39,883
======= =======
</TABLE>
6. LONG-TERM DEBT
Long-term debt consisted of the following loan agreements with banks (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
$150 million accounts receivable securitization facility,
due March 14, 2002....................................... $ -- $125,000
$75 million revolving credit facility, due March 14,
2002..................................................... -- 49,200
$210 million revolving credit facility, retired and repaid
March 14, 1997........................................... 84,834 --
$15 million term-loan facility, retired and repaid March
14, 1997................................................. 12,750 --
$15 million term-loan facility, retired and repaid March
14, 1997................................................. 15,000 --
-------- --------
Total long-term debt.................................. 112,584 174,200
Less current portion....................................... 1,500 --
-------- --------
Long-term debt, less current portion.................. $111,084 $174,200
======== ========
</TABLE>
F-51
<PAGE> 163
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(a) Existing Credit Facilities
In March, 1997, the Company entered into two five-year loan agreements
aggregating $225 million (the "Existing Credit Facilities") with a group of
financial institutions to replace its previous credit facility. In connection
with this early retirement of long-term debt, the Company recorded a pre-tax
extraordinary charge of $10.3 million ($6.3 million net of taxes) in the first
quarter of fiscal 1997. This charge reflected the write-off of deferred
financing costs of $6.3 million, prepayment penalties of $2.7 million and $1.3
million in costs associated with the termination of interest-rate protection
agreements.
The Existing Credit Facilities bear interest based on either the prime rate
or LIBOR plus an additional spread based on certain financial ratios and mature
on March 14, 2002. The effective rate at December 27, 1997 was 7.34%. The
Company is required to comply with various covenants in connection with the
Existing Credit Facilities and borrowings are subject to calculations based on
accounts receivable and inventory. The revolving credit facility is secured by
liens on substantially all of the Company's assets and contains various
restrictions on, among other things, the Company's ability to pay dividends and
dispose of assets. Additionally, in the event of a change in control, the
outstanding principal amount of these facilities shall become due and payable.
PRC is the legal borrower for the accounts receivable securitization facility.
Pursuant to the terms of the accounts receivable securitization facility PSC
sells, on an ongoing basis and without recourse, an undivided interest in a
designated pool of trade accounts receivable to PRC. In order to maintain the
designated balance in the pool of accounts receivable sold, PSC is obligated to
sell undivided interests in new receivables as existing receivables are
collected. PSC has retained substantially the same credit risk as if the
receivables had not been sold. PSC, as agent for PRC, retains collection and
administrative responsibilities on the receivables sold to PRC. The creditors
for this facility have security interests in PRC's assets (consisting primarily
of accounts receivable purchased from PSC) and are entitled to be satisfied by
such assets prior to equity holders. The Company pays a quarterly variable
commitment fee, as defined in the agreements, based on the unused portion of the
facilities which fee averaged 0.33% of such unused portion during 1997. At
December 27, 1997, the Company had approximately $35 million available under the
Existing Credit Facilities.
(b) Previous Credit Facility
On March 31, 1995, in conjunction with the acquisition of NAD, the Company
entered into a $240 million Loan and Security Agreement (the "Previous Credit
Facility") with a group of banks that was retired and repaid before its maturity
on March 14, 1997. The Previous Credit Facility provided for a revolving-credit
facility of up to $210 million and term loans aggregating $30 million. The
interest rate on the Previous Credit Facility was reset every month to reflect
current market rates. The effective rate during fiscal 1995 and 1996 was 8.7
percent. This rate reflected the effect of interest-rate protection agreements,
which were terminated on March 14, 1997 in connection with the retirement of
this facility.
7. LEASES
The Company leases certain of its facilities, vehicles and other equipment
under long-term operating leases. Certain transportation equipment leases call
for contingent rental payments based upon total miles.
F-52
<PAGE> 164
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under non-cancelable operating leases as of
December 27, 1997, by fiscal year are as follows (in thousands):
<TABLE>
<S> <C>
1998.............................................. $ 28,600
1999.............................................. 25,183
2000.............................................. 22,222
2001.............................................. 18,342
2002.............................................. 13,581
Thereafter........................................ 36,315
--------
Total $144,243
========
</TABLE>
Rent expense, including contingent rental expense, was approximately $30.6
million, $39.3 million and $36.8 million during fiscal years 1995, 1996 and
1997, respectively.
8. INCOME TAXES
The income tax benefit (provision) before extraordinary items and
cumulative effect of a change in accounting principle for fiscal years 1995,
1996 and 1997, respectively, consisted of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- ------
<S> <C> <C> <C>
Current taxes:
Federal.............................................. $(1,236) $ 937 $ (582)
State................................................ (408) (9) (545)
------- ------- ------
Total current taxes............................... (1,644) 928 (1,127)
------- ------- ------
Deferred taxes, excluding other components:
Federal.............................................. 1,126 11,449 1,170
State................................................ 264 3,217 404
------- ------- ------
Total deferred taxes, excluding other
components...................................... 1,390 14,666 1,574
------- ------- ------
Other:
Alternative minimum tax-credit (utilization)
carryforwards..................................... 666 (184) 38
Utilization of operating-loss carryforwards.......... (497) -- --
------- ------- ------
Total other....................................... 169 (184) 38
------- ------- ------
Income tax benefit (provision)......................... $ (85) $15,410 $ 485
======= ======= ======
</TABLE>
The following table summarizes the differences between the Company's
effective income tax rate and the statutory Federal income tax rate for fiscal
years 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
----- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State income taxes (net of federal taxes)................. (16.9) 5.2 5.0
Goodwill amortization..................................... (10.9) (0.3) (0.7)
Other..................................................... (18.4) (0.7) (5.4)
----- ---- ----
(12.2)% 38.2% 32.9%
===== ==== ====
</TABLE>
F-53
<PAGE> 165
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of each type of temporary difference that gave rise to the
Company's deferred tax assets and deferred tax liabilities at December 28, 1996
and December 27, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Acquisition-related expenses.............................. $ 3,567 $ 1,262
Accounts receivable, principally due to allowance for
doubtful accounts...................................... 1,222 2,011
Property, plant and equipment, principally due to
differences in depreciation............................ 1,935 1,063
Self-insurance reserves................................... 3,493 3,355
Impairment of long-lived assets........................... 4,036 3,231
Restructuring and contract-termination charges............ 8,121 3,224
Benefit of federal and state net operating-loss
carryforwards.......................................... 5,797 23,933
Other..................................................... 2,025 2,682
------- -------
Total deferred tax assets.............................. 30,196 40,761
Less valuation allowance.................................. -- --
------- -------
Total deferred tax assets, net......................... $30,196 $40,761
------- -------
Deferred tax liabilities:
Computer software......................................... $(1,811) $(3,225)
Acquisition-related liabilities........................... (803) (1,138)
Other..................................................... (568) (406)
------- -------
Total deferred tax liabilities......................... (3,182) (4,769)
------- -------
Net deferred tax assets................................ $27,014 $35,992
======= =======
</TABLE>
In order to fully realize the net deferred tax assets at December 27, 1997,
the Company will need to generate future taxable income of approximately $90
million. Management believes that it is more likely than not that the Company's
deferred tax asset will be realized as a result of future taxable income,
expected to be generated based on the Company's reasonable projections of future
earnings. The Company anticipates that increases in taxable income will result
primarily from (i) future projected revenue and gross margin growth through the
addition of new restaurant chains and the expansion of services provided to new
and 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. In
addition, management believes reasonable tax planning strategies and other
potential transactions will be available that could be used to realize the
deferred tax asset before the expiry of any material net operating losses, which
will not begin to occur until after 2010.
At December 28, 1996 and December 27, 1997, other current assets included
income taxes receivable of approximately $1.5 million and $0.4 million,
respectively, which consisted primarily of overpayments of tax liabilities and
pending carryback refund claims. United States federal income tax returns for
fiscal years 1992 and 1993 are currently under examination by the Internal
Revenue Service. A preliminary assessment is pending which is not material to
the consolidated financial position or results of operations as of December 27,
1997.
F-54
<PAGE> 166
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLANS
(a) Defined-Contribution Plans
On January 1, 1997, the Company's defined contribution plan, which covers
substantially all employees, was renamed the ProSource Retirement Advantage
Plan. Eligible employees can contribute up to 15% of base compensation, with the
following benefits: (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 ratably over four years of
service.
