<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999.
REGISTRATION NO. 333-51541
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
POST-EFFECTIVE
AMENDMENT NO. 1
ON
FORM S-1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
NEBCO EVANS HOLDING COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5142 06-1444203
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
</TABLE>
545 STEAMBOAT ROAD
GREENWICH, CONNECTICUT 06830
(203) 661-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF THE COMPANY'S PRINCIPAL EXECUTIVE OFFICES)
------------------------------
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
A. PETTER OSTBERG ADAM O. EMMERICH, ESQ.
VICE PRESIDENT WACHTELL, LIPTON, ROSEN & KATZ
NEBCO EVANS HOLDING COMPANY 51 WEST 52ND STREET
545 STEAMBOAT ROAD NEW YORK, NEW YORK 10019
GREENWICH, CONNECTICUT 06830 (212) 403-1000
(203) 661-2500
</TABLE>
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: Promptly upon
the effective date of the registration statement.
------------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
------------------------------
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES OR ACCEPT ANY OFFER TO SELL THESE SECURITIES OR
SOLICIT OFFERS TO BUY THESE SECURITIES IN ANY PLACE WHERE THE OFFER IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 30, 1999
PRELIMINARY PROSPECTUS
NEBCO EVANS HOLDING COMPANY
12 3/8% NEW SENIOR DISCOUNT NOTES DUE 2007
11 1/4% SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2008
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12 3/8% NEW SENIOR DISCOUNT NOTES DUE 2007
Accretion and Interest
- - The New Notes accrete at an annual rate of 12 3/8% to an aggregate principal
amount of $100,387,000 at July 15, 2002.
- - After July 15, 2002 interest is payable on January 15 and July 15 each year at
a 12 3/8% annual rate.
Redemption
- - We may redeem some or all of the New Notes any time after July 15, 2002, or
before then at 112.375% of the accreted value using the proceeds of an equity
offering.
Change in Control
- - If we experience a change in control, you may require us to repurchase the New
Notes.
Security and Ranking
- - The New Notes are not secured by any collateral.
- - They are subordinate to all secured debt, rank equally with all existing and
future senior unsecured debt, and rank senior to all existing and future
subordinated debt.
- - As of December 26, 1998, the New Notes were effectively subordinate to
approximately $922.6 million of indebtedness of our primary subsidiary,
AmeriServe Food Distribution, Inc.
11 1/4% SENIOR REDEEMABLE EXCHANGEABLE
PREFERRED STOCK DUE 2008
Dividends
- - Dividends on the New Preferred Stock will be cumulative at 11 1/4% per annum
payable quarterly on March 1, June 1, September 1 and December 1 each year.
- - We may pay dividends in cash or with additional shares of New Preferred Stock.
Maturity and Redemption
- - We may redeem some or all of the New Preferred Stock any time after March 1,
2003 at the redemption prices set forth in this prospectus.
- - If we have not already done so, we must redeem the New Preferred Stock on
March 1, 2008.
Exchange
- - We may exchange all New Preferred Stock for 11 1/4% Subordinated Exchange
Debentures due 2008. We may redeem the Exchange Debentures any time after
March 1, 2003, or before then at 109% of principal using proceeds of an equity
offering.
Change in Control
- - If we experience a change in control, you may require us to repurchase the New
Preferred Stock.
Ranking
- - The New Preferred Stock ranks equally with other preferred stock, but is
effectively subordinate to NECH's debt and all debt of our primary subsidiary,
AmeriServe Food Distribution, Inc.
-------------------------
SEE "RISK FACTORS," COMMENCING ON PAGE 12, FOR A DISCUSSION OF CERTAIN FACTORS
THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE NEW NOTES OR NEW PREFERRED
STOCK.
Neither the Securities and Exchange Commission nor any state securities
commission has 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 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 New Notes and New Preferred Stock are not listed on any
securities exchange or admitted thereof to trading in the National Association
of Securities Dealers Automated Quotation System and the Company does not intend
to make any such listing or seek such admission to trading. DLJ currently makes
a market in the New Notes and New Preferred Stock; however, it is not obligated
to do so and any market-making may be discontinued at any time. The Company
receives no portion of the proceeds of sales of the New Notes and New Preferred
Stock and has paid certain expenses incident to the registration of the New
Notes and the New Preferred Stock.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS APRIL , 1999.
<PAGE> 3
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 the New Notes and New Preferred Stock offered hereby, nor does it
constitute an offer to sell or the solicitation of an offer to buy any of the
New Notes or 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 a Registration
Statement on Form S-4, and amendments to such Registration Statement, under the
Securities Act for the registration of the New Notes and New Preferred Stock.
This Prospectus, which constitutes a part of the Registration Statements, does
not contain all of the information set forth in the Registration Statements,
certain items of which are contained in exhibits and schedules to the
Registration Statements as permitted by the rules and regulations of the SEC.
For further information with respect to NEHC or the New Notes offered hereby,
reference is made to the Registration Statements, 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 Statements, 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 Statements, 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 (1) State Street Bank and Trust Company as trustee and as
transfer agent under the Indenture dated as of July 11, 1997 among the Company
and the Senior Discount Note Trustee, pursuant to which the New Notes have been
issued, and the Certificate of Designations pursuant to which the shares of New
Preferred Stock have been issued, respectively, and (2) the holders of the New
Notes and 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 the New Notes and New Preferred Stock as if they were subject to such
periodic reporting requirements.
In addition, NEHC has agreed that for so long as any of the New Notes and
New Preferred Stock remain outstanding, they will make available to any
prospective purchaser of the New Notes and New Preferred Stock or Holder of the
New Notes and New Preferred Stock in connection with any sale thereof, the
information required by Rule 144A(d)(4) under the Securities Act.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read along with the more detailed
information and financial statements, including the notes to the financial
statement, 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 147. Generally, 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 approximately 36,000 restaurant locations in North America. The Company has
had long-standing relationships with such leading restaurant concepts as
Applebee's, Arby's, Burger King, Chick-fil-A, Chili's, Dairy Queen, KFC, Lone
Star Steakhouse, Long John Silver's, Olive Garden, Pizza Hut, Red Lobster,
Sonic, Subway, Taco Bell, TCBY, and TGI Friday's.
On July 11, 1997, the Company acquired the U.S. and Canadian operations of
PFS (the "PFS Acquisition"), a division of PepsiCo, Inc. 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. 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 and previously serviced by PFS.
The Distribution Agreement was modified and extended in 1998. See "The Business
- -- Recent Customer Developments."
In October 1997, AmeriServe also acquired PFS de Mexico, S.A. de C.V., a
regional systems foodservice 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 million principal amount of its 10 1/8% Senior Subordinated
Notes due 2007. 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. For further
information, see Note 7 to the historical financial statements of NEHC included
elsewhere herein.
3
<PAGE> 5
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 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 million in aggregate
principal amount at maturity of its 8 7/8% Senior Notes due 2006. 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, 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 7 and 8 to the
historical financial statements of NEHC included elsewhere herein.
On December 28, 1997, Nebraska AmeriServe merged with and into AmeriServ
and The Harry H. Post Company, a wholly owned subsidiary of AmeriServe merged
with and into AmeriServ. In the mergers, AmeriServ changed its name to
AmeriServe Food Distribution, Inc.
On March 6, 1998, NEHC consummated the offering and sale (the "Offering")
of $250 million of its 11 1/4% Senior Redeemable Exchangeable Preferred Stock
due 2008 (the "Preferred Stock") in transactions not requiring registration
under the Securities Act. Approximately $153.6 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 (the "Senior Preferred Stock"), 15% Junior
Exchangeable Preferred Stock due 2009 (the "Junior Preferred Stock"), and Junior
Non-Convertible Preferred Stock. NEHC expects to use the remaining net proceeds
for general corporate purposes. The Senior Preferred Stock was sold pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act. On June 22, 1998, NEHC exchanged all the
outstanding Senior Preferred Stock due 2008 for new Senior Preferred Stock,
which are registered under the Securities Act, with terms substantially
identical to the Senior Preferred Stock.
RECENT DEVELOPMENTS
On May 21, 1998, the Company acquired all of the outstanding stock of
ProSource, Inc. ("ProSource"). ProSource, which reported net sales of $3.9
billion for its fiscal year ended December 27, 1997, was in the foodservice
distribution business, specializing in quick service and casual dining chain
restaurants. ProSource serviced approximately 12,700 restaurants, principally in
the United States, including such chains as Burger King, Chick-fil-A, Chili's,
Long John Silver's, Olive Garden, Red Lobster, Sonic, TCBY and TGI Friday's.
Funding of the acquisition and related transactions included $125 million
provided by expansion of the Company's Accounts Receivable Program to include
ProSource accounts receivable (see Note 8 to the historical financial statements
of NEHC included elsewhere herein), a $50 million capital contribution to the
Company from NEHC and cash and cash equivalents on hand.
For further information about financings by AmeriServe in connection with
the ProSource acquisition and subsequently, see Notes 7 and 8 to the historical
financial statements of NEHC included elsewhere herein.
On December 27, 1998, ProSource Services Corporation, a wholly owned
subsidiary of ProSource, merged with and into ProSource and ProSource merged
with and into AmeriServe. The Company effected the mergers to rationalize its
corporate organization.
4
<PAGE> 6
BUSINESS STRATEGY
The Company's strategy is to: (i) pursue profitable internal and external
growth opportunities; (ii) capitalize on its nationwide network of distribution
centers to increase customer density and regional market penetration; (iii)
continue to provide low cost, superior customer service; and (iv) maximize
operating leverage by integrating and consolidating the Company, PFS and
ProSource quick service and casual dining businesses and by pursuing selective
acquisitions within the fragmented foodservice distribution industry.
NEHC's principal executive offices are located at 545 Steamboat Road,
Greenwich, Connecticut 06830 and its telephone number is (203) 661-2500.
5
<PAGE> 7
SUMMARY OF TERMS OF NEW NOTES
The form and terms of the New Notes are the same as the form and terms of
the Notes (which they have replaced) except that (i) the New Notes have been
registered under the Securities Act, and, therefore, do not bear legends
restricting the transfer thereof and (ii) the holders of the New Notes generally
are not entitled to further registration rights under the Registration Rights
Agreement, which rights generally have been satisfied when the Exchange Offer
was consummated. The New Notes evidence the same debt as the Notes and are
entitled to the benefits of the Indenture. See "Description of
Securities -- Description of New Notes."
Securities.................... $100,387,000 principal amount at maturity of
NEHC's 12 3/8% New Senior Discount Notes due
2007.
Maturity Date................. July 15, 2007.
Accretion..................... The New Notes accrete at a rate of 12 3/8%,
compounded semi-annually to an aggregate
principal amount of $100,387,000 at July 15,
2002.
Interest Rate................. The New Notes bear cash interest at the rate of
12 3/8% per annum, payable semiannually on July
15 and January 15 of each year, commencing
January 15, 2003.
Ranking....................... The New Notes are general unsecured obligations
of NEHC, rank pari passu in right of payment to
all existing and future senior indebtedness of
NEHC and rank senior in right of payment to all
subordinated indebtedness of NEHC. As
indebtedness of NEHC, however, the Notes are
effectively subordinated to all indebtedness of
the Company. As of December 26, 1998, the Notes
were effectively subordinate to approximately
$922.6 million of indebtedness of the Company.
See "Risk Factors."
Optional Redemption........... The New Notes are redeemable at the option of
NEHC, in whole or in part, at any time on or
after July 15, 2002 in cash at the redemption
prices set forth herein, plus accrued and
unpaid interest and liquidated damages, if any,
thereon to the date of redemption. In addition,
at any time, NEHC may redeem the New Notes, in
whole but not in part, at the option of NEHC,
at a redemption price of 112.375% of the
accreted value (determined at the date of
redemption), with the net cash proceeds of a
public equity offering. See "Description of
Securities -- Description of the New
Notes -- Optional Redemption," and "Prospectus
Summary -- Summary of Terms of New Notes."
Change of Control............. Upon the occurrence of a change of control,
each holder of New Notes has the right to
require NEHC to repurchase all or any part of
such holder's Notes at an offer price in cash
equal to 101% of the accreted value thereof on
the date of repurchase (if such date of
repurchase is prior to July 15, 2002) or 101%
of the aggregate principal amount thereof, plus
accrued and unpaid interest and liquidated
damages, if any, thereon to the date of
repurchase (if such date of purchase is on or
after July 15, 2002). See "Description of
Securities -- Description of New
Notes -- 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
6
<PAGE> 8
repurchase all New Notes tendered. See "Risk
Factors -- Payments must be made upon a change
of control."
Certain Covenants............. The Indenture contains certain covenants that
limit, among other things, the ability of NEHC
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 New
Notes -- Certain Covenants."
Form and Denomination......... The certificates representing the New Notes are
issued in fully registered form, deposited with
a custodian for and registered in the name of a
nominee of the depository in the form of a
global new note. Beneficial interests in the
certificates representing the global new notes
are shown on, and transfers thereof are
effected through, records maintained by the
depository and its participants. See
"Description of New Notes -- Senior
Subordinated Notes -- Book -- Entry, Delivery
and Form."
Original Issue Discount....... The New Notes are being issued with original
issue discount for U.S. federal income tax
purposes. Thus, although interest will not be
payable on the New Notes prior to July 15,
2002, holders will be required to include
amounts in gross income for U.S. federal income
tax purposes in advance of receipt of the cash
payments to which such income is attributable.
See "Description of Certain Federal Income Tax
Consequences -- To Holders of New
Notes -- Original Issue Discount."
YOU SHOULD CONSIDER THE INFORMATION UNDER "RISK FACTORS" IN DECIDING TO
INVEST IN THE NEW NOTES.
7
<PAGE> 9
SUMMARY OF TERMS OF NEW 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 New Preferred Stock."
Securities.................... 2,500,000 shares of New Preferred Stock.
Liquidation Preference........ $100 per share, plus accrued and unpaid
dividends.
Dividends..................... Dividends on the New 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 New 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 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, the New 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 New
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 New
Preferred Stock.
Voting........................ The New 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 New 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
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<PAGE> 10
New Preferred Stock, with the holders of shares
of any parity securities, 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.
Exchange Provisions........... The New 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 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.
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 New 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 New 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
New 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 New
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.
Registration Rights........... If any holder of shares of old Preferred Stock
notified NEHC within 20 days of the
consummation of the Exchange Offer that (A)
such holder was prohibited by law or SEC policy
from participating in the Exchange Offer, or
(B) such holder may not resell the New
Preferred Stock acquired by it in the Exchange
Offer to the public without delivering a
prospectus and the Prospectus contained in the
Registration Statement is not appropriate or
available for such resales by such holder, or
(C) such holder is a broker-dealer and holds
shares of old Preferred Stock acquired directly
from NEHC or one of its respective affiliates,
then NEHC will be required to provide a shelf
registration statement to cover resales of the
shares of old
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<PAGE> 11
Preferred Stock by the holders thereof.
Notwithstanding the foregoing, at any time
after consummation of the Exchange Offer, NEHC
may allow the shelf registration statement to
cease to be effective and usable if (i) the
Board of Directors of NEHC determines in good
faith that it is in the best interests of NEHC
not to disclose the existence of or facts
surrounding any proposed or pending material
corporate transaction involving NEHC, and NEHC
notifies the holders within a certain period of
time after the Board of Directors makes such
determination, or (ii) the prospectus contained
in the shelf registration statement contains an
untrue statement of a material fact necessary
in order to make the statements therein, in the
light of the circumstances under which they
were made, not misleading. NEHC will pay
certain liquidated damages to holders of Notes
and holders of New Preferred Stock if NEHC is
not in compliance with its obligations under
the Registration Rights Agreement.
TERMS OF SUBORDINATED EXCHANGE DEBENTURES
Issue......................... 11 1/4% Subordinated Exchange Debentures due
2008 issuable, at NEHC's option, in exchange
for the New Preferred Stock in an aggregate
principal amount equal to the aggregate
liquidation preference of the outstanding New
Preferred Stock, plus, without duplication,
accrued and unpaid dividends to the date fixed
for the exchange thereof, 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, 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
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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 26, 1998, the Exchange Debentures were
subordinate to $988.2 million of Senior Debt.
See "Risk Factors."
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."
YOU SHOULD CONSIDER THE INFORMATION UNDER "RISK FACTORS" IN DECIDING TO
INVEST IN THE NEW PREFERRED STOCK.
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RISK FACTORS
You should consider carefully the following factors, as well as the other
information in this Prospectus, before making a decision to invest in the New
Notes and 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, and these statements are subject to various
risks and uncertainties. NEHC's actual results may differ materially from the
results discussed in 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.
NEHC AND THE COMPANY ARE AND WILL BE SUBSTANTIALLY LEVERAGED.
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. For the year ended December 26, 1998, NEHC
had total indebtedness of $988.2 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
$285.8 million as of December 26, 1998, and NEHC's earnings were inadequate to
cover combined fixed charges and preferred stock dividends by $150.7 million.
The Company may incur additional indebtedness in the future, subject to
limitations imposed by the Indenture 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 New Preferred Stock and to make
scheduled payments of principal of, or to pay interest on, or to refinance its
indebtedness (including the New Notes) 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 (including the New Notes) and dividends when
payable on the New Preferred Stock. However, all or a portion of the principal
payments at maturity on the New Notes may require refinancing. There can be no
assurance 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, including the New Notes, 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 now leveraged could have important consequences
to holders of the New Notes and New 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; (iii) the Indenture and the Senior Note Indenture of the Company
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 repurchasing all New Notes tendered to it upon the occurrence of a
change of control. See "Description of New Notes -- Repurchase at the Option of
Holders -- Change of Control," "Description of Indebtedness" and "The Business."
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<PAGE> 14
NEHC'S HOLDING COMPANY STRUCTURE MAKES THE NEW NOTES AND NEW PREFERRED STOCK
EFFECTIVELY SUBORDINATE TO THE DEBT OF ITS SUBSIDIARIES.
NEHC is a holding company and does not have any material operations or
assets other than ownership of capital stock of its subsidiaries. Accordingly,
the New Notes and New Preferred Stock are effectively subordinated to all
existing and future liabilities of NEHC's subsidiaries, including indebtedness
under the Company's credit facility, the Senior Notes and Senior Subordinated
Notes. As of December 26, 1998, the aggregate amount of indebtedness of NEHC's
subsidiaries to which the holders of the New Notes and New Preferred Stock were
effectively subordinated was approximately $922.6 million. In addition, certain
of NEHC's subsidiaries have $111.3 million of additional availability under the
Company's 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 the New Notes and New
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 Company's credit facility are
secured by substantially all of their respective assets. Additionally, NEHC will
guarantee AmeriServe's obligations under the Company's credit facility and such
guarantee will be secured by a first priority pledge of all the capital stock of
AmeriServe owned by NEHC. See "Description of Indebtedness -- Credit Facility."