The Company also had 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 Money Purchase Plan was
terminated effective December 1996.
The amount of contribution expense incurred by the Company for these plans
was approximately $2.2 million, $2.7 million and $1.5 million for fiscal years
1995, 1996 and 1997, respectively.
(b) Defined-Benefit Pension Plans
In conjunction with the changes to the ProSource Retirement Advantage Plan
in 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. The Company
settled all pension obligations related to these terminated plans in 1997
through (i) the purchase of annuities, (ii) lump-sum payments, or (iii) the
transfer of plan benefits into the ProSource Retirement Advantage Plan, at the
participant's discretion. The accrued liability as of December 28, 1996 was
adequate to cover the unfunded termination liability of these three pension
plans.
Pension costs of approximately $0.9 million and $1.1 million reflected in
the consolidated statements of operations for fiscal years 1995 and 1996,
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 $0.9 million, $1.2 million,
and $1.1 million for fiscal years 1995, 1996 and 1997, 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 Class B common stock at $10.00 per share in 1992,
132,500 shares of Class B common stock at $11.00 per share in 1993 and 1994, and
270,000 shares of Class B common stock at $10.00 per share in 1995 and 1996. In
connection with the purchases of Class B common stock, each Management Employee
entered into a Management Shareholders Agreement with the Company and Onex.
The ProSource, Inc. Amended Management Option Plan (1995) (the "1995 Option
Plan") provides certain Management Employees with options to purchase one-half
the number of shares of Class B common stock purchased under the Stock Plan at
the same price per share paid by such stockholder (either $10.00 or $11.00).
Subject to the 1995 Option Plan, options granted under the 1995 Option Plan are
exercisable until December 31, 2000. No additional options will be granted under
the 1995 Option Plan. The 1995 Option Plan was amended in November 1996 to
provide that all unvested options vest at a rate of 10% per year through
December 31, 1999, when all remaining options vest. As a result, 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 1996 and 1997, the Company granted options
F-55
<PAGE> 167
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to purchase 358,000 and 16,000 shares, respectively, of Class B common stock at
$14.00 per share. Options under the 1996 Option Plan vest ratably over four
years from the date of grant. These options cannot be exercised, however, until
the earlier of (i) the date on which the market value of the Company's common
stock is 25% greater than the exercise price 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.
Under the ProSource, Inc. 1997 Directors Stock Option Plan (the "1997
Directors Plan"), which was approved by the shareholders in April 1997, the
Company may grant options to its directors, who so elect to receive such options
in lieu of fees, to purchase shares of Class A common stock at $4.00 per share
below the stated fair market value on the date of grant. Options to purchase up
to 100,000 shares of Class A common stock may be granted under this plan. In
April 1997, the Company granted options to purchase 10,500 shares of Class A
common stock at $5.25 per share. Options under the 1997 Directors Plan vest and
become exercisable one year from the date of grant, provided that the holder
thereof is still a director of the Company at such time. Subject to the
provisions of the 1997 Directors Plan, options may be exercised for a period of
up to 10 years after the vesting date. During the year ended December 27, 1997,
the Company recognized $28,000 of compensation expense associated with this
plan.
A summary of the status of the Company's three option plans for the years
ended December 30, 1995, December 28, 1996, and December 27, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
1995 EXERCISE 1996 EXERCISE 1997 EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options
outstanding -- beginning....... 237,450 $10.22 327,700 $10.16 706,450 $12.10
Options granted.................. 101,750 10.00 388,750 13.69 26,500 10.53
Options exercised................ -- -- (125) 10.00 -- --
Options canceled................. (11,500) 10.00 (9,875) 10.00 (93,300) 11.91
------- ------ ------- ------ ------- ------
Options outstanding -- ending.... 327,700 $10.16 706,450 $12.10 639,650 $12.06
======= ====== ======= ====== ======= ======
Options exercisable --year-end... 41,500 $10.12 78,401 $10.13 176,449 $11.86
======= ====== ======= ====== ======= ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 27, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ------------------------------
NUMBER WEIGHTED AVG. NUMBER
OUTSTANDING REMAINING WEIGHTED AVG. EXERCISABLE WEIGHTED AVG.
EXERCISE PRICES AT 12/27/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/27/97 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 5.25.................... 10,500 9 years $ 5.25 -- $ 5.25
10.00.................... 262,100 3 years 10.00 87,034 10.00
11.00.................... 33,050 3 years 11.00 9,915 11.00
14.00.................... 334,000 9 years 14.00 79,500 14.00
------- ------- ------ ------- ------
Totals............... 639,650 6 years $12.06 176,449 $11.86
======= ======= ====== ======= ======
</TABLE>
During fiscal year 1996, the Company adopted SFAS No. 123. Under the
provisions of the new standard, the Company elected to continue using the
intrinsic-value method of accounting for stock-based compensation plans granted
to employees under Accounting Principles Board Opinion No. 25 and provide
pro-forma disclosure for the fair-value based method of accounting for
compensation costs related to stock-option plans and other forms of stock-based
compensation under SFAS No. 123.
The Company estimated the weighted-average fair value of each option
granted during 1995, 1996 and 1997 at $8.27, $7.34 and $5.41, respectively. The
fair value of these options was computed at the date of grant
F-56
<PAGE> 168
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1995, 1996 and 1997, respectively: risk-free interest rates of
6.3%, 6.2% and 6.3%; dividend yields of 0.0% for all years presented, volatility
factors of the expected market price of the Company's common stock of 33.0% for
all years presented and a weighted-average expected life of the options of 7, 7
and 5 years, respectively.
The Black-Scholes option valuation model was developed for use in computing
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the computed fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except per share data).
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Pro forma net loss.................................. $(1,587) $(23,817) $(13,943)
Pro forma net loss per share -- basic and diluted... $ (0.35) $ (4.10) $ (1.49)
</TABLE>
In conjunction with the acquisition of NAD, the Company issued warrants to
Martin-Brower. At December 28, 1996 and December 27, 1997, the warrants were
exercisable for 283,425 shares of Class B common stock at $12.35 per share
during the period from April 1, 1997 through March 31, 2000, and upon
consummation of certain transactions.
On November 15, 1996, the Company completed the issuance of 3,400,000
shares of Class A common stock (at a price of $14.00 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 a subordinated note payable
to Onex; (ii) to prepay, at a discount, $10 million in outstanding principal and
$0.1 million in accrued interest under a 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.
Under the ProSource, Inc. 1997 Employee Stock Purchase Plan, which was
approved by the shareholders in April 1997, employees of the Company purchased a
total of 33,799 shares of Class A common stock at $6.035 per share in 1997. In
January 1998, an additional 30,336 shares of Class A common stock were purchased
by employees at $6.035 per share under this plan.
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 27, 1997, such guarantees amounted to approximately
$0.8 million and were covered by a letter of credit. At December 27, 1997, the
Company was also obligated for $15.0 million in other letters of credit issued
on behalf of the Company
F-57
<PAGE> 169
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
primarily as a guarantee of payment for obligations arising from workers'
compensation claims. At December 27, 1997, the Company had $9.2 million
available in unused letters of credit under its Existing Credit Facilities.
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.
12. CONCENTRATIONS OF CREDIT RISK
Burger King Corporation ("BKC") owned and franchisee-owned Burger King
restaurants collectively accounted for 45%, 41% and 46% of the Company's sales
in fiscal years 1995, 1996 and 1997, respectively. Sales to BKC-owned
restaurants represented approximately 5% of sales for each of the aforementioned
years. Amounts due from BKC-owned restaurants at December 28, 1996 and December
27, 1997 were $5.5 million and $5.8 million, respectively.
In addition, sales to Darden Restaurants, Inc. (owner of Red Lobster and
Olive Garden restaurants) accounted for 18%, 20%, and 21% of the Company's sales
in fiscal years 1995, 1996 and 1997, respectively. Amounts due from Darden
Restaurants, Inc. at December 28, 1996 and December 27, 1997, were approximately
$41.1 million and $41.4 million, respectively.
Sales to company-owned and franchisee-owned Arby's restaurants accounted
for 10% of Company sales in fiscal years 1995 and 1996. No other customer or
restaurant concept accounted for more than 10% of the Company's sales in fiscal
years 1995, 1996 or 1997. The Company periodically performs credit evaluations
on its customers' financial condition and generally does not require collateral.
13. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
During the fourth quarter of 1997, the Financial Accounting Standards
Board's Emerging Issues Task Force reached a consensus on Issue No. 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project that Combines Business Process Reengineering and Information
Technology Transformation." The consensus requires that the cost of business
process reengineering activities, whether done internally or by third parties,
is to be expensed as incurred. As a result, any remaining unamortized portion of
previously capitalized business process reengineering costs is required to be
written off. The cumulative impact of initially conforming to this new standard
in the fourth quarter of 1997 was reported as a change in accounting principle
in the accompanying consolidated statements of operations, with a cumulative
charge, net of tax, of $6.4 million, or $0.69 per share.
14. NET LOSS PER SHARE
For all years presented in the accompanying consolidated statements of
operations, all stock options and other potential common shares were excluded
from the calculation of diluted loss per share, since they would produce
anti-dilutive results. As a result, there are no reconciling items to the
numerator and denominator of the basic and diluted loss per share computations.
F-58
<PAGE> 170
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following were outstanding during fiscal 1997, but were excluded from
the computation of diluted net loss per common share for fiscal 1997.
<TABLE>
<CAPTION>
RELATED NUMBER OF CONVERSION
COMMON STOCK SHARES PRICE PER SHARE EXPIRATION
-------------------------- ---------------- -----------------------------
<S> <C> <C> <C>
Options -- 1995 Option Plan..... 288,650 shares -- Class B $10.00 or $11.00 December 2000
Options -- 1996 Option Plan..... 340,500 shares -- Class B $14.00 November 2006 to January 2007
Options -- 1997 Directors
Plan.......................... 10,500 shares -- Class A $5.25 April 2007
Stock Warrants.................. 283,425 shares -- Class B $12.35 March 2000
$0.5 million convertible
subordinated note............. 25,000 shares -- Class A $20.00 November 1999
</TABLE>
15. SUBSEQUENT EVENT
On January 29, 1998, the Company signed a definitive merger agreement with
AmeriServe Food Distribution, Inc. ("AmeriServe"). Under the terms of the
agreement, AmeriServe has agreed to pay $15.00 in cash for each outstanding
share of the Company's common stock. In addition, under the agreement, all
outstanding options will be accelerated and option holders will receive $15.00
less the applicable exercise for each share issuable upon exercise of the
options. AmeriServe has indicated that it intends to refinance all of the
Company's outstanding debt.
The merger is subject to regulatory approvals and other customary
conditions to closing. Onex Corporation and certain of its affiliates, which own
approximately 61% of the Company's outstanding stock, representing approximately
85% of the voting power, have committed to vote in favor of the merger, which
will assure the necessary shareholder approval. The merger is expected to close
in the second quarter of fiscal 1998.
F-59
<PAGE> 171
======================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY NEHC OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF NEHC SINCE THE
DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Prospectus Summary.................... 3
Risk Factors.......................... 10
Use of Proceeds....................... 15
Capitalization........................ 16
Selected NEHC Historical Financial
Data................................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
The Business.......................... 24
Management............................ 34
Security Ownership of Certain
Beneficial Holders and Management... 38
Certain Relationships and Related
Party Transactions.................. 40
Description of Indebtedness and
Preferred Stock..................... 42
Description of Securities............. 48
Certain Federal Income Tax
Consequences to Holders of Preferred
Stock............................... 96
Plan of Distribution.................. 102
Legal Matters......................... 103
Experts............................... 103
Index of Certain Defined Terms........ 104
Index to Unaudited Pro Forma
Consolidated Financial Statements... P-1
Index to Historical Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
NEBCO EVANS HOLDING COMPANY
11 1/4% SENIOR REDEEMABLE EXCHANGEABLE
PREFERRED STOCK DUE 2008
--------------------
PROSPECTUS
--------------------
JUNE 19, 1998
======================================================
<PAGE> 172
NEBCO EVANS HOLDING COMPANY
ADDENDUM TO PROSPECTUS DATED JUNE 19, 1998
- ------------------------------------------------------------------------------
By Prospectus dated June 19, 1998, Donaldson, Lufkin & Jenrette
Securities Corporation may engage in market-making transactions with respect to
shares of new 11 1/4% Senior Redeemable Exchangeable Preferred Stock due 2008
(the "New Preferred Stock") of Nebco Evans Holding Comapny ("NEHC"), which
shares have been registered under th Securities Act of 1933, as amended. This
addendum (the "Addendum") includes certain additional information which NEHC
has filed with the Securities and Exchange Commission. Specifically, the
addendum includes NEHC's Quarterly Report on Form 10-Q for the quarter ended
March 28, 1998, as well as Current Reports on Form 8-K, dated May 6, 1998 and
May 21, 1998. Each of the attached documents includes information which
investors may wish to consider in addition to the information contained
elsewhere in the Prospectus in connection with an investment in the New
Preferred Stock and should be considered an integral part of the Propestus
dated June 19, 1998.
- ------------------------------------------------------------------------------
<PAGE> 173
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER:
NEBCO EVANS HOLDING
COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1444203
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
545 STEAMBOAT ROAD
GREENWICH, CT 06830
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(203) 661-2500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
All shares of the registrant's common stock are held by one affiliate. As
of May 11, 1998, there were 6,508 shares of Class A Common Stock and 1,733
shares of Class B Common Stock of the registrant outstanding.
1
<PAGE> 174
2
NEBCO EVANS HOLDING COMPANY
FORM 10-Q INDEX
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 28, 1998
and December 27, 1997 .............................................3
Condensed Consolidated Statements of Operations for the three
months ended March 28, 1998 and March 29, 1997.....................4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 28, 1998 and March 29, 1997.....................5
Notes to Condensed Consolidated Financial Statements...............6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................9
Part II. Other Information
Item 1. Legal Proceedings .................................................18
Item 2. Changes in Securities .............................................18
Item 3. Defaults upon Senior Securities ...................................18
Item 4. Submission of Matters to a Vote of Security Holders................18
Item 5. Other Information .................................................19
Item 6. Exhibits and Reports on Form 8-K ..................................19
Signatures
..................................................................21
Exhibits
....................................................................22
2
<PAGE> 175
3
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
NEBCO EVANS HOLDING COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C> <C>
MARCH 28, DECEMBER 27,
1998 1997
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 239,796 $ 231,450
Accounts receivable............................................................. 36,505 43,625
Undivided interest in accounts receivable trust................................. 125,482 154,371
Allowance for doubtful accounts................................................. (13,897) (15,566)
Inventories..................................................................... 152,542 150,148
Other current assets............................................................ 37,494 29,937
----------- -----------
Total current assets..................................................... 577,922 593,965
Property and equipment, net....................................................... 141,476 142,138
Intangible assets, net............................................................ 732,272 737,870
Other noncurrent assets........................................................... 5,349 4,817
----------- -----------
$ 1,457,019 $ 1,478,790
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt............................................... $ 5,511 $ 5,127
Accounts payable................................................................ 259,091 345,603
Accrued and other current liabilities........................................... 95,213 101,219
----------- -----------
Total current liabilities................................................ 359,815 451,949
Long-term debt.................................................................... 944,626 943,609
Other noncurrent liabilities...................................................... 37,546 38,430
11 1/4% Senior redeemable exchangeable
preferred stock................................................................. 240,083 --
Stockholders' equity (deficit):
8%Senior preferred stock, $.01 par value per share; 300 shares authorized,
235 shares outstanding, $2,374
liquidation value............................................................. 2,350 2,350
13 1/2% Senior exchangeable preferred stock, $.01 par
value per share; 5,000,000 shares authorized, 2,400,000
shares outstanding............................................................ -- 59,186
15% Junior exchangeable preferred stock, $.01 par value
per share; 5,000,000 shares authorized, 2,200,000
shares outstanding............................................................ -- 56,819
Junior nonconvertible preferred stock, $.01 par value
per share; 600 shares authorized and outstanding,
$16,875 liquidation value..................................................... -- 15,000
Class A voting common stock, $.01 par value per share;
30,000 shares authorized, 6,508 shares outstanding............................ -- --
Class B nonvoting common stock, $.01 par value per
share; 20,000 shares authorized, 1,733 shares
outstanding................................................................... -- --
Additional paid-in capital...................................................... -- 4,889
Accumulated deficit............................................................. (127,401) (93,442)
----------- -----------
Total stockholders' equity (deficit)..................................... (125,051) 44,802
----------- -----------
$ 1,457,019 $ 1,478,790
=========== ===========
See accompanying notes.