The payment of dividends on and redemption price of the New Preferred Stock
will be subordinated to all existing and future indebtedness of NEHC, including
the New 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 26, 1998, NEHC had total indebtedness of $988.2 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 New Preferred Stock" and
"-- Description of Exchange Debentures -- Subordination."
THERE ARE LIMITATIONS 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 under the New Notes and New 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 New Notes or New Preferred Stock or to make any
funds available therefor. In addition, the Company's credit facility and the
indentures governing the New Notes, the Senior Notes and the Senior Subordinated
Notes 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. Under the Company's credit facility, subject to meeting certain
financial covenants, NEHC's subsidiaries will be permitted to pay dividends to
NEHC equal to the semi-annual interest payments due on the New Notes; provided
that upon a notice of a default or event of default under the Company's credit
facility, NEHC's subsidiaries will be prohibited from paying such dividends
until the earlier of the 180th day following such notice and the date such
default or event of default is cured or waived. Accordingly, repayment of the
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<PAGE> 15
New Notes may depend upon the ability of NEHC to effect an offering of capital
stock or to refinance the New Notes.
THERE ARE LIMITATIONS ON PAYING DIVIDENDS ON NEW PREFERRED STOCK.
The indenture for the New Notes prohibits cash dividends, except to the
extent, if any, that (1) the "basket" available for the making of restricted
payments under the indenture for the New Notes permits such payments or (2)
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 under the indenture and the dividend payment is less
than the sum of NEHC's net worth 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 New Notes in
2007 or in connection with any debt that refinances or replaces the New Notes.
In addition to the limitations imposed on the payment of dividends by the
indenture for the New Notes, under Delaware law, NEHC is permitted to pay
dividends on its capital stock, including the New 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 New Preferred Stock.
THERE ARE PRE-EXISTING LIENS ON NEHC'S ASSETS.
In connection with the Company's credit agreement, 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
Company's credit agreement. In the event of a default under the Company's credit
agreement or such guarantee, the lenders under the Company's credit agreement
could foreclose upon the assets pledged to secure the Company's credit
agreement, including such capital stock, and the holders of the New Notes and
New Preferred Stock might not be able to receive any payments until any payment
default was cured or waived, any acceleration was rescinded, or the indebtedness
under the Company's credit agreement was discharged or paid in full.
THE COMPANY'S PERFORMANCE RELIES SIGNIFICANTLY ON 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. In December 1998, the Company and ARCOP, a
cooperative of franchisees in the Arby's system, agreed to terminate the
existing agreement and enter into a new agreement that expires in December 2003.
Net sales to Arby's restaurants under the agreement approximate $400 million
annually. 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
a five-year 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
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. In September 1998,
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<PAGE> 16
the Company and Tricon agreed to revise and extend the agreement from five years
to seven and one-half years, with an additional two and one-half year extension
option. Including this option period, the agreement expires July 2007. Service
to Tricon company-owned restaurants under the agreement represented
approximately $1.7 billion in net sales in fiscal 1998. The Distribution
Agreement may be terminated at any time (1) 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, (2) by Tricon if
the Company is in material breach of the Distribution Agreement for failure to
maintain specified service levels for a specified period of time or (3) 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 on January 11, 2005 and
no assurance can be given that the Distribution Agreement will be renewed or, if
renewed, whether 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.
THE COMPANY'S PERFORMANCE DEPENDS SIGNIFICANTLY 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 sales to company-owned and
franchised restaurants (and including ProSource for all of 1998 and PFS for all
of 1997) but excluding net sales to the Wendy's concept in 1998 (sales to the
Wendy's concept were discontinued during 1998), the largest chains serviced by
the Company would have been Burger King, Taco Bell, Pizza Hut, KFC, and Red
Lobster, representing 25%, 17%, 16%, 7% and 7% of 1998 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 franchiser 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, assuming the inclusion of ProSource for the full year,
restaurants owned by Tricon accounted for approximately 21% of the Company's
1998 sales. Darden Restaurants, Inc., which owns all the Red Lobster and Olive
Garden Restaurants, accounted for approximately 10% of 1998 pro forma net sales.
No other customer accounted for more than 10% of 1998 sales on either a pro
forma or reported basis.
The Company provides service to Tricon's U.S. company-owned restaurants
under a long-term exclusive distribution agreement. Tricon is actively engaged
in the sale to franchisees of company-owned restaurants covered by the
distribution agreement. While the distribution agreement provides that prior to
sales of Pizza Hut and Taco Bell restaurants, 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 general, any 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.
The Company's customer contracts 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
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of the Company will be maintained in the future. See discussion above regarding
key contracts and "The Business -- Customers" and "-- Recent Customer
Developments."
INTEGRATION OF ACQUISITIONS MAY BE DIFFICULT.
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. acquired
NEBCO Distribution of Omaha, Inc. in 1986. NEBCO acquired Evans Brothers Company
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, AmeriServ Food Company in January 1996 and, in April 1997,
changed its name to "AmeriServe Food Distribution, Inc." As a result of the PFS
Acquisition and the ProSource acquisition, the Company has begun to integrate
PFS and ProSource with its existing business, including its prior acquisitions.
The Company is implementing a comprehensive restructuring involving
consolidation and transfer of business among warehouse facilities, re-routing of
truck deliveries, consolidation and streamlining of support functions and
relocation and training of employees. The Company is investing significant cash
expenditures to effect the restructuring plan, with the expectation of
substantial cost savings upon its completion. While the Company has made
important progress, there can be no assurance that the restructuring actions
will be completed on time, that business operations will not be disrupted during
the restructuring period, that spending will be within projected levels and that
the expected cost savings will be achieved. While management believes it has the
resources to meet the objectives, the ultimate level and timing of efficiencies
to be realized are subject to the Company's ability to manage through the
complexities of the restructuring plan and respond to unanticipated events. In
addition, while the Company has made acquisitions successfully before, both the
acquisition of PFS and of ProSource are substantially larger than the Company's
prior acquisitions. There can be no assurance that integration and the expected
cost savings will be realized on a timely basis. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Business
Restructuring."
THE COMPANY IS DEPENDENT 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.
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 certain members of senior management. 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."
THE FOOD SERVICE INDUSTRY IS HIGHLY COMPETITIVE.
The Company's future results are subject to economic and competitive risks
and uncertainties in the chain restaurant and foodservice distribution
industries and in the economy, generally. The foodservice distribution industry
is highly competitive, and the trend of consolidation, as evidenced by the
Company's acquisition activity, may further intensify competitive pressures.
While the Company will take appropriate actions to retain desired business, some
loss of customers during this transition period has occurred and is a continuing
risk. In addition, the activities associated with the restructuring plan and
computer systems initiatives increase the risk of business disruption;
therefore, there can be no assurance of the Company's consistent achievement of
service level requirements set forth in customer contracts. The Company could
also 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. Management believes that completion of the
restructuring plan will enhance the Company's position as one of the most
efficient
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distributors in its industry and, therefore, highly competitive in pricing and
customer service. See "The Business -- Competition."
HOLBERG AND DLJ HAVE THE ABILITY TO CONTROL THE COMPANY.
Holberg indirectly owns all of the issued and outstanding common 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 any amendment to
the 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 the New Notes and New Preferred
Stock.
THE COMPANY IS REQUIRED TO MAKE PAYMENTS UPON A CHANGE OF CONTROL.
Upon the occurrence of a change of control, each holder of New Notes may
require NEHC to repurchase all or a portion of such holder's New Notes at 101%
of the accumulated principal thereof on the date of repurchase (if such date of
repurchase is prior to July 15, 2002) or 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest, if any, and Liquidated
Damages, if any, to the date of repurchase (if such date of repurchase is on or
after July 15, 2002). In addition, the Credit Facility will provide that, if a
change of control (as defined therein) occurs, it will constitute an event of
default under the Credit Facility. In the event of such a change of control, the
Company would be required to repay the indebtedness outstanding under the Credit
Facility and the Company may be required to repay the New 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 New Notes or the ability of NEHC to
repay the indebtedness under the New Notes. See "Description of
Securities -- Description of New Notes -- Repurchase at the Option of
Holders -- Change of Control" and discussion of holding company structure above.
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 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."
THE COMPANY'S COMPUTER SYSTEMS MAY EXPERIENCE PROBLEMS WITH THE YEAR 2000
TRANSITION
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
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systems of other companies on which the Company's systems rely on or interface
with will be timely converted. The current cash costs (excluding leased computer
hardware) to implement the new system and perform the assessment and remediation
of the Y2K issue will approximate $105 million.
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
THE NEW NOTES AND THE GUARANTEES OF THE NEW NOTES.
Management of NEHC believes that the indebtedness represented by the New
Notes is being incurred for proper purposes and in good faith, and that, based
on present forecasts, asset valuations and other financial information, after
the consummation of the Transactions and the Offering, NEHC will be solvent,
will have sufficient capital for carrying on its business and will be able to
pay its debts as they mature. See "-- Substantial Leverage and Debt Service."
Notwithstanding management's belief, however, if a court of competent
jurisdiction in a suit by an unpaid creditor or a representative of creditors
(such as a trustee in bankruptcy or a debtor-in-possession) were to find that,
at the time of the incurrence of the New Notes indebtedness, or in the event
Exchange Debentures are later issued, at the time of their issuance, NEHC was
insolvent, was rendered insolvent by reason of such incurrence, was engaged in a
business or transaction for which its remaining assets constituted unreasonably
small capital, intended to incur, or believed that it would incur, debts beyond
its ability to pay such debts as they matured, or intended to hinder, delay or
defraud its creditors, and that the indebtedness was incurred for less than
reasonably equivalent value, then such court could, among other things, (i) void
all or a portion of NEHC's obligations to the holders of the New Notes, or
Exchange Debentures, the effect of which would be that the holders of the New
Notes, or Exchange Debentures, may not be repaid in full and/or (ii) subordinate
NEHC's obligations to the holders of the New Notes, or Exchange Debentures, to
other existing and future indebtedness of NEHC to a greater extent than would
otherwise be the case, the effect of which would be to entitle such other
creditors to be paid in full before any payment could be made on the New Notes,
or Exchange Debentures.
THERE ARE NO ESTABLISHED TRADING MARKETS FOR THE NEW NOTES AND NEW PREFERRED
STOCK.
There is no existing trading market for the New Notes and New Preferred
Stock, and there can be no assurance regarding the future development of a
market for the New Notes and New Preferred Stock or the ability of the holders
of the New Notes or New Preferred Stock to sell their New Notes or New Preferred
Stock or the price at which such holders may be able to sell their New Notes or
New Preferred Stock. If such market were to develop, the New Notes and 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 Notes and
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 Notes and
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 the
New Notes and 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 the New Notes and 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.
18
<PAGE> 20
USE OF PROCEEDS
This Prospectus is delivered in connection with the sale of the New Notes
and New Preferred Stock by DLJ in market-making transactions. NEHC will not
receive any of the proceeds from such transactions.
19
<PAGE> 21
CAPITALIZATION
(DOLLARS IN THOUSANDS)
The following table sets forth the consolidated cash and capitalization of
NEHC as of December 26, 1998. This table should be read in conjunction with the
historical financial statements of NEHC and the related notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Cash and cash equivalents................................... $ 37,646
========
Long-term debt (including current portion):
Senior Notes due 2006..................................... $350,000
Senior Subordinated Notes due 2007........................ 500,000
Senior Discount Notes due 2007............................ 65,624
Revolving credit facility................................. 4,000
Other..................................................... 3,766
Capital lease obligations................................. 64,794
--------
Total long-term debt.............................. 988,184
11 1/4% Senior Redeemable Exchangeable Preferred Stock due
2008...................................................... 262,107
Stockholders' equity (deficit):
8% Senior Convertible Preferred Stock..................... 2,350
Common.................................................... (285,704)
--------
Total stockholders' deficit....................... (283,354)
--------
Total capitalization.............................. $966,937
========
</TABLE>
20
<PAGE> 22
SELECTED NEHC HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following table presents selected historical financial data of NEHC at
and for the fiscal years 1994, 1995, 1996, 1997 and 1998 which have been derived
from the audited financial statements of NEHC. The historical financial
statements of NEHC for the fiscal years 1994, 1995, 1996, 1997 and 1998 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
------------------------------------------------------------
1994 1995 1996(a) 1997(b) 1998(c)
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................ $358,516 $400,017 $1,389,601 $3,508,332 $7,420,951
Gross profit..................... 37,914 40,971 140,466 348,975 680,025
Operating expenses............... 34,488 36,695 122,430 358,958(d) 716,357(e)
-------- -------- ---------- ---------- ----------
Operating income (loss).......... 3,426 4,276 18,036 (9,983) (36,332)
Interest expense, net............ (3,294) (3,936) (16,423) (54,016) (90,824)
Loss on sale of accounts
receivable(f)................. -- -- -- (6,757) (24,906)
Interest income -- Holberg and
affiliate..................... 533 749 528 632 1,335
Minority interest................ -- -- (2,345) -- --
-------- -------- ---------- ---------- ----------
Income (loss) before income
taxes, extraordinary loss, and
cumulative effect of
accounting change............. 665 1,089 (204) (70,124) (150,727)
Provision (credit) for income
taxes......................... 523 583 1,300 1,030 1,563
-------- -------- ---------- ---------- ----------
Income (loss) before
extraordinary loss and
cumulative effect of
accounting change............. 142 506 (1,504) (71,154) (152,290)
Extraordinary loss on early
extinguishment of debt........ -- -- -- (15,935) --
-------- -------- ---------- ---------- ----------
Net income (loss)................ $ 142 $ 506 $ (1,504) $ (87,089) $ (152,290)
======== ======== ========== ========== ==========
OTHER DATA:
EBITDA(g)........................ $ 6,710 $ 7,038 $ 27,925 $ 76,959 $ 119,329
Depreciation and amortization.... 3,284 2,762 10,372 34,493 65,574
Capital expenditures............. 1,331 2,496 12,701 23,300 68,534
Net cash provided by (used in):
Operating activities.......... 4,276 4,505 4,151 50,179 (107,257)
Investing activities.......... (5,422) (5,574) (105,417) (880,067) (368,055)
Financing activities.......... 490 619 102,915 1,059,114 299,508
Ratio of earnings to fixed
charges(h).................... 1.1x 1.2x N/A N/A N/A
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 1,025 $ 575 $ 2,224 $ 231,450 $ 37,646
Total assets..................... 79,218 77,503 314,946 1,478,790 1,935,812
Long-term debt, including current
portion....................... 32,160 32,779 164,444 948,736 988,184
Total stockholders' equity
(deficit)..................... 17,205 10,157 18,519 44,802 (283,354)
</TABLE>
- ------------------------------
(a) Includes the effects of the acquisition of AmeriServ on January 25, 1996.
(b) Includes the effects of the acquisition of PFS effective June 11, 1997.
(c) Includes the effects of the acquisition of ProSource on May 21, 1998.
21
<PAGE> 23
(d) Includes $52.4 million in restructuring and other unusual costs. See Note 3
to the historical financial statements of NEHC included elsewhere herein.
(e) Includes $90.1 million in restructuring and other unusual costs. See Note 3
to the historical financial statements of NEHC included elsewhere herein.
(f) Relates to an ongoing program to provide additional financing capacity
through sales of accounts receivable. See Note 8 to the historical financial
statements of NEHC included elsewhere herein.
(g) 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 and 1998 excludes $52.4 million and $90.1 million, respectively 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 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.
(h) 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. For the fiscal year 1998 earnings were inadequate to cover
combined fixed charges and preferred stock dividends by $150.7 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NATURE OF OPERATIONS
NEHC is the parent company of the Company and HWPI. The Company comprises
substantially all of the operations of NEHC, as 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 operates
within a single type of business activity, with no operating segments as defined
by Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information."
The Company services approximately 36,000 restaurants, the vast majority of
which are in the United States. The Company's major customers are owners and/or
franchisees operating restaurants in the Arby's, Burger King, Chick-fil-A,
Chili's, Dairy Queen, KFC, Lone Star Steakhouse, Long John Silver's, Olive
Garden, Pizza Hut, Red Lobster, Sonic, Taco Bell, TCBY and TGI Friday's systems.
For most of these concepts, the Company services all or a substantial majority
of the U.S. restaurants in the systems. 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, a privately held diversified
service company. In addition to NEHC, Holberg has subsidiaries operating within
the parking services industry in North America.
22
<PAGE> 24
ACQUISITIONS
On May 21, 1998, the Company acquired ProSource for $313.5 million in cash,
which reflected $15.00 per share for all of the outstanding common stock,
repayment of existing indebtedness of ProSource of $159.5 million and direct
costs of the acquisition. ProSource, which reported net sales of $3.9 billion
for its fiscal year ended December 27, 1997, was in the foodservice distribution
business, specializing in quick service and casual dining chain restaurants.
ProSource serviced approximately 12,700 restaurants, principally in the United
States, in such chains as Burger King, Chick-fil-A, Chili's, Long John Silver's,
Olive Garden, Red Lobster, Sonic, TCBY and TGI Friday's. Funding of the
acquisition and related transactions included $125 million in proceeds from the
sale of ProSource accounts receivable (see Note 8 to the historical financial
statements of NEHC included elsewhere herein), a $50 million capital
contribution to the Company from NEHC and cash and cash equivalents on hand. The
acquisition has been accounted for under the purchase method; accordingly, 31
weeks of results for the former ProSource operations are included in the
Company's reported operating results for the year ended December 26, 1998. The
comparisons of reported operating results for fiscal 1998 to fiscal 1997
presented below under "Results of Operations" are significantly impacted by the
acquisition of ProSource.
Effective June 11, 1997, the Company acquired the U.S. and Canadian
operations of PFS in an asset purchase transaction for $841.6 million in cash,
including direct costs. PFS posted net sales of $3.4 billion for its fiscal year
ended December 25, 1996. PFS was engaged in the distribution of food products,
supplies and equipment to approximately 17,000 company-owned and franchised
restaurants in the Pizza Hut, Taco Bell and KFC systems, which were spun-off by
PepsiCo, Inc. in October 1997 as TRICON Global Restaurants, Inc. Funding of the
acquisition was provided by long-term borrowings and sale of accounts receivable
(see Notes 7 and 8 to the historical financial statements of NEHC included
elsewhere herein) and a $130 million capital contribution to the Company from
NEHC. The acquisition has been accounted for under the purchase method;
accordingly, 28 weeks of results for the former PFS operations are included in
the Company's reported operating results for the year ended December 27, 1997.
The comparisons of reported operating results for fiscal 1998 to fiscal 1997 and
fiscal 1997 to fiscal 1996 presented below under "Results of Operations" are
significantly impacted by the acquisition of PFS.
BUSINESS RESTRUCTURING
In the last two years, the Company's pro forma sales have grown
significantly from $1.5 billion in 1996 to $9.1 billion in 1998 (including the
full year effect of acquisitions). This growth came largely from the
acquisitions of PFS and ProSource, both large foodservice distribution companies
with national scope specializing in the chain restaurant segment of the U.S.
foodservice industry.
These acquisitions have resulted in redundancies in the Company's warehouse
facilities, truck delivery routes and administrative and other support
functions. The Company has developed a business restructuring plan to
consolidate and integrate the acquired businesses. Actions identified in the
plan include construction of new strategically located warehouse facilities,
closures of a number of existing warehouse facilities and
expansions/reconfigurations of others, dispositions of property and equipment,
conversions of computer systems, reductions in workforce, relocation of
employees and centralization of support functions largely at the Dallas, Texas
headquarters.
Completion of the plan is expected to significantly increase operating
efficiencies through warehouse economies of scale, increased deliveries per
truck route and centralized, standardized support processes. Implementation of a
major new computer software and hardware platform (discussed below under
"Computer Systems and Year 2000 Issue") will facilitate the streamlining of
warehouse operations and support processes.
The Company will complete the plan in two phases. The first phase, which
represents a substantial majority of the restructuring actions, is the
consolidation of the quick service business. The integration of the casual
dining business, as discussed below, is the second phase. The Company estimates
cost savings from the quick service consolidation actions of approximately $100
million annually upon the anticipated
23
<PAGE> 25
completion of this phase in mid-2000. The Company may take additional
restructuring actions as the warehouse network continues to be assessed for
optimum efficiency.
The Company has recently completed the restructuring plan to include the
integration of the former ProSource casual dining operations, and the estimated
ProSource exit costs associated with both phases of the plan are reflected in
the preliminary purchase price allocation. The casual dining integration actions
will occur largely in 2000. Final estimates of cost savings from this
integration and all spending to effect it are not yet complete.
The Company is on schedule in its restructuring plan. As of March 15, 1999,
the Company has closed 17 warehouse facilities (including seven former ProSource
facilities) and transferred the business to new or existing facilities. Another
20 closures are planned for the balance of 1999. Five warehouse facilities have
been expanded and/or reconfigured, and four of the remaining five planned for
completion in 1999 are in process and on schedule. Operations have commenced at
three newly constructed state-of-the-art warehouse facilities in Orlando, FL,
Denver, CO and Memphis, TN, and four additional new warehouse facilities planned
for completion in 1999 are under construction and on schedule. As a result of
these actions, warehouse facilities that are complete with respect to
consolidation of the quick service business represent approximately 25% of quick
service net sales.
The Company will incur significant cash costs to effect the restructuring.
Approximately $119 million in cash costs have been accounted for through
restructuring charges in 1997 and 1998 and reserves recorded as part of the
purchase price allocations for PFS and ProSource. (See Notes 2 and 3 to the
historical financial statements of NEHC included elsewhere herein.)
Approximately $16 million of this amount was spent over fiscal 1998 and 1997,
and about $45 million is expected to be spent in 1999, primarily representing
employee severance and lease payments related to closed facilities. In addition,
cash integration costs, which are expensed as incurred, totaled approximately
$42 million over fiscal 1998 and 1997, and about $50 million is expected to be
spent in 1999. These integration costs relate primarily to start-up of new
warehouse facilities, activities to realign and centralize administrative and
other support functions and delivery fleet modifications.
CUSTOMER ACTIVITIES
Early in 1998, the Company initiated a renegotiation of its long-term
distribution agreement with Tricon, the Company's largest customer, that became
effective July 1997. In September 1998, the Company and Tricon agreed to revise
and extend the agreement from five years to seven and one-half years, with an
additional two and one-half year extension option. Including this option period,
the agreement expires July 2007. The agreement provides that the Company is the
exclusive distributor of a substantial majority of products purchased by
Tricon's U.S. company-owned restaurants, including Pizza Hut and Taco Bell
restaurants sold to franchisees. Service to Tricon company-owned restaurants in
the U.S. under the agreement represented approximately $1.7 billion in net sales
in fiscal 1998.
In April 1997, the Company began providing service to a substantial
majority of restaurants in the Arby's system under a distribution agreement that
was scheduled to expire in April 2000. In December 1998, the Company and ARCOP,
a cooperative of franchisees in the Arby's system, agreed to terminate the
existing agreement and enter into a new agreement that expires in December 2003.
While the majority of the restaurants under the agreement are serviced directly
by the Company, some are serviced by other cooperating independent distributors.
Net sales to Arby's restaurants under the agreement approximate $400 million
annually.
In addition, the Company has been very active in solidifying relationships
with other existing customers, particularly franchisees in the Burger King and
Tricon systems, through long-term contracts (largely five years). Of the
Company's Burger King customer base, about 80% is now under long-term contracts.
Long-term distribution agreements have been secured with a substantial majority
of franchisees in the Pizza Hut and Taco Bell systems.
24
<PAGE> 26
Currently, about 70% of the Company's total business is under contracts
with three or more years of remaining term.
As part of the Tricon and other new or revised distribution agreements, the
Company has moved a substantial portion of its business from pricing based on a
percentage mark-up (over cost) to a fee per case mark-up. This change results in
pricing that more closely correlates with the Company's cost structure and
insulates the Company from product cost and mix variability. Currently,
approximately 70% of the Company's business is under fee per case pricing.
In the course of revising or entering into new contracts, the Company in
cooperation with customers has identified supply chain efficiency and cost
reduction opportunities benefiting both parties. These include reduced
deliveries per week, after-hours delivery, electronic ordering and increasing
the time from order to delivery. Also, the Company provides value-added services
to customers such as consolidating purchases of low volume items to reduce the
cost of these products, and management of freight costs in transporting products
from vendors to the Company's centers, which reduces the freight component of
product costs.
During the second half of 1998, the Company discontinued service to Wendy's
company-owned and franchised restaurants as a result of a decision by Wendy's
International, Inc. to transfer its business to a competitor of the Company. Net
sales to the Wendy's concept were approximately $600 million annually, and the
discontinuance is expected to negatively impact the Company's operating profits
by approximately $15 million annually. A charge of $7.2 million was recorded in
1998 for certain costs related to the discontinuance, including equipment lease
terminations and employee severance. (See Note 3 to the historical financial
statements of NEHC included elsewhere herein.)
COMPUTER SYSTEMS AND YEAR 2000 ISSUE
The Company's business activity requires the processing of several thousand
transactions on a daily basis in the purchasing, transportation and warehousing
of food and supply items and sale of these items to restaurant customers. The
Company's operational and financial stability is reliant upon the orderly flow
of goods through the entire supply chain; i.e., from providers of food
commodities to food processors to the Company to customers' restaurants and
finally to consumers. This flow of goods depends on the use of computerized
systems throughout the supply chain.
The Company has taken a number of steps to assess and remediate its
exposure to the Year 2000 (Y2K) computer program code problem. The Company's
findings to date include:
- As measured by lines of program code, approximately 20% of the Company's
software was not Y2K compliant. Approximately one-third of this code has
been remediated, tested and placed back into production, and the balance
will be completed by mid-1999.
- The remaining 80% of software includes applications that are currently
being replaced by a new software package platform (see discussion below)
and several previously existing software application packages that the
Company will continue to utilize. The providers of the software packages
have certified that their products are Y2K compliant. The Company will,
by mid-1999, perform procedures to verify such compliance.
- The Company has completed an assessment of its computer hardware and
determined that approximately 30% of these devices are not Y2K compliant.
Remediation of this hardware will be completed by mid-1999.
- The Company has completed its assessment of other mechanical equipment
and devices with electronic components possibly susceptible to the Y2K
issue. Risk identified has been minimal, and the majority of upgrades
and/or replacements will be completed by mid-1999.
- The Company has requested information regarding Y2K readiness from 1,600
trading partners, including product suppliers, service providers and
customers. Responses from these trading partners
25
<PAGE> 27
have been evaluated, and critical risk situations are being assessed for
remediation and/or contingency actions in cooperation with the trading
partners.
- The Company is using the services of outside experts to assist internal
resources in the identification and remediation of Y2K issues in the
various areas of exposure discussed above.
Given the environment the Company operates in, with rapid movement of high
volumes of products in cooperation with a large number of trading partners, the
risk of the Y2K issue to the Company is high and could result in a significant
adverse effect on the Company's operations. The Company believes that software
and equipment within its control are or will be timely compliant. The risk lies
principally with the Company's large base of suppliers and customers. Within
these groups there is a wide range of exposure and resources focusing on
potential Y2K issues. The Company is limited in its ability to determine with a
high degree of reliability the state of readiness of trading partners and to
influence these partners to ascertain timely compliance.
The Company has initiated a contingency planning process to deal with
possible disruptions. Contingency plans will be developed by mid-1999 using
existing business continuity plans in a collaborative effort with trading
partners.
As referred to above, the Company is in the process of replacing certain
critical applications and processes within its management information system
with a new software and hardware platform. The software package platform
includes integrated warehouse operations and financial management applications.
The new system will complement the Company's consolidation effort by providing
the flexibility to support those processes that are customer-unique, while
allowing greater standardization and centralization of common processes. The
implementation of the system is on schedule. As of March 15, 1999, the new
system is operating in 12 of the final 21 warehouse facilities planned upon
completion of the quick service network consolidation, and the remaining
facilities will be converted by the third quarter of 1999. With respect to the
former ProSource operations, the Company intends to support the quick service
business with the new system, but in the short-term will continue to utilize
applications currently supporting the casual dining business, which will be Y2K
compliant by mid-1999.
The current cash costs (excluding leased computer hardware) to implement
the new system and perform the assessment and remediation of the Y2K issue will
approximate $105 million. Approximately $50 million of this amount was spent
over fiscal 1998 and 1997, and the balance of about $55 million is expected to
be spent in 1999. The costs to purchase and develop the software for the new
system is being capitalized. The costs to roll-out the developed software,
largely data conversion and training in nature, and to perform the assessment
and remediation of the Y2K issue are expensed as incurred. The Company believes
the Y2K costs are unusual and one-time in nature and are therefore reported as a
component of "Restructuring and other unusual costs" in the Consolidated
Statements of Operations.
RESULTS OF OPERATIONS
This discussion, as well as the discussion under "Liquidity and Capital
Resources" below, should be read in conjunction with the historical financial
statements of NEHC included elsewhere herein, particularly the Consolidated
Statements of Operations and the Consolidated Statements of Cash Flows.
26
<PAGE> 28
The following table presents certain financial information of the Company,
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0%
Cost of goods sold............................ 89.9 90.1 90.8
----- ----- -----
Gross profit.................................. 10.1 9.9 9.2
Distribution, selling and administrative
expenses.................................... 8.1 7.8 7.6
----- ----- -----
Operating income before depreciation of
property and equipment, amortization of
intangible assets and restructuring and
other unusual costs......................... 2.0% 2.2% 1.6%
===== ===== =====
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales increased $3.9 billion, or 112% to $7.4 billion in 1998. The
acquisitions of ProSource in May 1998 and PFS in June 1997 accounted for $2.5
billion and $1.5 billion of the increase, respectively. The discontinuance of
the Wendy's business during the third quarter of 1998 was largely offset by the
addition of service to Arby's beginning April 1997.
Gross profit increased $331.1 million, or 95%, to $680.0 million in 1998
due primarily to the acquisitions. The gross profit percentage (margin)
decreased from 9.9% in 1997 to 9.2% in 1998 primarily reflecting the impact of
the ProSource acquisition. ProSource's casual dining business has higher product
case costs as compared to the Company's other business, resulting in a lower
gross profit margin. The Company's profitability is largely determined by the
relationship of the negotiated mark-up, or distribution fee that is added to
product cost to determine sales prices, to the cost of the Company's warehouse,
transportation and administrative activities. Therefore, a decline in the gross
profit margin does not necessarily indicate a decline in profitability in
dollars.
Distribution, selling and administrative expenses increased $288.7 million,
or 106%, to $560.7 million in 1998 due primarily to the acquisitions.
Distribution, selling and administrative expenses as a percent of net sales
decreased from 7.8% in 1997 to 7.6% in 1998. This change reflects both PFS'
lower operating expense margin and the downward effect on the operating cost
margin of the higher case sales prices in ProSource's casual dining business as
compared to the Company's other business (see gross profit discussion above),
partially offset by strategic administrative spending in 1998.
Operating income before depreciation of property and equipment,
amortization of intangible assets and restructuring and other unusual costs
increased $42.4 million, or 55%, to $119.3 million in 1998 due primarily to the
acquisitions. As a percent of net sales, this income measure declined from 2.2%
in 1997 to 1.6% in 1998. This change was driven by the lower gross profit margin
as discussed above.
Depreciation of property and equipment increased $13.8 million to $31.5
million in 1998 primarily reflecting the acquisitions.
Amortization of intangible assets increased $17.2 million to $34.1 million
in 1998, reflecting the amortization of the intangible assets primarily arising
primarily from the purchase price allocations for PFS and ProSource.
Restructuring and other unusual costs in 1998 totaled $90.1 million and
included $12.7 million in restructuring (exit) costs primarily for future lease
terminations and employee severance, $16.7 million in impairment of property,
equipment and other assets, $8.6 million in financing fees, fees related to a
modification of the accounts receivable sale program and other one-time indirect
costs associated with the acquisition of ProSource and $52.1 million in expenses
consisting primarily of incremental costs incurred to integrate the acquisitions
and implement the new computer system platform. The restructuring and impairment
charges reflected actions to be taken with respect to the Company's then
existing facilities as a
27
<PAGE> 29
result of the acquisition of ProSource. (See Note 3 to the historical financial
statements of NEHC included elsewhere herein.)
Interest expense net of interest income increased $36.8 million to $90.8
million in 1998, reflecting interest on debt issued primarily to finance the
acquisitions.
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 sells the receivables to a
master trust. The loss on sale of accounts receivable of $24.9 million largely
represented the return to investors in certificates issued by the master trust.
(See Note 8 to the historical financial statements of NEHC included elsewhere
herein). The increase of $18.1 million over 1997 reflected the July 1997
inception date as well as expansion of the program, including the addition of
ProSource accounts receivable.
Provision for income taxes represented state income taxes currently payable
and current and deferred foreign income taxes. The Company's net deferred tax
assets are offset entirely by a valuation allowance, reflecting a net operating
loss carryforward position.
Net loss of $152.3 million in 1998 compared to net loss of $87.1 million in
1997 was driven by increases in restructuring and other unusual costs, interest
expense, loss on sale of accounts receivable and amortization of intangible
assets, partially offset by the operating profits from the acquisitions.
COMPARISON OF RESULTS OF OPERATIONS ON A PRO FORMA BASIS
This supplementary information is provided to enhance the analysis of
results of operations. The following pro forma results represent the combined
historical results of the Company, PFS and ProSource for the periods presented
as if the acquisitions had occurred at the beginning of fiscal 1997. These pro
forma combined results do not purport to represent what the actual results would
have been if the acquisitions of PFS and ProSource had occurred at the beginning
of fiscal 1997.
<TABLE>
<CAPTION>
PRO FORMA COMBINED RESULTS
YEAR ENDED
--------------------------------------
DECEMBER 27, 1997 DECEMBER 26, 1998
$ % $ %
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Net sales.............................................. $8,907.6 100.0% $9,081.0 100.0%
Cost of goods sold..................................... 8,093.4 90.9 8,269.6 91.1
-------- ----- -------- -----
Gross profit........................................... 814.2 9.1 811.4 8.9
Distribution, selling and administrative expenses...... 674.1 7.6 683.6 7.5
-------- ----- -------- -----
Operating income before depreciation, amortization and
restructuring and other unusual costs................ $ 140.1 1.6% $ 127.8 1.4%
======== ===== ======== =====
</TABLE>
Management fees to Holberg Industries, Inc. included in distribution,
selling and administrative expenses were $4.0 million in both years.
The Company estimates that approximately $18.9 million and $6.4 million for
fiscal 1998 and 1997, respectively, in operating cost reductions could be
achieved within the distribution networks of the Company (pre-acquisitions) and
ProSource, even before savings from the integration of the Company, PFS and
ProSource networks. No estimates were developed for ProSource for the periods
prior to its acquisition, and no amounts were estimated for the PFS network as
it was assumed to be reasonably efficient. The results presented have not been
adjusted for such cost savings.
The pro forma net sales growth in 1998 of $173.4 million, or 1.9% over
1997, was driven by growth in case sales to existing customers and the addition
of the Lone Star Steakhouse business, partially offset by lower sales of about
$180 million from the discontinuance of the Wendy's business in the third
quarter of 1998. At the end of the year, stores served by the Company totaled
about 35,600 in 1998 compared to
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<PAGE> 30
about 38,600 in 1997, including over 700 stores in Canada and Mexico in both
years. The decrease was driven by the discontinuance of the Wendy's business,
closures by Tricon of underperforming restaurants and resignations by the
Company of individually small inefficient accounts, partially offset by
additional units in both the casual dining and quick serve business of the
former ProSource operations.
Pro forma gross profit in 1998 decreased $2.8 million from 1997, and the
gross margin declined .2 of a point to 8.9%. This performance reflected higher
pricing by PFS during the first half of 1997 (prior to acquisition) and the
relatively faster growth of the casual dining business, which has a lower gross
profit margin (see gross profit discussion above) than the quick service
business. Gross profit in 1998 was negatively impacted by $4 million in one-time
unusual charges to cost of sales. Also, some temporary softening of gross
margins occurred in the fourth quarter of 1998 as certain supply chain
efficiency and cost reduction initiatives built into new customer contracts are
phased-in. (See discussion under "Customer Activities" above.)
Pro forma operating expenses in 1998 rose $9.5 million or 1.4% over 1997,
and as a percent of net sales decreased .1 of a point to 7.5%. This performance
reflected the impact of the net sales growth, the effect of certain unusually
low 1997 administrative expenses in the former PFS operations prior to and
immediately following the sale of the business to the Company, as well as
strategic administrative spending in 1998.
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 $160.0 million,
or 143%, to $272.0 million in 1997 due primarily to the acquisition of PFS.
Distribution, selling and administrative expenses as a percent of net sales
decreased from 8.1% in 1996 to 7.8% in 1997. This change reflects the impact of
PFS's lower operating expense margin, as well as leveraging of the incremental
Arby's business.
Operating income before depreciation of property and equipment,
amortization of intangible assets and restructuring and other unusual costs
increased $48.6 million, or 171%, to $77.0 million in 1997 due primarily to the
acquisition of PFS. As a percent of net sales, this income measure rose from
2.0% in 1996 to 2.2% in 1997. This change was driven by the lower distribution,
selling and administrative expense as a percent of net sales as discussed above.
Depreciation of property and equipment increased $12.1 million to $17.7
million in 1997 primarily reflecting the acquisition of PFS.
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.