Note: The balance sheet at December 27, 1997 has been derived from the audited
financial statement at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
</TABLE>
3
<PAGE> 176
4
NEBCO EVANS HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, UNAUDITED)
THREE MONTHS ENDED
----------------------------
MARCH 28, MARCH 29,
1998 1997
----------- -----------
Net sales ................................ $ 1,123,938 $ 335,311
Cost of goods sold ....................... 1,013,010 300,682
----------- -----------
Gross profit ............................. 110,928 34,629
Distribution, selling and administrative
expenses ............................... 95,294 32,271
Amortization of intangible assets......... 6,814 997
Costs to integrate acquired operations.... 1,988 --
----------- -----------
Operating income ......................... 6,832 1,361
Other income (expense):
Interest expense, net .................. (19,299) (4,735)
Loss on sale of accounts receivable..... (3,588) --
Interest income-affiliates ............. 152 85
----------- -----------
(22,735) (4,650)
----------- -----------
Loss before income taxes ................. (15,903) (3,289)
Provision (benefit) for income taxes..... 296 (649)
----------- -----------
Net loss ................................. $ (16,199) $ (2,640)
=========== ===========
See accompanying notes.
4
<PAGE> 177
5
NEBCO EVANS HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<S> <C> <C>
THREE MONTHS ENDED
-------------------------
MARCH 28, MARCH 29,
1998 1997
--------- ----------
OPERATING ACTIVITIES:
Net loss .............................................. $ (16,199) $ (2,640)
Adjustments to reconcile net loss to cash
used for operating activities:
Depreciation and amortization ....................... 12,588 2,872
Interest accreted on subordinated loans.............. 1,792 1,254
Changes in assets and liabilities.................... (62,780) (5,532)
--------- ---------
Net cash used for operating activities................. (64,599) (4,046)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures................................... (4,550) (2,346)
Net cash transfers to affiliates....................... (8,543) (2,491)
--------- ---------
Net cash used in investing activities.................. (13,093) (4,837)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock.............. 250,000 --
Financing fees incurred................................ (10,000) --
Repurchase of preferred stock.......................... (153,572) --
Net increase in borrowings under revolving
line of credit....................................... -- 11,433
Repayments of long-term debt........................... (390) (714)
--------- ---------
Net cash provided by financing activities.............. 86,038 10,719
--------- ---------
Net increase in cash................................... 8,346 1,836
Cash at beginning of period............................ 231,450 2,224
--------- ---------
Cash at end of period.................................. $ 239,796 $ 4,060
========= =========
Supplemental disclosures:
Cash paid during the period for:
Interest........................................... $ 25,875 $ 3,663
Income taxes, net of refunds....................... $ 67 $ 325
Noncash investing and financing activities:
Capital expenditures through capital leases
(included in long-term debt)....................... $ 904 $ 1,367
</TABLE>
See accompanying notes.
5
<PAGE> 178
6
NEBCO EVANS HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1998 (UNAUDITED)
1. INTERIM FINANCIAL DATA
The accompanying unaudited condensed consolidated financial statements of Nebco
Evans Holding Company (NEHC) have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of adjustments of
a normal and recurring nature) considered necessary for a fair presentation of
the financial position and results of operations have been included. Operating
results for the three-month period ended March 28, 1998 are not necessarily
indicative of the results that might be expected for the entire fiscal year
ended December 26, 1998. This report should be read in conjunction with the
consolidated financial statements and footnotes thereto included in NEHC's Form
10-K for the fiscal year ended December 27, 1997.
2. ACQUISITIONS
Effective June 11, 1997, AmeriServe Food Distribution, Inc. (the Company), a
direct subsidiary of NEHC, acquired the PFS Division of PepsiCo, Inc. PFS
distributed food products, supplies and equipment to franchised and
company-owned restaurants in the Pizza Hut, Taco Bell and KFC systems, which
were spun-off by PepsiCo, Inc. in October 1997 and are now operating as Tricon
Global Restaurants, Inc. The acquisition has been accounted for under the
purchase method. Twelve weeks of PFS operating results are included in the
Company's operating results for the three months ended March 28, 1998.
The following unaudited pro forma results of operations for the three months
ended March 29, 1997 assume the acquisition of PFS and related transactions
occurred at the beginning of that period (in thousands):
Net sales ............................. $1,055,836
Net loss .............................. (13,921)
On January 29, 1998, the Company entered into a definitive merger agreement
pursuant to which the Company will acquire all of the approximately 9.4 million
outstanding shares of ProSource, Inc. (ProSource) for $15.00 per share in cash.
The Company will also refinance the existing indebtedness of ProSource of
approximately $174 million. The transaction is expected to close in late May
1998. ProSource, which reported net sales of $3.9 billion for its fiscal year
ended December 27, 1997, is in the foodservice distribution business,
specializing in quick service and casual dining chain restaurants. ProSource
services approximately 12,700 restaurants, principally in the United States, in
such chains as Burger King, Red Lobster, Olive Garden, TGI Friday's, Long John
Silver's, Chili's, Sonic, Chick-fil-A, Wendy's and TCBY.
6
<PAGE> 179
7
3. SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK
On March 6, 1998, NEHC received proceeds of $250 million upon issuance of
2,500,000 shares of 11 1/4% Senior Redeemable Exchangeable Preferred Stock
(Preferred Stock) due 2008, with a liquidation preference of $100 per share, in
transactions not requiring registration under the Securities Act of 1933, as
amended. Approximately $154 million of proceeds from the issuance were used to
repurchase all NEHC's outstanding 13 1/2% senior exchangeable preferred stock,
$25,000 series junior nonconvertible preferred stock and 15% junior exchangeable
preferred stock; this amount included $10.7 million in premiums above the face
value of the repurchased stock. Dividends on the Preferred Stock are payable
quarterly in cash or in additional shares of Preferred Stock, at NEHC's option.
The Preferred Stock is exchangeable into 11 1/4% Subordinated Exchange
Debentures due 2008, at NEHC's option, subject to certain conditions, on any
scheduled dividend payment date.
On May 1, 1998, NEHC completed an offer to exchange all the outstanding Senior
Redeemable Exchangeable Preferred Stock due 2008 with new stock with
substantially identical terms that is registered under the Securities Act of
1933, as amended.
4. COSTS TO INTEGRATE ACQUIRED OPERATIONS
As a result of the 1997 acquisition of PFS, the Company had previously
identified a number of actions designed to consolidate and integrate the
operations of the Company and PFS and thereby improve the efficiency and
effectiveness of the combined warehouse and transportation network and
operations support infrastructure.
These actions included construction of new warehouse facilities, closures of
certain existing warehouse facilities and expansions of others, dispositions of
property and equipment, conversions of computer systems, reductions in
workforce, relocations of employees and other consolidation and integration
activities.
Certain costs associated with those actions, principally exit costs for lease
terminations and employee severance, were previously accrued for as part of the
PFS purchase price allocation or the restructuring charge recorded in the third
quarter of 1997. Other incremental costs associated with the actions not
qualifying as exit costs are expensed as incurred and reported as integration
costs in the consolidated statements of operations.
7
<PAGE> 180
8
The Company is in the early stages of the PFS consolidation and integration
plan. Because of the probable acquisition of ProSource (see Note 2), the plan is
expected to be modified and will likely result in certain changes in the scope
and timing of the actions to accommodate the integration of ProSource's
operations.
5. ACCOUNTS RECEIVABLE PROGRAM
Under a five-year Accounts Receivable Program effective July 1997, the Company
received $225 million upon the initial transfer of accounts receivable to a
wholly owned, special purpose, bankruptcy-remote subsidiary, AmeriServe Funding
Corporation (Funding), and concurrent sale of the accounts receivable by Funding
to AmeriServe Master Trust (the Trust). The Trust financed the purchase through
the issuance of $225 million in interest bearing certificates. As of March 28,
1998, accounts receivable sold to the Trust totaled $350.5 million and the
undivided interest in the Trust (receivables sold less the $225 million
proceeds) totaled $125.5 million.
6. GUARANTOR SUBSIDIARIES
The Company's principal operating subsidiaries fully, unconditionally, jointly
and severally guarantee the Company's $500 million 10 1/8% Senior Subordinated
Notes and $350 million 8 7/8% Senior Notes.
The guarantor subsidiaries are direct wholly owned subsidiaries of the Company.