Restructuring and other unusual costs in 1997 totaled $52.4 million and
included $13.4 million in restructuring (exit) costs primarily for future lease
terminations and employee severance, $12.4 million in impairment of property,
equipment and other assets, $13.6 million in financing fees, commitment fees
related to the accounts receivable sale program, and other one-time indirect
costs associated with the acquisition of PFS and $13.0 million in expenses
consisting primarily of incremental costs incurred to integrate the operations
of PFS and previous acquisitions. The restructuring and impairment charges
reflected actions to be taken with respect to the Company's then existing
facilities as a result of the acquisition of PFS. (See Note 3 to the historical
financial statements of NEHC included elsewhere herein.)
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<PAGE> 31
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 a program established by the
Company in July 1997 to provide additional financing capacity. Under this
ongoing program, accounts receivable are sold to a consolidated, wholly owned,
special purpose, bankruptcy-remote subsidiary, which in turn sells the
receivables to a master trust. The loss on sale of accounts receivable of $6.8
million largely represented the return to investors in certificates issued by
the master trust. (See Note 8 to the historical financial statements of NEHC
included elsewhere herein.)
Provision for income taxes primarily represented estimated amounts
currently 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 associated with previous credit facilities.
Net loss of $87.1 million in 1997 compared to net loss of $1.5 million in
1996 was driven by the restructuring and other unusual costs, the extraordinary
loss on early extinguishment of debt, the loss on sale of accounts receivable,
interest expense and amortization of intangible assets, partially offset by on-
going operating profits from PFS.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity include cash provided by operating
activities, a credit facility of up to $220 million, of which $151.2 million was
available and $39.9 million was used (through borrowings and letters of credit)
at December 26, 1998, proceeds from the accounts receivable program of up to
$485 million, of which $445 million was available and was fully used at December
26, 1998, proceeds from sales of warehouse facilities and lease financing of new
warehouse facilities, delivery fleet, material handling equipment and computer
hardware requirements.
In late March 1999, an amendment to the credit facility was completed that
allows the Company up to $30 million in letters of credit before usage of the
facility is impacted, resulting in additional current liquidity in this amount.
Also at that time, NEHC provided $25 million in a cash capital contribution to
the Company.
The Company believes that its liquidity sources will be adequate to fund
the approximately $150 million in 1999 cash needs for the restructuring actions
and computer systems initiatives (discussed above under "Business Restructuring"
and "Computer Systems and Year 2000 Issue," respectively). Cash capital
expenditures for 1999 in addition to amounts included in the computer systems
initiatives are estimated to be about $25 million.
FISCAL 1998 COMPARED TO FISCAL 1997
Net cash used for operating activities was $107.3 million in 1998 compared
to cash provided of $50.2 million in 1997. This change was led by higher
interest payments of $66.9 million, an unfavorable change related to accounts
receivable of $52.7 million due primarily to the effect on collections of the
relative timing of the 1998 and 1997 fiscal year-ends and the Christmas holiday,
increased restructuring and integration spending of about $36 million (including
$13.6 million in payments charged to restructuring reserves) and $27.5 million
in an unfavorable change in timing of accounts payable payments. These changes
were partially offset by the cash operating profits from the acquired PFS and
ProSource businesses.
Net cash used for investing activities decreased $494.0 million to $386.1
million in 1998, primarily due to the difference in the purchase prices of
ProSource and PFS. Capital expenditures increased $45.2 million to $68.5
million, reflecting the capitalization of software purchased and developed for
the new computer software platform discussed under "Computer Systems and Year
2000 Issue" above, as well as the impact of the acquisitions.
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<PAGE> 32
Net cash provided by financing activities of $299.5 million in 1998
reflected issuance of senior redeemable exchangeable preferred stock, a portion
of the proceeds from which was used to redeem outstanding preferred stock. Also,
the Company received additional proceeds from its accounts receivable program in
connection with the ProSource acquisition and a restructuring of the program.
(See Note 8 to the historical financial statements of NEHC included elsewhere
herein.)
SEASONALITY AND GENERAL PRICE LEVELS
Historically, the Company's operating results have reflected seasonal
variations. The Company experiences lower net sales and operating profits in the
first and fourth calendar 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. The
Company is in the process of adopting a 13-period fiscal calendar (see Note 1 to
the historical financial statements of NEHC included elsewhere herein). Under
this calendar, the first three quarters consist of 12 weeks and the fourth
quarter consists of 16 weeks. As a result, reported net sales and operating
profits for the fourth quarter will not necessarily decline from the second and
third quarters.
Inflation has not had a significant impact on the Company's operations.
Food price deflation could adversely affect the Company's profitability as
approximately 30% of the Company's sales are at prices based on product cost
plus a percentage markup.
CAUTIONARY STATEMENTS
Restructuring Risk
As discussed above under "Business Restructuring," the Company is in the
process of implementing a comprehensive restructuring involving consolidation
and transfer of business among warehouse facilities, re-routing of truck
deliveries, consolidation and streamlining of support functions and relocation
and training of employees. The Company is investing significant cash
expenditures to effect the restructuring plan, with the expectation of
substantial cost savings upon its completion.
While the Company has made important progress, there can be no assurance
that the restructuring actions will be completed on time, that business
operations will not be disrupted during the restructuring period, that spending
will be within projected levels and that the expected cost savings will be
achieved. While management believes it has the resources to meet the objectives,
the ultimate level and timing of efficiencies to be realized are subject to the
Company's ability to manage through the complexities of the restructuring plan
and respond to unanticipated events.
Computer Systems Risk
As discussed above under "Computer Systems and Year 2000 Issue," the
Company is implementing a new computer software and hardware platform that will
allow standardization and centralization of warehouse operations and support
processes. The Company is also actively identifying and remediating Y2K code
problems in applications that will not be replaced by the new system. These
activities are occurring concurrently with the Company's restructuring actions.
While the Company has made important progress, there can be no assurance
that the system implementation and Y2K remediation efforts will be completed on
time, that business operations will not be disrupted and that spending will be
within projected levels.
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 and in the economy, generally. The trend of consolidation in the
foodservice distribution industry, as evidenced by the Company's acquisition
activity, may further intensify competitive pressures. While the Company will
take appropriate actions to retain desired business, some loss of customers
during this transition period has occurred and is a continuing risk.
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<PAGE> 33
In addition, the activities associated with the restructuring plan and computer
systems initiatives increase the risk of business disruption; therefore, there
can be no assurance of the Company's consistent achievement of service level
requirements set forth in customer contracts. Management believes that
completion of the restructuring plan will enhance the Company's position as one
of the most efficient distributors in its industry and, therefore, highly
competitive in pricing and customer service.
With respect to risk of customer concentration, including ProSource net
sales on a pro forma basis, approximately 21% of the Company's net sales are to
Tricon and 10% are to Darden Restaurants, Inc., which owns all the Red Lobster
and Olive Garden restaurants. The Company provides service to Tricon's U.S.
company-owned restaurants under a long-term exclusive distribution agreement
discussed above under "Customer Activity." Tricon is actively engaged in the
sale to franchisees of company-owned restaurants covered by the distribution
agreement. While the distribution agreement provides that prior to sales of
Pizza Hut and Taco Bell restaurants, 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. The Company provides service to Red Lobster and
Olive Garden restaurants under exclusive distribution agreements effective June
1997 and expiring in May 2002.
Market Risk
The Company's Senior Notes, Senior Subordinated Notes and NEHC's New Notes
carry fixed interest rates and, therefore, do not expose the Company and NEHC to
the risk of earnings or cash flow loss due to changes in market interest rates.
The Company is exposed to market interest rates in connection with its
accounts receivable program and credit facility. As discussed above under
"Results of Operations," the loss on sale of accounts receivable as reported in
the Consolidated Statements of Operations largely represents the return to
investors in variable interest rate certificates issued by a master trust to
which the rights of ownership of a substantial majority of the Company's
accounts receivable have been transferred. At December 26, 1998, the master
trust had certificates outstanding in the amount of $445 million. At this level,
a one-point change in interest rates would impact the annual loss on sale of
accounts receivable by $4.5 million. Borrowings against the Company's credit
facility, which totaled $4 million at December 26, 1998, carry variable interest
rates. (See Notes 6 and 7 to the historical financial statements of NEHC
included elsewhere herein.)
At December 26, 1998, NEHC and the Company are not engaged in other
contracts which would cause exposure to the risk of material earnings or cash
flow loss due to changes in market commodity prices, foreign currency exchange
rates or interest rates.
Risk of Leverage
NEHC and the Company are and will continue to be highly leveraged as a
result of the indebtedness incurred in connection with the acquisitions. NEHC
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 the Company's actual results to
differ materially from expected and historical results, see "Risk Factors."
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<PAGE> 34
THE BUSINESS
NEHC is a Delaware corporation and the parent company of AmeriServe, a
Delaware corporation, and Holberg Warehouse Properties, Inc. a Delaware
corporation. 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 Industries,
Inc. 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 Distribution of Omaha, Inc. in
1986. NEBCO acquired Evans Brothers Company 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
Food Company ("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. (as such,
"Nebraska AmeriServe").
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
approximately 36,000 restaurant locations in North America. The Company has had
long-standing relationships with such leading restaurant concepts as Applebee's,
Arby's, Burger King, Chick-fil-A, Chili's, Dairy Queen, KFC, Lone Star
Steakhouse, Long John Silver's, Olive Garden, Pizza Hut, Red Lobster, Sonic,
Subway, Taco Bell, TCBY, and TGI Friday's.
On July 11, 1997, the Company acquired the U.S. and Canadian operations of
PFS, a division of PepsiCo, Inc. 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. In
addition, in connection with the PFS Acquisition, the Company entered into a
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 and
previously serviced by PFS. As described in "Recent Customer Developments" under
Item 1 of this Report, the Distribution Agreement was modified and extended in
1998.
In October 1997, AmeriServe also acquired PFS de Mexico, S.A. de C.V., a
regional systems foodservice 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 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, 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. (For further
information, see Note 7 to the historical financial statements of NEHC included
elsewhere herein.)
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<PAGE> 35
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
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 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 million in aggregate
principal amount at maturity 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"). 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, 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 7 and 8 to the
historical financial statements of NEHC included elsewhere herein.
On December 28, 1997, Nebraska AmeriServe merged with and into AmeriServ
and The Harry H. Post Company, a wholly owned subsidiary of AmeriServe merged
with and into AmeriServ. In the mergers, AmeriServ changed its name to
AmeriServe Food Distribution, Inc. 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.
On March 6, 1998, NEHC consummated the offering and sale of $250 million of
its 11 1/4% Senior Redeemable Exchangeable Preferred Stock due 2008 in
transactions not requiring registration under the Securities Act. Approximately
$153.6 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. NEHC expects to use the remaining net proceeds for general
corporate purposes, including contributions to the capital of AmeriServe.
Dividends on the Preferred Stock are cumulative at 11 1/4% per annum, payable
quarterly in either cash or additional shares of Preferred Stock, at NEHC's
option. The Preferred Stock is redeemable, at NEHC's option, at any time after
March 1, 2003 and is exchangeable, also at NEHC's option, into 11 1/4%
Subordinated Exchange Debentures due 2008, in each case, subject to certain
terms and conditions. The Senior Preferred Stock was sold pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act. On June 22, 1998, NEHC consummated an offer to exchange all the
outstanding Senior Preferred Stock due 2008 for new Senior Preferred Stock,
which are registered under the Securities Act, with terms substantially
identical to the Senior Preferred Stock.
On May 21, 1998, the Company acquired all of the outstanding stock of
ProSource, Inc. ProSource, which reported net sales of $3.9 billion for its
fiscal year ended December 27, 1997, was in the foodservice distribution
business, specializing in quick service and casual dining chain restaurants.
ProSource serviced approximately 12,700 restaurants, principally in the United
States, including such chains as Burger King, Chick-fil-A, Chili's, Long John
Silver's, Olive Garden, Red Lobster, Sonic, TCBY and TGI Friday's. Funding of
the acquisition and related transactions included $125 million provided by
expansion of the Company's Accounts Receivable Program to include ProSource
accounts receivable (see Note 8 to the historical financial statements of NEHC
included elsewhere herein), a $50 million capital contribution to the Company
from NEHC and cash and cash equivalents on hand.
For further information about financings by AmeriServe in connection with
the ProSource acquisition and subsequently, see Notes 7 and 8 to the historical
financial statements of NEHC included elsewhere herein.
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<PAGE> 36
On December 27, 1998, ProSource Services Corporation, a wholly owned
subsidiary of ProSource, merged with and into ProSource and ProSource merged
with and into AmeriServe. The Company effected the mergers to rationalize its
corporate organization.
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 $140 billion in sales in 1998.
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, 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 food-related items and
often serve as a single source of supply for their customers. Broadline
foodservice 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 strategy is to: (i) pursue profitable internal and external
growth opportunities; (ii) capitalize on its nationwide network of distribution
centers to increase customer density and regional market penetration; (iii)
continue to provide low cost, superior customer service; and (iv) maximize
operating leverage by integrating and consolidating the Company, PFS and
ProSource quick service and casual dining businesses and by pursuing selective
acquisitions within the fragmented foodservice distribution industry.
CUSTOMERS
The Company's customers are generally owners and/or franchisees of chain
restaurant concepts. The Company's customers include over 30 restaurant concepts
with approximately 36,000 restaurant locations. 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 company-owned and franchised restaurants, the Company's
sales to the following restaurant concepts as an approximate percentage of total
pro forma sales (including ProSource for all of
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<PAGE> 37
1998 and PFS for all of 1997 but excluding net sales to the Wendy's concept in
1998 (sales to the Wendy's concept were discontinued during 1998) were:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Burger King................................................. 5% 25%
Taco Bell................................................... 29% 17%
Pizza Hut................................................... 27% 16%
KFC......................................................... 12% 7%
Red Lobster................................................. -- 7%
Arby's...................................................... 7% 4%
Wendy's..................................................... 11% --
</TABLE>
On a pro forma basis, assuming the inclusion of ProSource for the full
year, restaurants owned by Tricon accounted for approximately 21% of the
Company's 1998 sales. Darden Restaurants, Inc., which owns all the Red Lobster
and Olive Garden Restaurants, accounted for approximately 10% of 1998 pro forma
net sales. No other customer accounted for more than 10% of 1998 sales on either
a pro forma or reported basis.
RECENT CUSTOMER DEVELOPMENTS
Early in 1998, the Company initiated a renegotiation of its long-term
distribution agreement with Tricon, the Company's largest customer, that became
effective July 1997. In September 1998, the Company and Tricon agreed to revise
and extend the agreement from five years to seven and one-half years, with an
additional two and one-half year extension option. Including this option period,
the agreement expires July 2007. The agreement provides that the Company is the
exclusive distributor of a substantial majority of products purchased by
Tricon's U.S. company-owned restaurants, including Pizza Hut and Taco Bell
restaurants sold to franchisees. Service to Tricon company-owned restaurants in
the U.S. under the agreement represented approximately $1.7 billion in net sales
in fiscal 1998.
In April 1997, the Company began providing service to a substantial
majority of restaurants in the Arby's system under a distribution agreement that
was scheduled to expire in April 2000. In December 1998, the Company and ARCOP,
a cooperative of franchisees in the Arby's system, agreed to terminate the
existing agreement and enter into a new agreement that expires in December 2003.
While the majority of the restaurants under the agreement are serviced directly
by the Company, some are serviced by other cooperating independent distributors.
Net sales to Arby's restaurants under the agreement approximate $400 million
annually.
In addition, the Company has been very active in solidifying relationships
with other existing customers, particularly franchisees in the Burger King and
Tricon systems, through long-term contracts (largely five years). Of the
Company's Burger King customer base, about 80% is now under long-term contracts.
Long-term distribution agreements have been secured with a substantial majority
of franchisees in the Pizza Hut and Taco Bell systems.
Currently, about 70% of the Company's total business is under contracts
with three or more years of remaining term.
As part of the Tricon and other new or revised distribution agreements, the
Company has moved a substantial portion of its business from pricing based on a
percentage mark-up (over cost) to a fee per case mark-up. This change results in
pricing that more closely correlates with the Company's cost structure and
insulates the Company from product cost and mix variability. Currently,
approximately 70% of the Company's business is under fee per case pricing.
In the course of revising or entering into new contracts, the Company in
cooperation with customers has identified supply chain efficiency and cost
reduction opportunities benefiting both parties. These include reduced
deliveries per week, after-hours delivery, electronic ordering and increasing
the time from order to delivery. Also, the Company provides value-added services
to customers such as consolidating
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<PAGE> 38
purchases of low volume items to reduce the cost of these products, and
management of freight costs in transporting products from vendors to the
Company's centers, which reduces the freight component of product costs.
During the second half of 1998, the Company discontinued service to Wendy's
company-owned and franchised restaurants as a result of a decision by Wendy's
International, Inc. to transfer its business to a competitor of the Company. Net
sales to the Wendy's concept were approximately $600 million annually, and the
discontinuance is expected to negatively impact the Company's operating profits
by approximately $15 million annually. A charge of $7.2 million was recorded in
1998 for certain costs related to the discontinuance, including equipment lease
terminations and employee severance. (See Note 3 to the historical financial
statements of NEHC included elsewhere herein.)
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 61 distribution centers,
its fleet of approximately 1,500 tractors and 2,100 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 acquisitions of PFS and ProSource, the Company expects to
reduce the number of current distribution centers to 28, including four
redistribution, one equipment, and two international centers. In order to
accomplish this consolidation, the Company will operate its business in new and
larger facilities. (For further information, see "Business Restructuring").
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 ("SKUs") (excluding the redistribution and equipment distribution centers)
for its customers at 61 facilities located throughout the United States, Canada
and Mexico. 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
37
<PAGE> 39
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 customers within a 150 mile radius.
ORDER FULFILLMENT
The Company places a significant emphasis on providing high quality service
in order fulfillment. By providing high quality service and reliability, the
Company believes it can reduce the number of reorders and redeliveries, reducing
costs for both the Company and its customers. Each restaurant places product
orders based on recent usage, estimated sales and existing restaurant
inventories. The Company 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 1,500 tractors and 2,100
trailers through its subsidiary, AmeriServe Transportation, Inc. The Company
leases approximately 480 tractors from Penske Truck Leasing pursuant to
full-service leases that include maintenance. The Company also leases
approximately 390 tractors from General Electric Capital Corp. which are
maintained through Penske Truck Leasing, UPS Truck Leasing and other national
maintenance providers. The Company owns approximately 540 tractors and 870
trailers which are maintained by national maintenance providers. The remaining
tractors (approximately 90) and trailers (approximately 1,230) are leased under
finance leases (which equipment is maintained by national maintenance providers)
or full-service leases (which include maintenance) from a variety of leasing
companies. Lease terms average six years for new tractors and nine years for new
trailers. Licensing and fuel tax reporting for the entire fleet is provided by
J.J. Keller & Associates, Inc.
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 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 and ProSource businesses currently operate
with different computer systems. AmeriServe utilizes a variety of personal
computers and IBM AS/400-based software applications. PFS and ProSource also
operates with a variety of applications, the core of which are mainframe-based.
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, PFS
and ProSource. This conversion process is progressing
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<PAGE> 40
and is expected to be substantially completed by mid-1999 and will result in all
of the Company's quick service distribution centers operating with the same
computer systems and the same operating policies and practices. For certain
risks related to this project, see "Computer Systems and Year 2000 Issue" above.
PROCUREMENT, LOGISTICS AND REDISTRIBUTION
The Company procures a wide range of food, paper and cleaning products for
ultimate distribution to its chain restaurant customers. The Company also
operates two redistribution centers for the purpose of purchasing 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 Company also offers redistribution 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 6,000
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,
captive distribution companies owned by restaurant companies and broadline
foodservice distributors.
The Company competes directly with other systems specialists that target
chain restaurant concepts. The Company's principal competitors are Sysco
Corporation's Sygma division, McLane's, Marriott Distribution Services Inc.,
Alliant Foodservice Inc., Performance Food Group, U.S. Foodservice, MBM
39
<PAGE> 41
Corp. and PYA Monarch. 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. The Company 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 their restaurants on a nationwide
basis, the Company believes it 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.
The Company 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 and ProSource Acquisitions, the Company reviewed
existing reports and retained environmental consultants to conduct an
environmental audit of their respective operations in order to identify
conditions that could have material adverse effects on the Company. The Company
has obtained final reports on the results of such audits with regard to PFS and
ProSource, which concluded that there are no environmental matters that are
likely to have a material adverse effect on the Company.
40
<PAGE> 42
EMPLOYEES
NEHC has no paid employees. As of December 26, 1998, the Company had
approximately 8,000 full-time employees, approximately 600 of whom were employed
in corporate support functions and approximately 7,400 of whom were warehouse,
transportation, sales, and administrative staff at the distribution centers. As
of such date, approximately 900 of the Company's employees were covered by 11
collective bargaining agreements. Five collective bargaining agreements covering
approximately 450 employees will expire in 1999. The Company has not experienced
any material labor disputes or work stoppages and believes that its
relationships with its employees are good.
FACILITIES
The Company leases approximately 125,000 square feet of headquarters office
space in Addison, Texas, a suburb of Dallas.
The Company currently operates 61 distribution centers located throughout
the United States, Canada and Mexico and is constructing four new distribution
centers as follows:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET LEASED/OWNED
- -------- ----------- ------------
<S> <C> <C>
Albany, NY.................................................. 104,000 Leased
Arlington, TX(4)............................................ 105,600 Leased
Atlanta, GA(4).............................................. 157,000 Leased
Atlanta, GA(2).............................................. 230,000 Leased
Bell, CA.................................................... 91,792 Leased
Burlington, NJ.............................................. 60,880 Owned
Charlotte, NC(4)............................................ 158,500 Owned
Charlotte, NC(4)............................................ 91,771 Leased
Charlotte, NC(2)............................................ 190,000 Leased
Chester, NY................................................. 131,400 Leased
Columbus, OH................................................ 143,903 Leased
Conroe, TX(4)............................................... 33,900 Owned
Denver, CO.................................................. 165,000 Leased
Douglasville, GA(4)......................................... 60,670 Owned
Farmingdale, NY............................................. 35,000 Leased
Fort Worth, TX.............................................. 113,000 Leased
Fredericksburg, VA.......................................... 53,000 Owned
Fullerton, CA............................................... 61,740 Leased
Grand Prairie, TX(4)........................................ 32,200 Owned
Grand Rapids, MI............................................ 180,000 Owned
Greensboro, NC(4)........................................... 41,000 Owned
Gridley, IL................................................. 146,100 Owned
Gulfport, MS................................................ 63,792 Leased
Harahan, LA(4).............................................. 36,180 Leased
Hebron, KY.................................................. 124,000 Leased
Houston, TX(4).............................................. 69,800 Leased
Houston, TX(2).............................................. 150,000 Leased
Indianapolis, IN(4)......................................... 115,200 Leased
Indianapolis, IN(3)......................................... 180,100 Leased
Industry, CA................................................ 92,000 Leased
Jonesboro, GA(4)............................................ 124,076 Leased
Kansas City, MO(2).......................................... 40,000 Leased
Lemont, IL(1)............................................... 105,000 Leased
</TABLE>
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<PAGE> 43
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET LEASED/OWNED
- -------- ----------- ------------
<S> <C> <C>
Lenexa, KS(4)............................................... 105,600 Leased
Lenexa, KS(4)............................................... 35,778 Leased
Lenexa, KS(4)............................................... 26,172 Leased
Lewisville, TX.............................................. 105,000 Leased
Madison, WI(1).............................................. 123,000 Leased
Manassas, VA................................................ 100,337 Owned
Memphis, TN................................................. 122,500 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(4)............................................. 169,900 Owned
Norman, OK.................................................. 11,093 Leased
Norman, OK.................................................. 52,000 Owned
Novi, MI(4)................................................. 72,830 Leased
Oakwood, OH................................................. 40,540 Owned
Obetz, OH................................................... 174,000 Leased
Omaha, NE(4)(6)............................................. 105,000 Leased
Ontario, CA................................................. 201,454 Leased
Orlando, FL................................................. 269,000 Leased
Orlando, FL................................................. 143,200 Owned
Oxford, MA.................................................. 40,000 Leased
Phoenix, AZ................................................. 92,425 Leased
Plymouth, MN................................................ 104,200 Leased
Portland, OR................................................ 81,815 Leased
Portland, OR................................................ 75,000 Leased
Romulus, MI(4).............................................. 34,897 Owned
Stafford, VA................................................ 30,000 Leased
Stockton, CA................................................ 105,000 Leased
Virginia Beach, VA.......................................... 23,045 Owned
Waukesha, WI(5)............................................. 196,000 Leased
Woodridge, IL............................................... 91,021 Leased
</TABLE>
- ------------------------------
(1) Redistribution facilities
(2) Under construction
(3) Restaurant equipment distribution center
(4) Scheduled to close in 1999.
(5) NEHC capital lease
(6) Owned by HWPI.
In connection with the PFS and ProSource acquisitions, the Company expects
to reduce the number of current distribution centers to 28, including four
redistribution, one equipment and two international centers. In order to
accomplish this integration and consolidation, the Company will operate its
business in 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> 44
MANAGEMENT
The following table sets forth certain information as of April 26, 1999,
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............................. 42 Director, Chairman and Chief Executive
Officer
John R. Evans.............................. 59 Director and Vice Chairman
Raymond E. Marshall........................ 49 Director, Executive Vice President and Vice
Chairman
Thomas C. Highland......................... 57 Director, Executive Vice President and Vice
Chairman
Kenneth R. Lane............................ 51 Executive Vice President and Chief
Operating Officer
Diana M. Moog.............................. 39 Executive Vice President and Chief
Financial Officer
Bruce Graham............................... 36 Acting Chief Information Officer
Gunnar E. Klintberg........................ 50 Director and Assistant Secretary and Member
of Compensation Committee
A. Petter Ostberg.......................... 37 Vice President
John D. Gainor............................. 42 President, Purchasing and Logistics
Kurt E. Twining............................ 43 Senior Vice President, Human Resources
Kevin J. Rogan............................. 47 Senior Vice President, General Counsel and
Secretary
Stanley J. Szlauderbach.................... 50 Vice President, Investor Relations and
Chief Accounting Officer
Ginette Wooldridge......................... 41 Vice President and Controller
Paul A. Garcia de Quevedo.................. 45 Vice President, Treasurer and Assistant
Secretary
Nancy M. Bittner........................... 35 Vice President, Planning
Leif F. Onarheim........................... 63 Director and Member of Audit Committee
Peter T. Grauer............................ 52 Director and Member of Compensation
Committee
Benoit Jamar............................... 43 Director and Member of Audit Committee
Daniel W. Crippen.......................... 47 Director
David R. Parker............................ 55 Director and Vice Chairman
</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 26 years with AmeriServe or its predecessors. Mr. Marshall
served as President and Chief Executive Officer of NEBCO from 1980 to 1989. Mr.
Marshall served as President of AmeriServe from 1990 to 1997. 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.
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<PAGE> 45
Thomas C. Highland. Mr. Highland joined AmeriServe at the time of the
acquisition of ProSource. Most recently he served as President and Chief
Executive Officer of ProSource. Mr. Highland joined ProSource in 1992 following
four years as President of Burger King Distribution Services. Prior to ProSource
he spent twenty-five years with Warner Lambert Company, most recently as Vice
President, U.S. Distribution.
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.
Diana M. Moog. Ms. Moog was named Executive Vice President and Chief
Financial Officer in 1998. Previously, she was Senior Vice President and Chief
Financial Officer. Ms. Moog joined AmeriServe as Senior Vice President and
Treasurer at the time of its acquisition of PFS in 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.
John D. Gainor. Mr. Gainor joined AmeriServe at the time of the
acquisition of ProSource. Most recently, he served as President, Logistics and
Redistribution of ProSource. Prior to joining ProSource in 1992, Mr. Gainor was
Director, Transportation and Planning for Warner Lambert Company.
Kurt E. Twining. Mr. Twining joined AmeriServe in 1997 as Senior Vice
President-Human Resources in connection with the PFS Acquisition. Mr. Twining
joined PFS in 1986 as Manager, Employee Relations. He then held positions of
Manager, Staffing and Development; Director, Employee Relations; Senior
Director, Employee Relations; Senior Director, Organization and Management
Development; and Vice President, Field Human Resources and Safety.
Kenneth R. Lane. Mr. Lane was named Executive Vice President and Chief
Operating Officer in 1998. Previously, he was Senior Vice President and Acting
Chief Operating Officer. He joined AmeriServe in 1997 as a Senior Vice President
in connection with the PFS Acquisition. The prior 24 years were spent with
PepsiCo in various positions, most recently as PFS Vice President Operations,
North, overseeing the Northern United States as well as international operations
in Mexico, Canada and Puerto Rico.
Bruce Graham. Mr. Graham was named Acting Chief Information Officer in
1998. Mr. Graham is an employee of The Feld Group, an information technology
consulting firm retained by the Company in 1998. In a previous assignment with
The Feld Group, Mr. Graham was Chief Information Officer of Oshawa, a food
retailer and distributor in Canada.
Kevin J. Rogan. Mr. Rogan was named Senior Vice President, General Counsel
and Secretary in 1999. Previously, he was Vice President, General Counsel and
Secretary. Before joining AmeriServe in 1997 he was Vice President, Legal at
McKesson Corporation. Prior to McKesson, Mr. Rogan served as legal counsel to
FoxMeyer Health Corporation, Grand Metropolitan, PLC and PepsiCo.
Stanley J. Szlauderbach. Mr. Szlauderbach was named Vice President,
Investor Relations and Chief Accounting Officer in 1998. Previously, he was Vice
President and Controller. Before joining AmeriServe, Mr. Szlauderbach spent 14
years at PepsiCo where his experience included eight years as Director,
Financial Reporting for PepsiCo and two years as Assistant Controller at Pizza
Hut.
Paul Garcia de Quevedo. Mr. Garcia joined AmeriServe at the time of the
acquisition of ProSource. Most recently he served as Vice President, Treasurer
and Secretary for ProSource. Mr. Garcia joined ProSource in 1992 and served as
Vice President, Finance and Controller during his tenure. Prior to ProSource,
Mr. Garcia was with Burger King serving in various financial capacities
including Vice President, Finance for Burger King Distribution Services.
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<PAGE> 46
Ginette Wooldridge. Ms. Wooldridge joined AmeriServe as Vice President and
Controller in 1998. Most recently, she served as Director of Accounting for
Frito-Lay. Prior to that, Ms. Wooldridge was Director of Corporate Audit for
PepsiCo, a position she assumed in 1992.
Nancy Bittner. Ms. Bittner joined AmeriServe as Vice President, Planning
in 1998. Prior to joining AmeriServe, she spent five years with Frito-Lay, most
recently as Director of Finance.
Daniel W. Crippen. Mr. Crippen has spent the last 21 years in the
foodservice distribution business beginning with The Harry H. Post Company. He
is Chairman of the Board of Directors of IDA. Mr. Crippen has been a member of
the NEHC and AmeriServe Boards since 1997.
Leif F. Onarheim. In 1996, Mr. Onarheim was elected chairman of NHO,
Norway'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, 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. Mr. Onarheim has
been a member of the Audit Committee of the NEHC and AmeriServe Boards since
1998.
Peter T. Grauer. Mr. Grauer has been a Managing Director of Donaldson,
Lufkin & Jenrette Merchant Banking, Inc. since 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 and AmeriServe Boards since January 1996.
Benoit Jamar. Mr. Jamar is a Managing Director in the Mergers &
Acquisitions group at Donaldson, Lufkin & Jenrette Securities Corporation
("DLJSC"). He joined DLJSC in 1989. Mr. Jamar has been a member of the NEHC and
AmeriServe Boards since 1997. Mr. Jamar has been a member of the Audit Committee
of the NEHC and AmeriServe Boards since 1998.
David R. Parker. Mr. Parker joined AmeriServe at the time of the
acquisition of ProSource. Most recently he served as Chairman of ProSource. Mr.
Parker joined ProSource in 1992. Prior to ProSource, Mr. Parker served as Senior
Executive Vice President of Ryder Systems, Inc. and President of the Vehicle
Leasing and Service Division.
The directors of NEHC and the Company 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 and the Company 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.
45
<PAGE> 47
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- SECURITIES OTHER ANNUAL
FISCAL SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) OPTIONS(#)(11) ($)
- --------------------------- ------ -------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C>
John V. Holten...................... 1998 -- -- -- --
Chairman and Chief 1997 -- -- -- --
Executive Officer 1996 -- -- -- --
Raymond E. Marshall................. 1998 323,977 500,000 -- 265,646(5)
Executive Vice President 1997 301,375 500,000(2) -- 202,621(3)
Vice Chairman 1996 273,793 265,000(4) -- --
Kenneth R. Lane..................... 1998 266,890 266,840 45,660 --
Executive Vice President 1997 97,942(6) 196,840 -- --
Chief Operating Officer 1996 --(7) -- -- --
Diana M. Moog....................... 1998 268,942 265,370 45,660 --
Executive Vice President 1997 102,066(6) 195,370 -- --
Chief Financial Officer 1996 --(7) -- -- --
Thomas C. Highland.................. 1998 287,133(8) 225,000 -- 87,305(10)
Executive Vice President 1997 --(9) -- -- --
and Vice Chairman 1996 --(9) -- -- --
</TABLE>
- ------------------------------
(1) The amounts shown in this column include FLEX credits, car allowance and
amounts contributed by the Company to its 401(k) plan under a contribution
matching program.
(2) This amount includes discretionary cash bonuses paid by AmeriServe for
services provided during 1997 in connection with the PFS acquisition.
(3) This amount was paid to Mr. Marshall to reimburse relocation expenses and
premiums paid by the Company on behalf of Mr. Marshall for a whole life
insurance policy and annuity to which Mr. Marshall is entitled to the cash
surrender value. This program was discontinued in 1998.
(4) This amount includes discretionary cash bonuses paid by Holberg for
services provided during 1995 in connection with the acquisition of
AmeriServ.
(5) This amount reflects forgiveness of debt by the Company for relocation
assistance and premiums on a whole life insurance policy.
(6) This amount reflects employment with the Company from July through December
1997. Mr. Lane and Ms. Moog were employed by PepsiCo, Inc. prior to July of
1997.
(7) Mr. Lane and Ms. Moog were employed by PepsiCo, Inc. in 1996.
(8) This amount reflects employment with the Company from June through December
1998. Mr. Highland was employed by ProSource, Inc. prior to June of 1998.
(9) Mr. Highland was employed by ProSource, Inc. in 1997 and 1996.
(10) This amount represents perquisites paid by the Company.
(11) This represents options to purchase Class A Common Stock, par value $0.01
per share of NEHC.
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.
MANAGEMENT STOCK OPTION PLAN
In 1998 NEHC adopted its Management Stock Option Plan (the "Stock Option
Plan"). Employees and independent contractor consultants of NEHC and its
subsidiaries and affiliates as designated from time to time by NEHC's Board of
Directors, including the Company, may be granted stock options to purchase
shares of NEHC Class A Common Stock ("Options") under the Stock Option Plan. The
aggregate number of shares of NEHC Class A Common Stock that may be issued,
transferred or
46
<PAGE> 48
exercised or exercised pursuant under the Stock Option Plan is 1,000,000 shares
(subject to certain adjustments). The Stock Option Plan is administered by
NEHC's Board.
The NEHC Board has the ability to determine, among other things, which
individuals will be granted Options pursuant to the Stock Option Plan, the
number of shares of NEHC Class A Common Stock that will be subject to each
Option grant and the other terms and provisions of each Option. Only
non-qualified stock options may be granted under the Stock Option Plan. The
purchase price for Options will be the fair market value of the NEHC Class A
Common Stock on the date of grant unless the NEHC Board provides otherwise at
the time of grant.
The vesting period of each Option is determined by the NEHC Board at the
time of grant; provided that, unless the NEHC Board determines otherwise at the
time of grant, each then outstanding Option shall become vested as to one-half
of its then unvested shares upon the completion of an Initial Public Offering.
An Initial Public Offering is defined as sale of NEHC common stock pursuant to a
registration under the Securities Act where at least 25% of the outstanding
common stock of NEHC becomes publicly traded or NEHC common stock with a market
value of at least $100 million becomes publicly traded or any other sale of NEHC
common stock the which NEHC Board determines qualifies as an Initial Public
Offering.
Each Option terminates the earlier of the option holder's termination of
employment for cause, 90 days after the option holder's termination of
employment for other than cause or ten years after the original grant of the
Option. NEHC retains the right to purchase shares originally acquired as a
result of Option exercise at the then determined fair market value thereof at
any time after the option holder's termination of employment and before the
earlier of the first anniversary of such termination or the date of an Initial
Public Offering. Such shares may also be purchased by the NEHC at any time
within 30 days after a sale of NEHC at the price per share established by such
sale.
The table below sets forth information concerning grants of stock options
for shares of Class A Common Stock, par value $0.01 per share, of NEHC (the
"NEHC Class A Common Stock") made to each of the Named Executive Officers during
1998. No grants of stock options occurred prior to 1998.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ---------- ------------ -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John V. Holten.................. -- -- -- -- -- --
Raymond E. Marshall............. -- -- -- -- -- --
Kenneth R. Lane................. 45,660(1) 10.4% $32.85 5/20/08 $943,299 $2,390,504
Diana M. Moog................... 45,660(2) 10.4% $32.85 5/20/08 $943,299 $2,390,504
Thomas C. Highland.............. -- -- -- -- -- --
</TABLE>
- ------------------------------
(1) These options may be surrendered at Mr. Lane's option at any time for an
amount equal to $300,000. If Mr. Lane exercises his right to receive cash in
lieu of his options within 30 days of an Initial Public Offering, he will
receive interest on the $300,000 at the rate of 10% per annum from March 1,
1999.