The Company and the guarantor subsidiaries conduct substantially all of the
operations of the Company and its subsidiaries on a consolidated basis. Separate
financial statements of the guarantor subsidiaries are not separately presented
because, in the opinion of management, such financial statements are not
material to investors.
The only significant subsidiary of the Company that is not a guarantor
subsidiary is Funding, which is a wholly owned, special purpose,
bankruptcy-remote subsidiary. Funding has no operating revenues or expenses, and
its only asset is an undivided interest in an accounts receivable trust (the
Trust--see Note 5). Funding's interest in the Trust is junior to the claims of
the holders of certificates issued by the Trust. Accordingly, as creditors of
the Company, the claims of the holders of the Senior Subordinated Notes and
Senior Notes against the accounts receivable held in
8
<PAGE> 181
9
the Trust are similarly junior to the claims of holders of the certificates
issued by the Trust.
Following is summarized combined financial information (in accordance with Rule
1-02(bb) of Regulation S-X) at March 28, 1998 and for the three months then
ended for the guarantor subsidiaries of the Company (in thousands):
Current assets................................$ 9,084
Current liabilities........................... 6,529
Noncurrent assets............................. 50,815
Noncurrent liabilities........................ 13,375
Net sales.....................................$44,558
Operating income.............................. 1,265
Net income.................................... 1,235
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Nebco Evans Holding Company (NEHC) is the parent of AmeriServe Food
Distribution, Inc. (the Company) and Holberg Warehouse Properties, Inc (HWPI).
The Company accounts for substantially all of NEHC's assets and operations.
HWPI's operations consist entirely of the leasing of two warehouse facilities to
the Company. The Company is a foodservice distributor specializing in
distribution to chain restaurants. The Company distributes a wide variety of
food items as well as paper goods, cleaning and other supplies and equipment to
approximately 25,500 restaurants. The Company's major customers are franchisers
and/or franchisees in the Pizza Hut, Taco Bell, KFC, Wendy's, Arby's, Burger
King and Dairy Queen restaurant systems.
Effective June 11, 1997, the Company acquired the PFS Division of PepsiCo, Inc.
PFS distributed food products, supplies and equipment to franchised and
company-owned restaurants in the Pizza Hut, Taco Bell and KFC systems, which
were spun-off by PepsiCo, Inc. in October 1997 and are now operating as Tricon
Global Restaurants, Inc. (Tricon). The acquisition has been accounted for under
the purchase method. Twelve weeks of PFS operating results are included in the
Company's operating results for the three months ended March 28, 1998. Because
of the relative sizes of the
9
<PAGE> 182
10
Company and PFS, which reported net sales of $308.7 million and $720.5 million,
respectively, for the first quarter of 1997, the comparisons of operating
results presented below are significantly impacted by the PFS acquisition.
In April 1997, the Company began providing foodservice distribution to
approximately 2,600 Arby's restaurants under a three-year contract. While the
majority of Arby's restaurants are serviced directly by the Company, some are
serviced by other cooperating independent distributors.
NEHC is an indirect subsidiary of Holberg Industries, Inc.
RECENT DEVELOPMENTS
On January 29, 1998, the Company entered into a definitive merger agreement
pursuant to which the Company will acquire all of the approximately 9.4 million
outstanding shares of ProSource, Inc. (ProSource) for $15.00 per share in cash.
The Company will also refinance the existing indebtedness of ProSource of
approximately $174 million. The transaction is expected to close in late May
1998. ProSource, which reported net sales of $3.9 billion for its fiscal year
ended December 27, 1997, is in the foodservice distribution business,
specializing in quick service and casual dining chain restaurants. ProSource
services approximately 12,700 restaurants, principally in the United States, in
such chains as Burger King, Red Lobster, Olive Garden, TGI Friday's, Long John
Silver's, Chili's, Sonic, Chick-fil-A, Wendy's and TCBY. The Company intends to
fund the acquisition of the shares and retirement of the debt through (a)
expansion of the Company's Accounts Receivable Program (see Note 5) to include
ProSource accounts receivable (estimated proceeds of $125 million), (b)
approximately $50 million from the Company's revolving credit facility, (c) a
capital contribution from NEHC of approximately $50 million and (d) cash and
cash equivalents on hand. Because of similarities in activities, the Company
intends to consolidate certain operations of ProSource with those of the
Company. With opportunities to combine certain warehousing, transportation and
administrative activities, the Company believes that significant cost
efficiencies are ultimately achievable.
The Company has been informed by Wendy's International, Inc., the franchiser of
the Wendy's concept, that it has selected a competitor as its distributor in
certain
10
<PAGE> 183
11
geographic markets and that it will begin to transfer the business of its
company-owned units away from the Company beginning in late 1998. In addition,
the Company understands that Wendy's International, Inc. has indicated that it
will attempt to remove the Company as an authorized distributor and influence
its franchisee operators to transfer their business to the competitor. The
Company intends to take all appropriate actions to continue servicing the
Wendy's franchisees, including maintaining the highest levels of customer
service. Including ProSource net sales on a pro forma basis, the Company's 1997
net sales to the Wendy's concept totaled approximately $650 million (about 2000
company-owned and franchised units), of which approximately $150 million, or
less than 2% of total pro forma net sales of $8.9 billion, represented the
Wendy's company-owned business (about 480 units).
RESULTS OF OPERATIONS
The following table presents certain financial information of NEHC, expressed as
a percentage of net sales:
Three Months Ended
---------------------
March 28, March 29,
1998 1997
--------- ----------
Net sales ........................... 100.0% 100.0%
Cost of goods sold .................. 90.1 89.8
Gross profit ........................ 9.9 10.2
Distribution, selling
and administrative expenses ....... 8.5 9.5
Operating income before
amortization of intangible
assets and costs to integrate
acquired operations ............... 1.4 .7
11
<PAGE> 184
12
First Quarter 1998 compared to First Quarter 1997
Net sales increased $788.6 million, or 235% to $1.1 billion in the first quarter
of 1998. The acquisition of PFS accounted for $724 million of the increase. The
remaining sales growth was largely due to the addition of service to Arby's.
Gross profit increased $76.3 million, or 220%, to $110.9 million in the first
quarter of 1998 due primarily to the acquisition of PFS. The gross profit margin
decreased from 10.2% in 1997 to 9.9% in 1998 reflecting the impact of PFS and a
customer mix shift towards business with relatively higher product costs.
Distribution, selling and administrative expenses increased $63.0 million, or
195%, to $95.3 million in the first quarter of 1998 due primarily to the
acquisition of PFS. Distribution, selling and administrative expenses as a
percent of net sales decreased from 9.5% in 1997 to 8.5% in 1998. This change
reflects the impact of PFS' lower operating expense margin, as well as
leveraging of the incremental Arby's business.
Operating income before amortization of intangible assets and costs to integrate
acquired operations increased $13.3 million to $15.6 million in the first
quarter of 1998 due primarily to the acquisition of PFS. As a percent of net
sales, this income measure rose from .7% in 1997 to 1.4% in 1998. This change
was driven by the lower distribution, selling and administrative expense as a
percent of net sales as discussed above.
Costs to integrate acquired operations of $2.0 million in the first quarter of
1998 primarily represented start-up costs of new distribution facilities,
expenses to relocate employees and computer system integration costs.
Amortization of intangible assets increased $5.8 million to $6.8 million in the
first quarter of 1998, reflecting the amortization of the intangible assets
arising from the allocation of the PFS purchase price.
Interest expense net of interest income increased $14.6 million to $19.3 million
in the first quarter of 1998, reflecting interest on additional debt primarily
to finance the acquisition of PFS.
12
<PAGE> 185
13
Loss on sale of accounts receivable relates to an ongoing Accounts Receivable
Program established by the Company to provide additional financing capacity.
Under the program, accounts receivable are sold to a consolidated, wholly owned,
special purpose, bankruptcy-remote subsidiary, which in turn transfers the
receivables to a master trust. The loss on sale of accounts receivable of $3.6
million primarily represents the return to investors in certificates issued by
the master trust. In a transaction expected to be completed in June 1998, the
current series of certificates issued by the master trust are expected to be
restructured, resulting in additional capital to the Company under the program
of approximately $50 million. Also, in connection with the acquisition of
ProSource, the Company intends to expand the program to include the accounts
receivable of ProSource, resulting in initial proceeds of approximately $125
million.
Provision for income taxes in 1998 represents estimated current income taxes
payable. The Company's net deferred tax assets are offset entirely by a
valuation allowance, reflecting the Company's net operating loss carryforward
position.
Net loss increased $13.6 million to $16.2 million in the first quarter of 1998,
as higher financing costs and amortization of intangibles more than offset the
operating income of PFS.
LIQUIDITY AND CAPITAL RESOURCES
Capital resources are expected to be sufficient to support ongoing business
needs as well as activities to integrate acquisitions. These resources include
cash provided by operating activities, capital lease financing of capital
expenditures, cash and cash equivalents on hand, a revolving credit facility of
$150 million ($137 million available at March 28, 1998 excluding letters of
credit) and additional capital from the Accounts Receivable Program as discussed
above.
In late May 1998, the Company expects to reach an agreement to replace the
existing revolving credit facility with a credit facility of up to $200 million
supported by the value of the Company's inventories of food and paper products
and supplies.
13
<PAGE> 186
14
First Quarter 1998 compared to First Quarter 1997
Net cash used for operating activities increased $60.6 million to $64.6 million
in the first quarter of 1998. This increase reflects unfavorable working capital
changes, due primarily to timing of accounts payable payments, and higher
interest payments, partially offset by the cash earnings generated by the PFS
operations.
Net cash used for investing activities increased $8.3 million to $13.1 million
in the first quarter of 1998. Capital expenditures increased $2.2 million to
$4.6 million in the first quarter of 1998, driven by the impact of the
acquisition of PFS.
Net cash provided by financing activities in the first quarter of 1998 reflected
NEHC's issuance of $250 million of 11 1/4% Senior Redeemable Preferred Stock due
2008. Approximately $154 million of proceeds from the issuance were used to
repurchase certain outstanding preferred stock; this amount included $10.7
million in premiums above the face value of the repurchased stock. The remaining
proceeds will be used for general corporate purposes, including contributions to
the capital of the Company. See Note 3. Net cash provided by financing
activities in the first quarter of 1997 reflected borrowings to support spending
for additional warehouse capacity as well as inventory build-up for the Arby's
business.
SEASONALITY AND INFLATION
Historically, the Company's sales and operating results have reflected seasonal
variations. The Company experiences lower net sales and income from operations
in the first and fourth quarters, with the effects being more pronounced in the
first quarter. Additionally, the effect of these seasonal variations is more
pronounced in regions where winter weather is generally more inclement.
Inflation has not had a significant impact on the Company's operations. Food
price deflation could adversely affect the Company's profitability as a
significant portion of the Company's sales are at prices based on product cost
plus a percentage markup. The Company has not experienced significant adverse
effects of food price deflation in recent years.
14
<PAGE> 187
15
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Consolidation and Integration of Acquisitions
The Company's acquisition of PFS and probable acquisition of ProSource presents
an opportunity to significantly improve operating efficiencies of the combined
businesses by eliminating redundant facilities, achieving warehouse economies of
scale with new and larger facilities, improving truck fleet utilization through
increased deliveries per route and leveraging the headquarters support
infrastructure.
As a result of the acquisition of PFS, the Company had previously identified a
number of actions to consolidate and integrate the operations of the Company and
PFS. These actions included construction of new warehouse facilities, closures
of certain existing warehouse facilities and expansions of others, dispositions
of property and equipment, conversions of computer systems, reductions in
workforce, relocation of employees and other consolidation and integration
activities.
Under current accounting rules, certain costs associated with these actions,
principally asset impairment reserves and exit cost accruals for lease
terminations and employee severance, were previously accounted for as part of
the PFS purchase price allocation or the restructuring charge recorded in the
third quarter of 1997. Other incremental costs associated with the actions not
qualifying as exit costs are expensed as incurred and reported as integration
costs in the consolidated statements of operations.
The Company is in the early stages of the PFS consolidation and integration
plan. Because of the probable acquisition of ProSource, the plan is expected to
be modified and will likely result in certain changes in the scope and timing of
the actions to accommodate the integration of ProSource's operations. Actions to
consolidate and integrate ProSource are expected to result in future asset
impairment reserves and exit cost accruals, as part of the ProSource purchase
price allocation or as a restructuring charge. The Company expects to record
such reserves and accruals in the second quarter of 1998; however, reliable
estimates have not yet been developed. Further, future results will be
negatively impacted by the integration costs to be expensed as incurred. Such
integration costs include start-up costs of new facilities and other
inefficiencies arising from the warehouse and transportation network
reconfiguration, as well as incremental expenses associated
15
<PAGE> 188
16
with the consolidation of the operations support infrastructure. Because of the
impact of ProSource on the consolidation plan, reliable estimates of these
integration costs have not yet been developed.
While management believes it has the resources to meet its objectives, the
ultimate level and timing of cost efficiencies to be achieved upon the
completion of the consolidation actions are subject to the Company's ability to
manage through the complexities of the consolidation and respond to
unanticipated events.
Computer Systems and Potential Year 2000 Issue
An important component of the consolidation effort is the replacement of most
existing management information systems with a new software platform and
hardware configuration. The new computer system will complement the
consolidation effort by providing the flexibility to support the varied
processes of the combined business as well as allowing greater centralization of
support functions. The Company expects to incur significant internal staff costs
as well as significant consulting and other expenditures to implement the new
system. Another critical benefit of the new system is that it replaces
applications that are not Year 2000 compliant. The implementation of the new
system is underway and expected to be completed in mid-1999. Because of the Year
2000 issue, a delay in the implementation of the new system could have a
significant adverse impact on the Company's operations. Further, the Company is
working with vendors and customers who are at various stages in analyzing this
issue. There can be no assurance that the systems of other companies that the
Company's systems rely on or interface with will be timely converted. While the
cost to implement the new system is significant (approximately $50 million), the
anticipated expenses to resolve Year 2000 issues with other peripheral systems
used by the Company are not expected to be significant.
16
<PAGE> 189
17
With respect to ProSource, the Company intends to convert the quick service
restaurant business to the Company's new computer system prior to 2000. The
systems supporting the remaining ProSource business are being replaced and/or
upgraded as described in ProSource's Form 10-K for the fiscal year ended
December 27, 1997.
Industry and Customer Risk
The Company's future results are subject to economic and competitive risks and
uncertainties in the chain restaurant and foodservice distribution industries.
The trend of consolidation in the Company's segment of the foodservice
distribution industry, as evidenced by the Company's acquisition activity, may
further intensify competitive pressures and negatively impact relationships
between the Company and its existing customers. Some of these customers will be
vulnerable to competitors' advances because of, among other reasons, concerns
about potential service level disruptions or lack of competitive alternatives as
the Company rapidly expands. While the Company will take appropriate actions to
retain desired business, some loss of customers during this transition period is
expected. Management believes that completion of the consolidation and
integration plan will enhance the Company's position as one of the most
efficient distributors in its industry and, therefore, highly price and service
competitive.
Although the Company provides foodservice distribution to Tricon under a
five-year exclusive distribution agreement effective July 1997, the Company is
subject to the inherent risk of customer concentration, as approximately 40% of
net sales (about 23% including ProSource on a pro forma basis) are to
Tricon-owned restaurants. Tricon is actively engaged in the sale to franchisees
of restaurants covered by the distribution agreement. While the distribution
agreement provides that prior to certain such sales, such franchisees will enter
into distribution agreements on substantially similar terms, there can be no
assurance that the transition from company-owned to franchised status will not
affect the Company's results. In addition, the Company's future results may be
impacted by the planned closure of poorly performing restaurants announced by
Tricon in December 1997.
17
<PAGE> 190
18
Risk of Leverage
NEHC and the Company are and will continue to be highly leveraged as a result of
the indebtedness incurred primarily in connection with the acquisition of PFS.
NEHC's and the Company's ability to meet interest payments, refinance the debt
or ultimately repay the debt is subject to the risks and uncertainties discussed
above.
For additional factors that could cause NEHC's actual results to differ
materially from expected and historical results, see the "Risk Factors" set
forth in NEHC's Registration Statement on Form S-4, filed with the Securities
and Exchange Commission on May 1, 1998.