(2) These options may be surrendered at Ms. Moog's option at any time for an
amount equal to $450,000. If Ms. Moog exercises her right to receive cash in
lieu of her options within 30 days of an Initial Public Offering, she will
receive interest on the $450,000 at the rate of 10% per annum from March 1,
1999.
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<PAGE> 49
The table below sets forth information concerning each exercise of options
for NEHC Class A Common Stock during 1998 by the Named Executive Officers, the
number of exercisable and unexercisable options for NEHC Class A Common Stock
held by them and the fiscal year-end value of such exercisable and unexercisable
options.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-
UNEXPECTED THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR-END(#) YEAR-END($)
SHARES ----------------- -----------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
- ---- ----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
John V. Holten....................... -- -- -- --
Raymond E. Marshall.................. -- -- -- --
Kenneth R. Lane...................... -- -- 0/45,660 --
Diana M. Moog........................ -- -- 0/45,660 --
Thomas C. Highland................... -- -- -- --
</TABLE>
- ------------------------------
(1) Underlying shares of NEHC Class A Common Stock are not publicly traded and
are subject to repurchase upon termination of employment with the Company
and in other circumstances; therefore, options have not been categorized as
"in-the-money." There has been no determination of fair market value of the
NEHC Class A Common Stock since the valuation made in connection with the
original grant of these options.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In 1998 the Company established its Supplemental Executive Retirement Plan
(the "SERP"). Officers and senior management employees of the Company who are
selected by the SERP administrator are participants in the SERP until
termination of employment or termination of their participation by such
administrator. Participants currently include the Named Executive Officers.
Under the SERP, each participant is allocated at December 31 of each year
while employed by the Company, five percent (or more as determined by the SERP
administrator) of such participant's salary and regular annual performance
bonus. In addition, each participant is allocated an investment credit equal to
the participant's SERP account balance multiplied by the announced base rate of
Bank of America, N.A., accrued and compounded semi-annually during the plan
year.
A participant is 100% vested in the participant's SERP benefit after five
years of employment. A vested participant (or such participant's beneficiaries)
receives a lump sum payment of the applicable SERP amount upon retirement,
termination (other than for cause), disability (as defined in the SERP) or
death. No SERP benefit is paid to a participant who is terminated for cause or
terminates employment for any reason (other than disability) prior to the five
year vesting period.
DIRECTOR COMPENSATION
Directors of NEHC do not receive compensation for serving on NEHC's Board
of Directors or any committee thereof. Leif F. Onarheim is paid $20,000 per year
to serve as a director of the Company and is a member of the Audit Committee of
AmeriServe and NEHC. Mr. Crippen has a consulting and non-competition agreement
with the Company for which he is paid $150,000 per year. This agreement expires
on July 15, 2000. Mr. Parker has a consulting and non-competition agreement with
the Company for which he is paid $576,000 per year. This agreement expires on
July 1, 2000.
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<PAGE> 50
COMPENSATION COMMITTEE
The members of the Company's Compensation Committee are Gunnar E. Klintberg
and Peter T. Grauer.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Mr. Marshall's current employment agreement with the Company provides for a
two year term, scheduled to lapse on January 1, 2001, with default annual
renewals, and an annual base salary of $350,000, subject to an annual merit
increase review, plus an annual bonus to be determined by the Compensation
Committee of the Board of Directors, 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.
Ms. Moog's current employment agreement with the Company provides for a
three year term, scheduled to lapse on July 11, 2000, with a default two year
renewal, and an annual base salary of $300,000, subject to an annual merit
increase review, plus an annual bonus to be determined by the Compensation
Committee of the Board of Directors, plus participation in any employee benefit
plans sponsored by the Company. Ms. Moog 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, Ms. Moog agrees not to render services to, or have any ownership
interest in, any business which is competitive with the Company. Ms. Moog's
employment agreement does not contain any change of control provisions.
Mr. Lane's current employment agreement with the Company provides for a
three year term, scheduled to lapse on July 11, 2000, with a default two year
renewal, and an annual base salary of $300,000, subject to an annual merit
increase review, plus an annual bonus to be determined by the Compensation
Committee of the Board of Directors, plus participation in any employee benefit
plans sponsored by the Company. Mr. Lane 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. Lane agrees not to render services to, or have any ownership
interest in, any business which is competitive with the Company. Mr. Lane's
employment agreement does not contain any change of control provisions.
Mr. Highland's current employment agreement with the Company provides for a
three year term, scheduled to lapse on July 1, 2001, with a default annual
renewal, and an annual base salary of $475,000, subject to an annual merit
increase review, plus an annual bonus to be determined by the Compensation
Committee of the Board of Directors, plus participation in any employee benefit
plans sponsored by the Company. Mr. Highland 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. Highland agrees not to render services to, or have any
ownership interest in, any business which is competitive with the Company. Mr.
Highland's employment agreement does not contain any change of control
provisions.
49
<PAGE> 51
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 24, 1999,
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 OF SHARES
NAME AND ADDRESS AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP OUTSTANDING
- ---------------- ----------------------------------------- -----------------
<S> <C> <C>
NED....................................... 8,241,000 shares of 100%(+)
Class B Common Stock
Orkla..................................... (1)
DLJ Merchant Banking Partners, L.P. and
certain of its affiliates ("DLJMB")..... Warrants to purchase 3,910,000 shares of 30%(++)
Class B Common Stock
Holberg................................... Warrants to purchase 753,300 shares of 6%(++)
Class B Common Stock
John V. Holten............................ (2)
Daniel W. Crippen......................... (3)
Peter T. Grauer........................... (4)
Benoit Jamar.............................. (4)
Gunnar E. Klintberg....................... (5)
Raymond E. Marshall....................... (6)
Leif F. Onarheim.......................... (7)
</TABLE>
- ------------------------------
(+) Computed with respect to the currently outstanding shares of Class B
Common Stock of NEHC (the "Class B Common Stock") without taking into
account any options or convertible interests of NEHC.
(++) Computed with respect to the currently outstanding shares of 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 753,300 shares of the Class B 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 34% of the outstanding common stock of Holberg
(which itself owns the balance of the common stock of NED not owned
directly by Orkla. The warrants described in this note have been computed
based upon the outstanding common shares of NED, without taking into
account any options or convertible interests of NED. 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.
(2) Mr. Holten owns all of the outstanding common stock of Incorporated,
corporate parent of Holberg, which entity owns approximately 66% of the
outstanding common stock of Holberg. 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 NED, without taking
into account any options or convertible interests of NED.
50
<PAGE> 52
(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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DLJMB, an affiliate of DLJSC, and certain of its affiliates beneficially
own approximately 30% (subject to adjustment as defined in agreement) of the
common stock of NEHC through warrants. 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 (see Note 7 to the historical
financial statements of NEHC included elsewhere herein) for which it received
certain customary fees and expenses.
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, DLJSC received a merger
advisory fee of $3.25 million in cash from the Company upon consummation of the
ProSource Acquisition.
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 as of 1997. In addition, in connection with the ProSource
Acquisition, Holberg received a merger advisory fee of $3.25 million from the
Company, upon consummation of the ProSource acquisition.
51
<PAGE> 53
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 at that date, 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 B Common Stock, to affiliates
of DLJSC. On January 6, 1998, Holberg purchased from DLJ Merchant Banking
Partners II, L.P. and certain of its affiliates ("DLJMBII") warrants to purchase
753,300 shares of Class B 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.
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 a 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 14 to the historical financial
statements of NEHC included elsewhere herein.)
Mr. Crippen has a consulting and non-competition agreement with the Company
for which he is paid $150,000 per year. This agreement expires on July 15, 2000.
Mr. Parker has a consulting and non-competition agreement with the Company for
which he is paid $576,000 per year. This agreement expires on July 1, 2000.
See also "Plan of Distribution."
52
<PAGE> 54
DESCRIPTION OF INDEBTEDNESS
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 New Senior Discount
Notes.
The New Senior Discount Notes will mature on July 15, 2007. No cash
interest is payable on the New Senior Discount Notes prior to January 15, 2003.
Interest on the New 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 New 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 New 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 New Senior Discount Notes may not be redeemed by NEHC until July 15,
2002. Thereafter, the New Senior Discount Notes may be prepaid with a premium
that declines each year until July 15, 2005 when the New 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 New
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
Company's 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 New 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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<PAGE> 55
8% SENIOR CONVERTIBLE PREFERRED STOCK
The 8% 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, substantially 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"), (iii) a group of banks and/or (iv)
individual private investors (all of the foregoing, collectively, referred to as
the "Purchasers").
The Accounts Receivable Program initially provided up to $225 million of
proceeds. During 1998, the Company received additional proceeds of $220 million
primarily as a result of the addition of ProSource trade accounts receivable (in
May) and the completion of a restructuring of the Program and implementation of
additional reporting requirements (in July). Transactions completed in December
1998 were designed primarily to refinance a substantial portion of the
bank-funded Trust certificates that supported the proceeds previously received
by the Company. The transactions, which also resulted in additional financing
capacity under the Program, included a $280 million Rule 144A private placement
of a three-year asset backed security and the establishment of a bank-funded,
three-year variable funding certificate of up to $100 million.
After these transactions, the Program provides up to $485 million in
capacity, depending on accounts receivable levels. Because of the linkage to
accounts receivable levels, the availability at December 26, 1998 was $445
million, all of which the Company had received in proceeds as of that date. The
proceeds reflected $653 million of accounts receivable sold less Funding's
undivided interest in the assets of the Trust of $208 million.
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 Purchasers' 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 Purchasers from time to
time for undivided interests in the Receivables in the Trust, reduced by the
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aggregate amount of distributions made to the Purchasers on account of
principal. As of December 26, 1998, the Banks' yield was 6.40%.
A non-usage fee of 3/8 of 1% per annum on a daily average of (i) the
aggregate commitments of the Purchasers under the Accounts Receivable Program
minus (ii) the Invested Amount is payable by AmeriServe Funding monthly in
arrears.
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
In May 1998, the Company entered into an amended credit agreement with a
group of financial institutions that provides for a credit facility, expiring in
2003, of up to $220 million (the "Credit Facility"). The amended credit facility
replaces the previous $150 million revolving credit facility. Interest rates on
borrowings under the facility are indexed to certain key variable rates plus an
additional spread based on certain financial ratios. Availability under the
facility is based on levels of the Company's inventories of food and paper
products and supplies. A commitment fee of up to .50% per annum is payable on
the unused portion of the facility. The availability under the credit facility
at December 26, 1998 was $151.2 million, against which borrowings were $4.0
million (at an 8.5% interest rate) and outstanding letters of credit totaled
$35.9 million. Day-to-day cash flows can result in significant fluctuations in
the amount of borrowings under the facility. In late March 1999, an amendment to
the credit facility was completed that allows the Company up to $30 million in
letters of credit before usage of the facility is impacted, resulting in
additional current liquidity in this amount.
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
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exceptions, NEHC, the Company and its subsidiaries are prohibited from pledging
any of their assets other than under the credit facility agreements.
Under the credit facility, a letter of credit fee is assessed 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 assessed 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 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; 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 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 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
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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 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 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
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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 NEW NOTES
General
The New Notes are issued pursuant to the Senior Discount Notes Indenture.
The terms of the New Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). 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 Senior Discount Notes Indenture, including the
definitions therein of certain terms used below. Copies of the Indenture are
available as set forth below under "-- Additional Information." The definitions
of certain terms used in the following summary are set forth below under
"-- Certain Definitions."
The New 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 New 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."
Principal, Maturity and Interest
The New Notes are limited in aggregate principal amount to $100,387,000 at
maturity and will mature on July 15, 2007. No cash interest will be payable on
the New Notes prior to January 15, 2003. Interest on the New 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. Interest on the New
Notes accrues from the most recent date to which interest has been paid or, if
no interest has been paid, from January 15, 2003. Interest is 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 New Notes is 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 New Notes at
their respective addresses set forth in the register of holders of New Notes;
provided that all payments of principal, premium and Liquidated Damages, if any,
and interest with respect to New Notes the holders of which have given wire
transfer instructions to NEHC are 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 is the
office of the Trustee maintained for such purpose. The New Notes are issued in
denominations of $1,000 and integral multiples thereof.
Optional Redemption
The New Notes will not be redeemable at NEHC's option prior to July 15,
2002. Thereafter, the New Notes 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 any, to the applicable redemption date, if redeemed during the
twelve-month period beginning on July 15 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE
YEAR ----------
<S> <C>
2002........................................................ 106.188%
2003........................................................ 104.125%
2004........................................................ 102.063%
2005 and thereafter......................................... 100.000%
</TABLE>
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Notwithstanding the foregoing, at any time NEHC may redeem the New Notes,
in whole but not in part, at the option of NEHC, at a redemption price of
112.375% of the Accreted Value (determined at the date of redemption), with the
net cash proceeds of a Public Equity Offering; provided that such redemption
shall occur within 45 days of the date of the closing of such Public Equity
Offering.
Selection and Notice
If less than all of the New Notes are to be redeemed at any time, selection
of New Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
New Notes are listed, or, if the New Notes 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 New Notes 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 New Notes to be redeemed at
its registered address. Notices of redemption may not be conditional. If any New
Note is to be redeemed in part only, the notice of redemption that relates to
such New Note shall state the portion of the principal amount thereof to be
redeemed. A new New Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original New Note. New Notes called for redemption become due on the date
fixed for redemption. On and after the redemption date, interest ceases to
accrue on New Notes 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 New Notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each holder of New Notes 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 New Notes pursuant to the offer
described below (as used in this section, the "Change of Control Offer") at an
offer price in cash equal to 101% of the Accreted Value thereof on the date of
purchase (if such date of purchase is prior to July 15, 2002) or 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of purchase (if such date of
purchase is on or after July 15, 2002) (as used in this section, 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 New Notes 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 (as used in this
section, the "Change of Control Payment Date"), pursuant to the procedures
required by the 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 New Notes 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 New Notes or portions thereof properly tendered pursuant
to the Change of Control Offer, (2) deposit with the Paying Agent an amount
equal to the Change of Control Payment in respect of all New Notes or portions
thereof so tendered and (3) deliver or cause to be delivered to the Trustee the
New Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of New Notes or portions thereof being purchased by
NEHC. The Paying Agent will promptly mail to each holder of New Notes so
tendered the Change of Control Payment for such New Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each holder a new New Note equal in principal amount to any unpurchased portion
of the Notes surrendered, if any; provided that each such new New Note will be
in a principal amount of $1,000 or an integral multiple thereof. NEHC will
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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 certain indebtedness of
NEHC's Subsidiaries and the existence of a Change of Control event of default in
the Credit Facility, it is unlikely that NEHC would be able to repurchase all of
the New Notes upon the occurrence of a Change of Control. See "Risk
Factors -- Change of Control." In addition, the New Notes will rank pari passu
in right of payment with other senior Indebtedness of NEHC. The ability of NEHC
to redeem all of the New Notes 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 New Notes 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 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 New
Notes, as well as restricting the ability of NEHC to obtain additional financing
in the future.
The Change of Control provisions described above are applicable whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the holders of the New Notes to require that NEHC
repurchase or redeem the New Notes 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
Indenture applicable to a Change of Control Offer made by NEHC and purchases all
New Notes 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 that phrase under applicable law.
Accordingly, the ability of a Holder of New Notes to require NEHC to repurchase
such New Notes 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 Indenture 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 New Notes 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 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.
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Pending the final application of any such Net Proceeds, NEHC may invest such Net
Proceeds in any manner that is not prohibited by the 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 New Notes (as used in this section,
an "Asset Sale Offer") to purchase the maximum principal amount of New Notes
that may be purchased out of the Excess Proceeds, at an offer price in cash in
an amount equal to 100% of the Accreted Value thereof on the date of purchase
(if such date of purchase is prior to July 15, 2002) or 100% of the principal
amount thereof plus accrued and unpaid interest and Liquidated Damages thereon,
if any, to the date of purchase (if such date of purchase is on or after July
15, 2002), in each case in accordance with the procedures set forth in the
Indenture. To the extent that the aggregate amount of New Notes 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 New Notes surrendered by holders thereof exceeds the amount
of Excess Proceeds, the Trustee shall select the New Notes 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 Indenture provides that, from and after the date of the 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 New Notes
(other than the Notes), except a payment of interest or principal at Stated
Maturity; or (iv) make any Restricted Investment (as used in this section, 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
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by NEHC and its Subsidiaries after the date
of the Indenture (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
date of the Indenture 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 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
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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 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 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
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 its Restricted Subsidiaries') management
pursuant to any management equity subscription agreement or stock option
agreement in effect as of the date of the 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; (vi) 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; (vii) other Investments in
Unrestricted Subsidiaries having an aggregate fair market value, taken together
with all other Investments made pursuant to this clause (vii) that are at that
time outstanding, not to exceed $3.0 million; (viii) Permitted Investments; (ix)
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; (x) non-cash accretions to the liquidation value of shares of Senior
Exchangeable Preferred Stock and shares of Junior Exchangeable Preferred Stock,
and any payment in kind dividends with respect to any of the foregoing; (xi) any
exchange of shares of Senior Exchangeable Preferred Stock and Junior
Exchangeable Preferred Stock for 13 1/2% Subordinated Exchange Debentures due
2009, or 15% Subordinated Exchange Debentures due 2009, as the case may be,
pursuant to the terms of the Senior Exchangeable Preferred Stock or Junior
Exchangeable Preferred Stock, as the case may be; or (xii) 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 the Company 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
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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
Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture 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 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 1.0, 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 Credit Facility; provided that the aggregate
principal amount of all term Indebtedness outstanding under the Credit
Facility after giving effect to such incurrence does not exceed the
aggregate amount of term Indebtedness borrowed under the Credit Facility on
July 11, 1997 less the aggregate amount of all repayments, optional or
mandatory, of the principal of any term Indebtedness under the Credit
Facility (other than repayments that are immediately reborrowed) that have
been made since July 11, 1997; provided that the foregoing proviso shall
not limit the principal amount of Permitted Refinancing Indebtedness that
may be incurred to refund, refinance or replace any Indebtedness incurred
pursuant to this clause (i);
(ii) the incurrence by the Restricted Subsidiaries of NEHC of
revolving Indebtedness and letters of credit pursuant to the Credit
Facility; provided that the aggregate principal amount of all revolving
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 Credit Facility
after giving effect to such incurrence does not exceed $150.0 million;
provided that the foregoing proviso shall not limit the principal amount of
Permitted Refinancing Indebtedness that may be 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 and its Restricted Subsidiaries of
Indebtedness represented by the New Notes, the New Senior Subordinated
Notes and the New Senior Subordinated Note Guarantees;
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(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 $150.0 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 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 New Notes 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 this 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 to a Subsidiary, other than
guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or a
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Subsidiary for the purpose of 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) any incurrence of Indebtedness permitted by clause (xi) of the
exceptions to the covenant described above under the caption "-- Restricted
Payments";
(xvii) guarantees incurred in the ordinary course of business in an
aggregate principal amount not to exceed $7.0 million at any time
outstanding; and
(xviii) the incurrence by NEHC or any of its Restricted Subsidiaries
of additional Indebtedness, including Attributable Debt incurred after the
date of the 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 (xviii), 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 (xviii) 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.