This quarterly report contains certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of
the Securities Act of 1933. Actual results could differ materially from those
projected in such forward-looking statements and readers are cautioned not to
place undue reliance on the forward-looking statements which speak only as of
the date hereof. NEHC undertakes no obligation to update these forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence or nonoccurrence of anticipated events.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On March 6, 1998, NEHC consummated the offering of $250 million of its
11 1/4% Senior Redeemable Exchangeable Preferred Stock due 2008 in
exempt transactions under Rule 144A and Regulation S under the
Securities Act. The initial purchaser of the securities was Donaldson,
Lufkin & Jenrette Securities Corporation. Approximately $154 million of
the net proceeds of the offering was used by NEHC to finance the
repurchase costs of certain classes of its outstanding preferred stock.
NEHC expects to use the remaining net proceeds for general corporate
purposes, including contributions to the capital of the Company.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
18
<PAGE> 191
19
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Asset Purchase Agreement between PepsiCo, Inc. and Nebco Evans Holding
Company (incorporated by reference to Exhibit 2.2 to the Registrant's
Registration Statement on Form S-4, No. 333-33223 filed August 8,
1997).
2.2 Agreement and Plan of Merger, dated as of January 29, 1998, by and
among AmeriServe Food Distribution, Inc., Steamboat Acquisition Corp.
and ProSource, Inc. (incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K, dated January 29, 1998).
2.3 Voting Agreement, dated as of January 29, 1998, by and among
AmeriServe Food Distribution, Inc., Steamboat Acquisition Corp. and
Onex DHC LLC and certain of its affiliates (incorporated by reference
to Exhibit 2.2 to the Registrant's Current Report on Form 8-K, dated
January 29, 1998).
3.1 Restated Certificate of Incorporation of NEHC. (incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K filed March 28, 1998)
3.2 By-Laws of the NEHC (incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4, No. 333-33223 filed
August 8, 1997).
4.1 Indenture, dated as of July 11, 1997, by and among NEHC and State
Street Bank and Trust Company, with respect to the New Senior Discount
Notes (incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-4, No. 333-33223 filed
August 8, 1997).
4.2 Form of New Senior Discount Note (incorporated by reference to Exhibit
4.2 to the Registrant's Registration Statement on Form S-4, No.
333-33223 filed August 8, 1997).
19
<PAGE> 192
20
27.1 Financial Data Schedule.*
- ----------------
* Filed herewith.
(b) Reports on Form 8-K.
During the first quarter of 1998, NEHC filed the following
filings:
1. Current Report on Form 8-K filed with the Securities and
Exchange Commission on December 31, 1997 disclosing, under
Item 5, the merger of the Company and The Harry H. Post
Company with and into AmeriServ Food Company.
2. Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 30, 1998, disclosing, under
Item 5, the ProSource acquisition.
3. Current Report on Form 8-K filed with the Securities and
Exchange Commission on March 16, 1998, disclosing, under Item
5, certain fourth quarter results relating to ProSource.
4. Amendment to the Current Report on Form 8-K/A filed with the
Securities and Exchange Commission on March 20, 1998,
disclosing under Item 5, certain fourth quarter results
relating to ProSource and, under Item 9, the offering and sale
of $250 million of 11 1/4% Senior Redeemable Exchangeable
Preferred Stock due 2008.
20
<PAGE> 193
21
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
Nebco Evans Holding Company
(Registrant)
Date: May 12, 1998 /s/ John V. Holten,
Chairman, Director and
Chief Executive Officer
Date: May 12, 1998 /s/ Diana M. Moog,
Senior Vice President and
Chief Financial Officer
21
<PAGE> 194
22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
Exhibit 27 Financial Data Schedule
22
<PAGE> 195
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF NEBCO EVANS HOLDING COMPANY FOR THE FIRST
QUARTER ENDED MARCH 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-26-1998
[PERIOD-START] DEC-28-1997
[PERIOD-END] MAR-28-1998
[CASH] 239,796
[SECURITIES] 0
[RECEIVABLES] 36,505
[ALLOWANCES] 13,772
[INVENTORY] 152,542
[CURRENT-ASSETS] 577,922
[PP&E] 0
[DEPRECIATION] 0
[TOTAL-ASSETS] 1,454,167
[CURRENT-LIABILITIES] 356,963
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 242,433
[COMMON] 0
[OTHER-SE] (127,401)
[TOTAL-LIABILITY-AND-EQUITY] 1,454,167
[SALES] 1,124,063
[TOTAL-REVENUES] 1,124,063
[CGS] 1,013,010
[TOTAL-COSTS] 1,013,010
[OTHER-EXPENSES] 104,221
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 19,929
[INCOME-PRETAX] (15,903)
[INCOME-TAX] 296
[INCOME-CONTINUING] (16,199)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (16,199)
[EPS-PRIMARY] 0
[EPS-DILUTED] 0
- ------------------------------------------------------------------------------
<PAGE> 196
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): May 6, 1998
NEBCO EVANS HOLDING COMPANY
(Exact Name of Registrant as Specified in Charter)
Delaware 06-1444203
(State or Other (Commission File Number) (IRS Employer
Jurisdiction of Identification No.)
Incorporation)
545 Steamboat Road
Greenwich, Connecticut 06830
(Address of Principal Executive Offices)
(203) 661-2500
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
<PAGE> 197
Item 5. Other Events.
Nebco Evans Holding Company's wholly owned subsidiary, AmeriServe
Food Distribution, Inc. ("AmeriServe"), has been informed by Wendy's
International, the franchiser of the Wendy's concept, that it has selected
SYSCO/Sygma as its distributor in certain geographic markets and that it will
begin to transfer the business of its corporate owned units away from AmeriServe
beginning in late 1998. In addition, Wendy's International has indicated that it
will attempt to remove AmeriServe as an authorized distributor and influence its
franchisee operators to transfer their business to SYSCO/Sygma. AmeriServe
intends to take all appropriate actions to continue servicing the Wendy's
franchisees, including maintaining the highest levels of customer service.
AmeriServe and ProSource, Inc., the acquisition of which AmeriServe anticipates
closing in late May 1998, currently service approximately 479 units owned by
Wendy's International. In addition, AmeriServe and ProSource, Inc. service
approximately 1,500 franchised units. In total, AmeriServe sales to the Wendy's
concept, including ProSource sales on a proforma basis, were approximately $650
million in 1997, of which Wendy's corporate owned units represented
approximately $150 million, or less than 2% of total proforma revenues.
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<PAGE> 198
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NEBCO EVANS HOLDING COMPANY
By: /s/ Kevin Rogan
Name: Kevin Rogan
Date: May 6, 1998 Title: Vice President and Secretary
-3-
<PAGE> 199
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): May 21, 1998
NEBCO EVANS HOLDING COMPANY
(Exact Name of Registrant as Specified in Charter)
Delaware _______ 06-1444203
(State or Other (Commission File Number) (IRS Employer
Jurisdiction of Identification No.)
Incorporation)
545 Steamboat Road
Greenwich, Connecticut 06830
(Address of Principal Executive Offices)
(203) 661-2500
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
<PAGE> 200
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On May 21, 1998, AmeriServe Food Distribution, Inc. (the "Company"),
a Delaware corporation and wholly owned subsidiary of Nebco Evans Holdings
Company ("Parent"), became the owner of all of the capital stock of ProSource,
Inc., a Delaware corporation ("ProSource"), pursuant to the merger (the
"Merger") of Steamboat Acquisition Corp., a Delaware corporation and wholly
owned subsidiary of the Company ("Merger Sub"), with and into ProSource with
ProSource as the surviving corporation. At the effective time of the Merger (the
"Effective Time"), ProSource became a wholly owned subsidiary of the Company and
an indirect wholly owned subsidiary of Parent.
The Merger was consummated pursuant to an Agreement and Plan of
Merger (the "Merger Agreement"), dated as of January 29, 1998, by and among the
Company, Merger Sub and ProSource. The Merger Agreement was approved and adopted
by the stockholders of ProSource at a special meeting held on May 20, 1998. In
the Merger, each share of ProSource Class A Common Stock, par value $0.01 per
share ("Class A Shares"), and each share of ProSource Class B Common Stock, par
value $0.01 per share ("Class B Shares" and together with the Class A Shares,
the "Shares"), was converted into the right to receive $15.00 in cash without
interest (the "Merger Consideration"). In connection with the Merger, the
Company also refinanced certain outstanding indebtedness of ProSource. Total
payments to ProSource's former stockholders are expected to be approximately
$142 million in cash. The sources of funds used in the acquisition of ProSource
included cash on hand, a $50 million capital contribution to the Company from
Parent and the sale of certain trade receivables of a wholly owned subsidiary of
ProSource under the Company's existing accounts receivable securitization
program with Bank of America, a commercial paper conduit administered by Bank of
America NT&SA and a group of other banks.
The foregoing description of the Merger and the Merger Agreement
does not purport to be complete and is qualified in its entirety by reference to
the Merger Agreement, a copy of which is attached hereto as Exhibit 2.1, and is
incorporated herein by reference. A copy of the press release announcing the
consummation of the Merger is attached hereto as Exhibit 99.1 and is
incorporated herein by reference.
ITEM 5. OTHER EVENTS.
At the Effective Time of the Merger, the Company, ProSource and
certain of the subsidiaries of ProSource (ProSource and such subsidiaries, the
"New Subsidiary Guarantors") executed a Second Supplemental Indenture, dated as
of May 21, 1998 (the "Senior Notes Supplemental Indenture"), amending the
Indenture, dated as of October 15, 1997, among the Company, certain subsidiaries
of the Company listed on the signature pages thereto and State Street Bank and
Trust Company, as Trustee, as amended by a supplemental indenture dated as of
December 23, 1997 (as so amended, the "Senior Notes Indenture"), providing for
the issuance of an aggregate principal amount of $350,000,000 of 8 7/8% Senior
Notes due 2006 (the "Senior Notes"). The New Subsidiary Guarantors also executed
a Note Guarantee, dated as of May 21, 1998 (the "Senior Notes Guarantee"),
pursuant to which the New Subsidiary Guarantors became guarantors under the
Senior Notes.
-2-
<PAGE> 201
Also at the Effective Time of the Merger, the Company and the New
Subsidiary Guarantors executed a Second Supplemental Indenture, dated as of May
21, 1998 (the "Senior Subordinated Notes Second Supplemental Indenture"),
amending the Indenture, dated as of July 11, 1997, among the Company, certain
subsidiaries of the Company listed on the signature pages thereto and State
Street Bank and Trust Company, as Trustee, as amended by a supplemental
indenture dated as of December 23, 1997 (as so amended, the "Senior Subordinated
Notes Indenture"), providing for the issuance of an aggregate principal amount
of $500,000,000 of 10 1/8% Senior Subordinated Notes due 2007 (the "Senior
Subordinated Notes"). The New Subsidiary Guarantors also executed a Note
Guarantee, dated as of May 21, 1998 (the "Senior Subordinated Notes Guarantee"),
pursuant to which the New Subsidiary Guarantors became guarantors under the
Senior Subordinated Notes.
The foregoing description of the Senior Notes Supplemental
Indenture, the Senior Notes Guarantee, the Senior Subordinated Notes
Supplemental Indenture and the Senior Subordinated Notes Guarantee does not
purport to be complete and is qualified in its entirety by reference to the
instruments themselves, copies of which are attached hereto as Exhibits 4.1,
4.2, 4.3 and 4.4, respectively, and are incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements for ProSource will be filed by amendment to this
Current Report on Form 8-K (this "Form 8-K") not later than 60 days after
the date that this Form 8-K was required to have been filed.
(b) Pro forma financial information for ProSource that would be required
pursuant to Article 11 of Regulation S-X will be filed by amendment to this
Form 8-K not later than 60 days after the date that this Form 8-K was
required to have been filed.
(c) Exhibits.
2.1 Agreement and Plan of Merger, dated as of January 29, 1998, by and
among AmeriServe Food Distribution, Inc., Steamboat Acquisition
Corp. and ProSource, Inc. (incorporated by reference to Exhibit 2.1
of the Current Report of the Company on Form 8-K, dated January
30, 1998).
4.1 Second Supplemental Indenture, dated as of May 21, 1998, amending
the Indenture, dated as of October 15, 1997, among AmeriServe Food
Distribution, Inc. and certain of its subsidiaries listed on the
signature pages thereto and State Street Bank and Trust Company, as
Trustee, as amended by a supplemental indenture, dated as of
December 23, 1997, relating to the AmeriServe Food Distribution,
Inc. 8 7/8% Senior Notes due 2006. (incorporated by reference to
Exhibit 4.1 of the Current Report of the Company on Form 8-K, dated
May 22, 1998).
4.2 Note Guarantee, dated as of May 21, 1998, by ProSource, Inc. and
certain of its subsidiaries listed on the signature pages thereto,
relating to the AmeriServe Food Distribution, Inc. 8 7/8% Senior
Notes due 2006. (incorporated by reference to
-3-
<PAGE> 202
Exhibit 4.2 of the Current Report of the Company on Form 8-K, dated
May 22, 1998).
4.3 Second Supplemental Indenture, dated as of May 21, 1998, amending
the Indenture, dated as of July 11, 1997, among AmeriServe Food
Distribution, Inc. and certain of its subsidiaries listed on the
signature pages thereto and State Street Bank and Trust Company, as
Trustee, as amended by a supplemental indenture, dated as of
December 23, 1997, relating to the AmeriServe Food Distribution,
Inc. 10 1/8% Senior Subordinated Notes due 2007. (incorporated by
reference to Exhibit 4.3 of the Current Report of the Company on
Form 8-K, dated May 22, 1998).
4.4 Note Guarantee, dated as of May 21, 1998, by ProSource, Inc. and
certain of its subsidiaries listed on the signature pages thereto,
relating to the AmeriServe Food Distribution, Inc. 10 1/8% Senior
Subordinated Notes due 2007. (incorporated by reference to Exhibit
4.4 of the Current Report of the Company on Form 8-K, dated May 22,
1998).
99.1 Press Release, dated May 21, 1998. (incorporated by reference to
Exhibit 99.1 of the Current Report of the Company on Form 8-K, dated
May 22, 1998).
-4-
<PAGE> 203
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NEBCO EVANS HOLDING COMPANY
By: /s/ A. Petter 0stberg
Name: A. Petter 0stberg
Title: Vice President
-5-
<PAGE> 204
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
NUMBER
2.1 Agreement and Plan of Merger, dated as of January 29, 1998, by and
among AmeriServe Food Distribution, Inc., Steamboat Acquisition
Corp. and ProSource, Inc. (incorporated by reference to Exhibit 2.1
of the Current Report of the Company on Form 8-K,
dated January 30, 1998).
4.1 Second Supplemental Indenture, dated as of May 21, 1998, amending
the Indenture, dated as of October 15, 1997, among AmeriServe Food
Distribution, Inc. and certain of its subsidiaries listed on the
signature pages thereto and State Street Bank and Trust Company, as
Trustee, as amended by a supplemental indenture, dated as of
December 23, 1997, relating to the AmeriServe Food Distribution,
Inc. 8 7/8% Senior Notes due 2006 (incorporated by reference to
Exhibit 4.1 of the Current Report of the Company on Form 8-K, dated
May 22, 1998).
4.2 Note Guarantee, dated as of May 21, 1998, by ProSource, Inc. and
certain of its subsidiaries listed on the signature pages thereto,
relating to the AmeriServe Food Distribution, Inc. 8 7/8% Senior
Notes due 2006 (incorporated by reference to Exhibit 4.2 of the
Current Report of the Company on Form 8-K, dated May 22, 1998).
4.3 Second Supplemental Indenture, dated as of May 21, 1998, amending
the Indenture, dated as of July 11, 1997, among AmeriServe Food
Distribution, Inc. and certain of its subsidiaries listed on the
signature pages thereto and State Street Bank and Trust Company, as
Trustee, as amended by a supplemental indenture, dated as of
December 23, 1997, relating to the AmeriServe Food Distribution,
Inc. 10 1/8% Senior Subordinated Notes due 2007 (incorporated by
reference to Exhibit 4.3 of the Current Report of the Company on
Form 8-K, dated May 22, 1998).
4.4 Note Guarantee, dated as of May 21, 1998, by ProSource, Inc. and
certain of its subsidiaries listed on the signature pages thereto,
relating to the AmeriServe Food Distribution, Inc. 10 1/8% Senior
Subordinated Notes due 2007 (incorporated by reference to Exhibit
4.4 of the Current Report of the Company on Form 8-K, dated May 22,
1998).
99.1 Press Release, dated May 21, 1998 (incorporated by reference to
Exhibit 99.1 of the Current Report of the Company on Form 8-K, dated
May 22, 1998).
-6-