Liens
The Indenture provides 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 trade payables or
Indebtedness of NEHC that is subordinate to or pari passu with the Notes (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 Indenture 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 July 11, 1997, (b) the Credit Facility as in effect as of July 11,
1997, and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided that
such amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements 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 Credit
Facility as in effect on July 11, 1997, (c) the Indenture and the New Notes, (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
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terms of the 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 Indenture 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 New Notes and the 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 Indenture 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 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
standing; provided that the following shall not be deemed Affiliate
Transactions: (p) any transaction permitted by the Amended and Restated
Investors Agreement dated on or about July 11, 1997,
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as the same may be from time to time amended, provided that no such amendment
materially affects the Notes, (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 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 consultants
of NEHC or any of its Restricted Subsidiaries, (u) annual management fees paid
to Holberg not to exceed $5.0 million in any one year, (v) transactions pursuant
to any contract or agreement in effect on the date of the 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 the 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 Donaldson, Lufkin & Jenrette
Securities Corporation or its Affiliates ("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 Indenture 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, and may permit its Restricted Subsidiaries to, 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, to the
extent it receives the proceeds of such transactions, 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 Indenture provides 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 Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any New Notes are outstanding, NEHC
will furnish to the holders of Notes (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 New Notes 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 Indenture provides 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 New Notes (whether or not prohibited by
the subordination provisions of the Indenture); (ii) default in payment when due
of the principal of or premium, if any, on the New Notes (whether or not
prohibited by the subordination provisions of the 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 New Notes 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 New Notes then outstanding to comply with any of its other
agreements in the Indenture or the New Notes; (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 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 (as used in this section, 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 New Notes
may declare all the New Notes to be due and payable immediately. Upon such
declaration, the principal of (or, if prior to July 15, 2002, the Accreted Value
of), premium, if any, and accrued and unpaid interest on the New Notes shall be
due and payable
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immediately. 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 New Notes will become due and payable
without further action or notice. Holders of the New Notes may not enforce the
Indenture or the New Notes except as provided in the Indenture. Subject to
certain limitations, holders of a majority in principal amount of the then
outstanding New Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from holders of the New Notes 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 New Notes pursuant to the optional
redemption provisions of the Indenture, an equivalent premium shall also become
and be immediately due and payable to the extent permitted by law upon the
acceleration of the New Notes. If an Event of Default occurs prior to July 15,
2002 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 New Notes prior to July 15, 2002, then the premium specified in the
Indenture shall also become immediately due and payable to the extent permitted
by law upon the acceleration of the New Notes.
The holders of a majority in aggregate principal amount of the New Notes
then outstanding by notice to the Trustee may on behalf of the holders of all of
the New Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of interest on, or the principal of, the New Notes.
NEHC is required to deliver to the Trustee annually a statement regarding
compliance with the 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 New Notes,
the Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of New Notes by accepting a New Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the New Notes. 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 New Notes (as used in
this section, "Legal Defeasance") except for (i) the rights of holders of
outstanding New Notes to receive payments in respect of the principal of,
premium and Liquidated Damages, if any, and interest on such New Notes when such
payments are due from the trust referred to below, (ii) NEHC's obligations with
respect to the New Notes concerning issuing temporary New Notes, registration of
New Notes, mutilated, destroyed, lost or stolen New Notes 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 Indenture. In addition, NEHC may, at its option and at any
time, elect to have the obligations of NEHC and the Subsidiary Guarantors
released with respect to certain covenants that are described in the Indenture
(as used in this section, "Covenant Defeasance") and thereafter any omission to
comply with such obligations shall not constitute a Default or Event of Default
with respect to the New Notes. 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 New Notes.
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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 New Notes, 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 New Notes on the stated maturity or on the applicable redemption
date, as the case may be, and NEHC must specify whether the New Notes 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 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 New Notes 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 New Notes 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 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 New Notes 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 New Notes in accordance with the
Indenture. The Registrar 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
Indenture. NEHC is not required to transfer or exchange any New Note selected
for redemption. Also, NEHC is not required to transfer or exchange any New Note
for a period of 15 days before a selection of New Notes to be redeemed.
The registered holder of a New Note 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 Indenture or
the New Notes may be amended or supplemented with the consent of the holders of
at least a majority in principal amount of the New Notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, New Notes), and any existing default
or compliance with any provision of the Indenture or the New Notes may be waived
with the consent of the holders of a
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majority in principal amount of the then outstanding New Notes (including
consents obtained in connection with a tender offer or exchange offer for New
Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any New Notes held by a non-consenting holder): (i) reduce the
principal amount of New Notes whose holders must consent to an amendment,
supplement or waiver; (ii) reduce the principal of or change the fixed maturity
of any New Note or alter the provisions with respect to the redemption of the
New Notes (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 New Note; (iv) waive a Default
or Event of Default in the payment of principal of or premium, if any, or
interest on the New Notes (except a rescission of acceleration of the New Notes
by the holders of at least a majority in aggregate principal amount of the New
Notes and a waiver of the payment default that resulted from such acceleration);
(v) make any New Note payable in money other than that stated in the New Notes;
(vi) make any change in the provisions of the Indenture relating to waivers of
past Defaults or the rights of holders of New Notes to receive payments of
principal of or premium, if any, or interest on the New Notes; (vii) waive a
redemption payment with respect to any New Note (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.
Notwithstanding the foregoing, without the consent of any holder of New
Notes, NEHC and the Trustee may amend or supplement the Indenture or the New
Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated New Notes in addition to or in place of certificated New Notes,
to provide for the assumption of NEHC's obligations to holders of New Notes in
the case of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the holders of New Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, or to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
Concerning the Trustee
The 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.
The holders of a majority in principal amount of the then outstanding New
Notes 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 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 Indenture at the
request of any Holder of New Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
Additional Information
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to NEHC, 545 Steamboat Road, Greenwich, Connecticut
06830; Attention: Secretary.
Book-Entry, Delivery and Form
The New Notes are represented by one or more fully-registered global notes
without interest coupons (collectively, "Global New Notes"). The Global New Note
is deposited upon issuance with The Depository Trust Company ("DTC"), in New
York, New York, and is 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.
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Except as set forth below, the Global New Note 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 Notes for Certificated Notes."
The New Notes 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 Notes, DTC will credit the accounts of
Participants designated by the Initial Purchaser with portions of the principal
amount of Global New Notes and (ii) ownership of such interests in the Global
New Notes 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 Notes).
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NEW NOTES DO
NOT HAVE NEW NOTES REGISTERED IN THEIR NAMES, DO NOT RECEIVE PHYSICAL DELIVERY
OF NEW NOTES IN CERTIFICATED FORM AND ARE NOT CONSIDERED THE REGISTERED OWNERS
OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal and premium and Liquidated Damages, if
any, and interest on a Global New Note registered in the name of DTC or its
nominee are payable by the Trustee to DTC or its nominee in its capacity as the
registered holder under the Indenture. Under the terms of the Indenture, NEHC
and the Trustee will treat the persons in whose names the New Notes, including
the Global New Notes, 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 Trustee nor any agent of NEHC or the 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 Notes, 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 Notes 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 Notes (including principal and
interest), 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 Notes as shown on the records of DTC. Payments by
Participants and the Indirect Participants to the beneficial owners of New Notes
are governed by standing instructions and customary practices and are not the
responsibility of DTC, the Trustee or NEHC. Neither NEHC nor the Trustee is
liable for any delay by DTC or its Participants in identifying the beneficial
owners of the New Notes, and NEHC and the Trustee may
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conclusively rely on and will be protected in relying on instructions from DTC
or its nominee as the registered owner of the New Notes for all purposes.
DTC has advised NEHC that it will take any action permitted to be taken by
a holder of New Notes only at the direction of one or more Participants to whose
account DTC interests in the Global New Notes are credited and only in respect
of such portion of the aggregate principal amount of the New Notes as to which
such Participant or Participants have given direction. However, if there is an
Event of Default under the New Notes, DTC reserves the right to exchange Global
New Notes for legended New Notes in certificated form, and to distribute such
New Notes 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 Notes 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 Notes for Certificated New Notes
A Global New Note is exchangeable for definitive New Notes in registered
certificated form if (i) DTC (x) notifies NEHC that it is unwilling or unable to
continue as depositary for the Global New Note 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
Trustee in writing that it elects to cause the issuance of the New Notes 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 Notes. In addition,
beneficial interests in a Global New Note may be exchanged for certificated New
Notes upon request but only upon at least 20 days' prior written notice given to
the Trustee by or on behalf of DTC in accordance with customary procedures. In
all cases, certificated New Notes delivered in exchange for any Global New Note
or beneficial interest therein are registered in the names, and issued in any
approved denominations, requested by or on behalf of the depositary (in
accordance with its customary procedures).
A New Note in definitive form will be issued upon the resale, pledge or
other transfer of any New Note or interest therein to any person or entity that
does not participate in the Depository. Transfers of certificated New Notes may
be made only by presentation of New Notes, duly endorsed, to the Trustees for
registration of transfer on the Note Register maintained by the Trustees 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 Notes
Subject to certain conditions, any person having a beneficial interest in
the Global New Note may, upon request to the Trustee, exchange such beneficial
interest for New Notes in the form of Certificated New Notes. Upon any such
issuance, the Trustee is required to register such Certificated New Notes 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 Trustee 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 Trustee in writing that it elects to cause the issuance
of New Notes in the form of Certificated New Notes under the Indenture, then,
upon surrender by the Global New Note holder of its Global New Note, New Notes
in such form will be issued to each person that the Global New Note Holder and
the DTC identify as being the beneficial owner of the related Notes.
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Neither NEHC nor the Trustee is liable for any delay by the Global New Note
holder or the DTC in identifying the beneficial owners of New Notes and NEHC and
the Trustee may conclusively rely on, and is protected in relying on,
instructions from the Global New Note holder or the DTC for all purposes.
Same Day Settlement and Payment
The Indenture requires that payments in respect of the New Notes
represented by the Global New Note (including 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 Note
Holder. With respect to Certificated New Notes, NEHC will make all payments of
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 Notes will also be settled in immediately available funds.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Accreted Value" means, for each $1,000 face amount of New Notes, as of any
date of determination prior to July 15, 2002, the sum of (i) the initial
offering price of each New Note and (ii) that portion of the excess of the
principal amount of each New Note over such initial offering price which shall
have been accreted thereon through such date, such amount to be so accreted on a
daily basis and compounded semi-annually on each July 15 and January 15 at the
rate of 12 3/8% per annum from the date of issuance of the Notes through the
date of determination.
"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 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
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(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 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 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
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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 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 accordance with Article 11 of Regulation S-X under
the Securities Act and 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 caption
"Incurrence of Indebtedness and Issuance of Preferred Stock" and shall be
included for purposes of the covenant described under the caption "Restricted
Payments" only to the extent of the amount of dividends or distributions paid in
cash to NEHC or one of its Restricted Securities.
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"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and (z)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"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 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 Credit Facility, or any successor thereto or
any person otherwise appointed.
"Credit Facility" means that certain Credit Facility, dated as of the date
of the Indenture, as amended, by and among AmeriServe and Bank of America,
providing for up to $220 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.
"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.
"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 New Notes 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 New Notes.
"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 Credit Facility) in existence on the date of
the 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), (ii) the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period, (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
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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 (as used in this section,
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, (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 Indenture.
"Global Notes" means the Rule 144A Global Note, the Regulation S Temporary
Global Notes and the Regulation S Permanent Global Notes.
"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 bankers' 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
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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."
"Junior Exchangeable Preferred Stock" means the 15% Junior Exchangeable
Preferred Stock Due 2009 of NEHC.
"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 reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
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"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 New Notes
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 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 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
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.
"Permitted Liens" means (i) Liens securing Indebtedness under the Credit
Facility that was permitted by the terms of the 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 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.
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"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 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 New
Notes, 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
New Notes on terms at least as favorable to the holders of New Notes 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, ASA.
Nebco Evans Distributors, Inc., DLJ Merchant Banking, L.P., DLJ International
Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc.,
DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking Partners II-A,
L.P., DLJ Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJ
Diversified Partners -- A, L.P., DLJ Millennium Partners, L.P., DLJ Millennium
Partners -- A, L.P., DLJMB Funding II, Inc., DLJ First ESC LLC, DLJ EAB
Partners, L.P. and UK Investment Plan 1997 Partners.
"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.
"Regulation S" means Regulation S promulgated under the Securities Act.
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"Regulation S Global Notes" means the Regulation S Temporary Global Notes
or the Regulation S Permanent Global Notes as applicable.
"Regulation S Permanent Global Notes" means the permanent global notes that
are deposited with and registered in the name of the Depository or its nominee,
representing a series of Notes sold in reliance on Regulation S.
"Regulation S Temporary Global Notes" means the temporary global notes that
are deposited with and registered in the name of the Depositary or its nominee,
representing a series of Notes sold in reliance on Regulation S.
"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) any 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.
"Rule 144A" means Rule 144A promulgated under the Securities Act.
"Rule 144A Global Note" means a permanent global note that is deposited
with and registered in the name of the Depository or its nominee, representing a
series of Notes sold in reliance on Rule 144A.
"Senior Exchangeable Preferred Stock" means the 13 1/2% Senior Exchangeable
Preferred Stock Due 2009 of NEHC.
"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).
"Subsidiary Guarantors" means all direct and indirect Restricted
Subsidiaries of the Senior Subordinated Notes.
"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
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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 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
"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 be permitted only 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.
DESCRIPTION OF NEW 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
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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 26, 1998, the Preferred Stock was
junior in right of payment to $988.2 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 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.
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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.
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
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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.
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
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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 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.
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
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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.
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 (as used in this section, 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) (as
used in this section, the "Change of Control
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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 (as used in this section,
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.
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
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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 (as used in this section, 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 (as used in
this section, 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:
(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
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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.
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.
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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 (as used in this
section, 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 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
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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
(xv) 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;
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(xvi) obligations in respect of performance and surety bonds and
completion guarantees provided by NEHC or any Restricted Subsidiary in the
ordinary course of business;
(xvii) guarantees incurred in the ordinary course of business in an
aggregate principal amount not to exceed $7.0 million at any time
outstanding; and
(xviii) 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 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.
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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, as used in
this section, 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 of NEHC, (w)
transactions between NEHC or its Restricted Subsidiaries on the one hand, and
Holberg on the other
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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
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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 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
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(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
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(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 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.
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"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.
"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 (as used in this section,
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
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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.
"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
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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 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
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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.
"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
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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, 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.
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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. 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
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 26, 1998, the Exchange Debentures were
subordinate to approximately $988.2 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
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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 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
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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 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 (as used in this section, the
"Change of Control Offer") at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus
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accrued and unpaid interest and Liquidated Damages thereon, if any, to the date
of purchase (as used in this section, 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 (as used in this section, 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, (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,
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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 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 (as used in this
section, 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
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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 in this
section 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
(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
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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 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 1.0, 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.
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The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (as used in this
section, 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;
(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;
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(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 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.
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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 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
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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 (as used in this section, 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 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.
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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.
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
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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 (as used
in this section, 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 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
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(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 (as
used in this section, "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 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 (as used in this section, "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
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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 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
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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.
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
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"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.
"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
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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 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,
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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 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
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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 (as used in this section,
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.
"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
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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 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, as amended, by and among AmeriServe and Bank of America, providing for
up to $220 million of revolving credit
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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.
"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
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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 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.
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"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.
"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;
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(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.
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
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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 (as used in this section,
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 (as used in this section,
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, 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.
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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).
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
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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.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
NEHC and the Initial Purchaser have entered into the Registration Rights
Agreement, pursuant to which NEHC has agreed to file with the Commission the
Exchange Offer Registration Statement on the appropriate form under the
Securities Act with respect to the New Preferred Stock. If (i) NEHC is not
required to file the Exchange Offer Registration Statement or permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any holder of Transfer Restricted
Securities notifies NEHC prior to the 20th day following consummation of the
Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the New
Preferred Stock or the New Exchange Debentures, as the case may be, acquired by
it in the Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (C) that it is a broker-dealer and
owns Preferred Stock or Exchange Debentures acquired directly from NEHC or an
affiliate of NEHC, NEHC will file with the Commission a Shelf Registration
Statement to cover resales of the Old Preferred Stock or the Exchange Debentures
by the holders thereof who satisfy certain conditions relating to the provision
of Information in connection with the Shelf
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Registration Statement. NEHC will use its best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
Commission. For purposes of the foregoing, "Transfer Restricted Securities"
means each share of Preferred Stock or Exchange Debenture, as the case may be,
until (i) the date on which such security has been exchanged by a person other
than a broker-dealer for New Preferred Stock or New Exchange Debentures, as the
case may be, in the Exchange Offer, (ii) following the exchange by a
broker-dealer in the Exchange Offer of a share of Old Preferred Stock or
Exchange Debenture, as the case may be, for New Preferred or New Exchange
Debentures, as the case may be, the date on which such new security is sold to a
purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of the prospectus contained in the Exchange Offer Registration
Statement, (iii) the date on which such security has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iv) the date on which such security is distributed to
the public pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) NEHC will file an
Exchange Offer Registration Statement with the Commission on or prior to 60 days
after the Closing Date, (ii) NEHC will use its best efforts to have the Exchange
Offer Registration Statement declared effective by the Commission on or prior to
120 days after the Closing Date, (iii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, NEHC will commence the
Exchange Offer and use its best efforts to issue on or prior to 30 business days
after the date on which the Exchange Offer Registration Statement was declared
effective by the Commission, New Preferred Stock or New Exchange Debentures, as
applicable, in exchange for all Old Preferred Stock or Exchange Debentures
tendered prior thereto in the Exchange Offer and (iv) if obligated to file the
Shelf Registration Statement, NEHC will use its best efforts to file the Shelf
Registration Statement with the Commission on or prior to 45 days after such
filing obligation arises and to cause the Shelf Registration to be declared
effective by the Commission on or prior to 120 days after such obligation
arises. If (a) NEHC fails to file any of the Registration Statements required by
the Registration Rights Agreement on or before the date specified for such
filing, (b) any of such Registration Statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), or (c) NEHC fails to consummate the Exchange Offer
within 30 business days of the Effectiveness Target Date with respect to the
Exchange Offer Registration Statement, or (d) the Shelf Registration Statement
or the Exchange Offer Registration Statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of
Transfer Restricted Securities during the periods specified in the Registration
Rights Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then NEHC will pay Liquidated Damages to each holder of
shares of Old Preferred Stock or Exchange Debentures, with respect to the first
90-day period immediately following the occurrence of the first Registration
Default in an amount equal to $.05 per week per $1,000 in Liquidation Preference
of the shares of Old Preferred Stock or principal amount of Exchange Debentures
held by such Holder. The amount of the Liquidated Damages will increase by an
additional $.05 per week per $1,000 in Liquidation Preference of the shares of
Old Preferred Stock or principal amount of Exchange Debentures with respect to
each subsequent 90-day period until all Registration Defaults have been cured,
up to a maximum amount of Liquidated Damages of $.50 per week per $1,000 in
Liquidation Preference of the shares of Old Preferred Stock or principal amount
of Exchange Debentures. All accrued Liquidated Damages will be paid by NEHC on
each Damages Payment Date to the Global New Certificate holder by wire transfer
of immediately available funds or by federal funds check and to holders of
certificated New Securities by wire transfer to the accounts specified by them
or by mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of shares of Old Preferred Stock or Exchange Debentures, as
applicable, will be required to make certain representations to NEHC (as
described in the Registration Rights Agreement) in order to participate in the
Exchange Offer and will be required to deliver information to be used in
connection with the Shelf Registration Statement and to provide comments on the
Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their securities included in the
Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
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DESCRIPTION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES
TO HOLDERS OF NEW NOTES
The following discussion is a summary of certain U.S. federal income tax
considerations relevant to the purchase, ownership and disposition of the New
Notes by the holders thereof. This summary does not purport to be a complete
analysis of all the potential federal income tax effects relating to the
acquisition, ownership and disposition of the New Notes. There can be no
assurance that the U.S. Internal Revenue Service will take a similar view of
such consequences. Further, the discussion does not address all aspects of
taxation that may be relevant to particular purchasers in light of their
individual circumstances (including the effect of any foreign, state or local
laws) or to certain types of purchasers (including dealers in securities,
traders in securities who elect to apply a mark-to-market method of accounting,
insurance companies, financial institutions, persons that hold New Notes that
are a hedge or that are hedged against currency risks or that are part of a
straddle or conversion transaction, persons whose functional currency is not the
U.S. dollar and tax-exempt entities) subject to special treatment under U.S.
federal income tax laws. The discussion below assumes that the New Notes are
held as capital assets.
The discussion of the U.S. federal income tax consequences set forth below
is based upon currently existing provisions of the Internal Revenue Code of
1986, as amended (the "Code"), judicial decisions, and administrative
interpretations. Because individual circumstances may differ, each prospective
purchaser of the New Notes is strongly urged to consult its own tax advisor with
respect to its particular tax situation and the particular tax effects of any
state, local, non-U.S. or other tax laws and possible changes in the tax laws.
As used herein, the term "U.S. Holder" means a beneficial owner of a New
Note who or which is for U.S. federal income tax purposes either (i) a citizen
or resident of the U.S., (ii) a corporation, partnership or other entity created
or organized in or under the laws of the U.S. or of any political subdivision
thereof, (iii) an estate or trust the income of which is subject to U.S. federal
income taxation regardless of its source or (iv) a trust if a court within the
U.S. is able to exercise primary supervision over the administration of the
trust and one or more U.S. fiduciaries have the authority to control all
substantial decisions of the trust. The term also includes certain former
citizens of the U.S. whose income and gain on the New Notes will be subject to
U.S. taxation. As used herein, the term "U.S. Alien Holder" means a beneficial
owner of a New Note that is not a U.S. Holder.
ORIGINAL ISSUE DISCOUNT
The New Notes are issued with original issue discount for U.S. federal
income tax purposes. U.S. Holders holding the New Notes are required to include
original issue discount in gross income as it accrues, on a constant-yield
basis, regardless of their method of tax accounting. This means that each U.S.
Holder may be required to include amounts in gross income without a
corresponding receipt of cash attributable to such gross income. The amount of
original issue discount on the New Notes is the excess of the stated redemption
price at maturity over the issue price of the New Notes. The issue price of the
New Notes is the first price at which a substantial amount of New Notes is sold
(other than to an underwriter, placement agent or wholesaler). The stated
redemption price at maturity of a debt instrument is the total of all payments
to be made on the instrument other than payments of qualified stated interest.
Qualified stated interest includes only interest that is unconditionally payable
at least annually at a single fixed rate during the entire term of the New
Notes. None of the interest on the New Notes will be qualified stated interest,
and all of the interest payable on the New Notes will be included in the stated
redemption price at maturity.
U.S. Holders of the New Notes must include in gross income, as interest,
the daily portions of original issue discount each day during the taxable year
on which the New Notes were held. The daily portions of original issue discount
will be determined by allocating to each day in each accrual period the ratable
portion of the original issue discount allocable to that period. (The accrual
periods may be of any length and may vary in length over the term of a debt
instrument, provided that each accrual period is no
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longer than one year and each scheduled payment of interest or principal occurs
on either the final day or the first day of an accrual period.) The original
issue discount allocable to an accrual period will equal the product of the
adjusted issue price of the New Notes at the beginning of the accrual period and
the New Notes' yield to maturity (determined on the basis of compounding at the
close of each accrual period and properly adjusted for the length of the accrual
period). Original issue discount allocable to a final accrual period is the
difference between the amount payable at maturity and the adjusted issue price
at the beginning of the final accrual period. Special rules will apply for
calculating original issue discount for an initial short period. The adjusted
issue price of the New Notes at the start of any accrual period will be the
issue price of the New Notes, increased by the amount of original issue discount
that accrued in all previous accrual periods and decreased by the amount of any
payments previously made on the New Notes and any payment made on the first day
of the current accrual period. Because the U.S. Holders of the New Notes will
include original issue discount in income as it accrues, actual payments of cash
interest on the New Notes will not trigger any additional interest income to the
U.S. Holders. Under these rules, a U.S. Holder will have to include in income
increasingly greater amounts of original issue discount in successive accrual
periods. NEHC is required to provide information returns stating the amount of
original issue discount accrued on New Notes held of record by persons other
than corporations and other exempt holders.
SALE OR OTHER TAXABLE DISPOSITION OF NEW NOTES
A U.S. Holder of a New Note will have a tax basis in the New Notes equal to
such U.S. Holder's purchase price of the New Note, increased by the amount of
original issue discount on the New Note that is included in the U.S. Holder's
gross income and decreased by payments of cash interest on the New Note received
by the U.S. Holder.
A U.S. Holder of a New Note will generally recognize gain or loss on the
sale, redemption or other taxable disposition of the New Note equal to the
difference (if any) between the amount realized from such sale, redemption or
disposition and the U.S. Holder's adjusted tax basis in the New Note. Such gain
or loss will generally be long-term capital gain or loss if the New Note has
been held for more than one year.
OPTIONAL REDEMPTION; REPURCHASE AT THE OPTION OF HOLDERS
Under certain circumstances, NEHC has the right to redeem the Notes prior
to July 15, 2007. See "Description of Securities -- Description of New
Notes -- Optional Redemption." Moreover, upon a Change of Control, holders of
New Notes will have the right to require the Company to repurchase their New
Notes. See "Description of Securities -- Description of New Notes -- Repurchase
at the Option of Holders -- Change of Control."
The presence of such options may affect the calculation of original issue
discount, among other things. The relevant Treasury Regulations provide that,
solely for purposes of the accrual of original issue discount, an issuer of a
debt instrument having an option or combination of options to redeem the debt
instrument prior to its stated maturity date will be presumed to exercise such
option or options in a manner that minimizes the yield on the debt instrument.
Conversely, a holder having an option to elect repayment of the debt instrument
prior to its stated maturity date or a combination of such options will be
presumed to exercise such option or options in a manner that maximizes the yield
on the debt instrument. If the exercise of such option or options to redeem the
debt instrument prior to its stated maturity date or to elect repayment of the
debt instrument prior to its stated maturity date actually occurs or does not
occur, contrary to the presumption made under the Treasury Regulations (a
"change of circumstances"), then, solely for purposes of the accrual of original
issue discount, the debt instrument is treated as reissued on the date of the
change in circumstances for an amount equal to its adjusted issue price on that
date.
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APPLICABLE HIGH-YIELD DISCOUNT OBLIGATIONS
If the New Notes are considered to have "significant original issue
discount" and if the yield of the New Notes is at least five percentage points
above the applicable federal rate, for the calendar month in which the New Notes
are issued, NEHC will not be able to deduct for tax purposes any original issue
discount accruing with respect thereto until such interest is actually paid. In
addition, in that event, if the yield of the New Notes is more than six
percentage points above the applicable federal rate, then (i) a portion of such
interest corresponding to the yield in excess of six percentage points above the
applicable federal rate will not be deductible by NEHC at any time, and (ii) a
corporate holder may be entitled to treat the interest that is not deductible as
a dividend to the extent of the earnings and profits of NEHC, which dividend may
then qualify for the dividends-received deduction. In such event, corporate
holders should consult their tax advisors concerning the availability of the
dividends-received deduction.
TAX CONSEQUENCES TO U.S. ALIEN HOLDERS
Under present U.S. federal income and estate tax law, and subject to the
discussion below concerning backup withholding:
(a) payments of principal or interest on the New Note (including
original issue discount) by the NEHC or any paying agent to a beneficial
owner of a New Note that is a U.S. Alien Holder, as defined above, will not
be subject to U.S. federal withholding tax, provided that, in the case of
interest, (i) such holder does not own, actually or constructively, 10% or
more of the total combined voting power of all classes of stock of NEHC
entitled to vote, (ii) such holder is not, for U.S. federal income tax
purposes, a controlled foreign corporation related, directly or indirectly,
to NEHC through stock ownership, (iii) such holder is not a bank receiving
interest described in Section 881(c)(3)(A) of the Code, and (iv) the
certification requirements under Section 871(h) or Section 881(c) of the
Code and Treasury Regulations thereunder (summarized below) are met;
(b) a U.S. Alien Holder of a New Note will not be subject to U.S.
federal income tax on gains realized on the sale, exchange or other
disposition of such New Note, unless (i) such holder is an individual who
is present in the U.S. for 183 days or more in the taxable year of sale,
exchange or other disposition, and certain other conditions are met; (ii)
such gain is effectively connected with the conduct by such holder of a
trade or business in the U.S. and, if certain tax treaties apply, is
attributable to a U.S. permanent establishment maintained by the U.S. Alien
Holder or (iii) the U.S. Alien Holder is subject to tax pursuant to the
Code provisions applicable to certain U.S. expatriates; and
(c) a New Note held by an individual who is not a citizen or resident
of the U.S. at the time of his death will not be subject to U.S. federal
estate tax as a result of such individual's death, provided that, at the
time of such individual's death, the individual does not own, actually or
constructively, 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote and payments with respect
to such New Note would not have been effectively connected with the conduct
by such individual of a trade or business in the U.S.
Sections 871(b) and 881(c) of the Code and currently effective Treasury
Regulations thereunder require that, in order to obtain the exemption from
withholding tax described in paragraph (a) above, either (i) the beneficial
owner of a New Note must certify, under penalties of perjury, to the Company or
paying agent, as the case may be, that such owner is a U.S. Alien Holder and
must provide such owner's name and address, and U.S. taxpayer identification
number, if any, or (ii) a securities clearing organization, bank or other
financial institution that holds customers securities in the ordinary course of
its trade or business (a "Financial Institution") and holds the New Note on
behalf of the beneficial owner thereof must certify, under penalties of perjury,
to NEHC or paying agent, as the case may be, that such certificate has been
received from the beneficial owner by it or by a Financial Institution between
it and the beneficial owner and must furnish the payor with a copy thereof. A
certificate described in this paragraph is effective only with respect to
payments of interest made to the certifying U.S. Alien Holder after delivery of
the certificate in the calendar year of its delivery and the two immediately
succeeding
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calendar years. Under currently effective U.S. Treasury Regulations, such
requirement will be fulfilled if the beneficial owner of a New Note certifies on
Internal Revenue Service Form W-8, under penalties of perjury, that it is a U.S.
Alien Holder and provides its name and address, and any Financial Institution
holding the New Note on behalf of the beneficial owner files a statement with
the withholding agent to the effect that it has received such a statement from
the beneficial owner (and furnishes the withholding agent with a copy thereof).
Treasury Regulations released on October 6, 1997 (the "New Regulations")
and effective for payments made after December 31, 1999, will provide
alternative methods for satisfying the certificate requirement described above.
The New Regulations also will require, in the case of New Notes held by a
foreign partnership, that (x) the certification be provided by the partners
rather than by the foreign partnership and (y) the partnership provide certain
information, including a United States taxpayer identification number. A
look-through rule will apply in the case of tiered partnerships.
If a U.S. Alien Holder of a New Note is engaged in a trade or business in
the U.S., and if interest on the New Note, or gain realized on the sale,
exchange or other disposition of the New Note, is effectively connected with the
conduct of such trade or business and, if certain tax treaties apply, is
attributable to a U.S. permanent establishment maintained by the U.S. Alien
Holder, the U.S. Alien Holder, although exempt from U.S. withholding tax, will
generally be subject to regular U.S. income tax on such interest or gain in the
same manner as if it were a U.S. Holder. In lieu of the certificate described in
the preceding paragraph, such a holder will be required to provide NEHC a
properly executed Internal Revenue Service Form 4224 in order to claim an
exemption from withholding tax. In addition, if such U.S. Alien Holder is a
foreign corporation, it may be subject to an additional branch profits tax equal
to 30% (or such lower rate provided by an applicable treaty) of its effectively
connected earnings and profits for the taxable year, subject to certain
adjustments. For purposes of the branch profits tax, interest on and any gain
recognized on the sale, exchange or other disposition of a New Note will be
included in the earnings and profits of such U.S. Alien Holder if such interest
or gain is effectively connected with the conduct by the U.S. Alien Holder of a
trade or business in the U.S. The New Regulations will change some of the
withholding reporting requirements described above, effective for payments made
after December 31, 1999, subject to certain grandfathering provisions.
BACKUP WITHHOLDING
Under current U.S. federal income tax law, a 31% backup withholding tax
requirement applies to certain payments of interest on, and the proceeds of a
sale, exchange or redemption of, the New Notes.
Backup withholding will generally not apply with respect to payments made
to certain exempt recipients, such as corporations or other tax-exempt entities.
In the case of a non-corporate U.S. Holder, backup withholding will apply only
if such holder (i) fails to furnish its TIN, which, for an individual, would be
his Social Security number, (ii) furnishes an incorrect TIN, (iii) is notified
by the Internal Revenue Service that it has failed to properly report payments
of interest and dividends or (iv) under certain circumstances, fails to certify,
under penalties of perjury, that it has furnished a correct TIN and has not been
notified by the Internal Revenue Service that it is subject to backup
withholding for failure to report interest and dividend payments.
In the case of a U.S. Alien Holder, under currently effective Treasury
Regulations, backup withholding will not apply to payments made by NEHC or any
paying agent thereof on a New Note if such holder has provided the required
certification under penalties of perjury that it is not a U.S. Holder (as
defined above) or has otherwise established an exemption, provided in each case
that NEHC or such paying agent, as the case may be, does not have actual
knowledge that the payee is a U.S. Holder.
Under currently effective Treasury Regulations, if payments on a New Note
are made to or through a foreign office of a custodian, nominee or other agent
acting on behalf of a beneficial owner of a New Note, such custodian, nominee or
other agent acting will not be required to apply backup withholding to such
payments made to such beneficial owner. However, under the New Regulations,
backup withholding may
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apply to payments made after December 31, 1999 if such custodian, nominee or
other agent has actual knowledge that the payee is a U.S. Holder.
Under currently effective Treasury Regulations, payments on the sale,
exchange or other disposition of a New Note made to or through a foreign office
of a broker generally will not be subject to backup withholding. However, under
the New Regulations, backup withholding may apply to payments made after
December 31, 1999 if such broker has actual knowledge that the payee is a U.S.
Holder. In the case of proceeds from a sale of a New Note by a U.S. Alien Holder
paid to or through the foreign office of a U.S. broker or a foreign office of a
foreign broker that is (i) a controlled foreign corporation for U.S. tax
purposes or (ii) a person 50% or more of whose gross income for the three-year
period ending with the close of the taxable year preceding the year of payment
(or for the part of that period that the broker has been in existence) is
effectively connected with the conduct of a trade or business within the U.S.,
information reporting is required unless the broker has documentary evidence in
its files that the payee is not a U.S. person and certain other conditions are
met, or the payee otherwise establishes an exemption. Payments to or through the
U.S. office of a broker will be subject to backup withholding and information
reporting unless the holder certifies, under penalties of perjury, that it is
not a U.S. Holder and that certain other conditions are met or otherwise
establishes an exemption.
Holders of New Notes should consult their tax advisors regarding the
application of backup withholding in their particular situations, the
availability of an exemption therefrom, and the procedure for obtaining such an
exemption, if available, and the impact of the New Regulations on payments made
with respect to New Notes after December 31, 1999. Any amounts withheld from
payment under the backup withholding rules will be allowed as a credit against a
Holder's U.S. federal income tax liability and may entitle such holder to a
refund; provided that the required information is furnished to the Internal
Revenue Service.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH PROSPECTIVE HOLDER OF NEW NOTES SHOULD CONSULT ITS OWN TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO THE PROSPECTIVE HOLDER OF THE
NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR
NON-U.S. INCOME TAX LAWS AND ANY RECENT OR PROSPECTIVE CHANGES IN APPLICABLE TAX
LAWS AND THE EFFECT OF THE NEW REGULATIONS WITH RESPECT TO PAYMENTS MADE AFTER
DECEMBER 31, 1999.
TO HOLDERS OF NEW PREFERRED STOCK
The following is a description of certain Federal income tax consequences
to the original holders of New 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, traders in
securities who elect to apply a mark-to-market method of accounting, financial
institutions, foreign persons, and persons who hold shares of New Preferred
Stock as part of a straddle, hedge or conversion transaction. Holders of New
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 New
Preferred Stock are capital assets in the hands of any holders.
Tax Treatment of Cash Distributions and Distributions of Additional Shares of
New Preferred Stock
The distribution of additional shares of New Preferred Stock ("Distribution
Shares") on the shares of New Preferred Stock sold pursuant to this Offering
will be subject to tax as described in the immediately following paragraph.
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Pursuant to Section 301(c)(1) of the Code, 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 Section 243 of the Code 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 Section 301(c) of the Code will equal
the amount of cash and the fair market value of the Distribution Shares
distributed. Pursuant to Section 301(c)(2) and (3) of the Code, 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 New Preferred Stock, and
thereafter, capital gain. Any such capital gain will be long-term capital gain
if the holder held the shares of New Preferred Stock for more than one year.
Pursuant to Section 305(c) of the Code 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 New Preferred Stock to which Section 301(c) of the Code 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 New 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 New 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 Section 305(c) of the Code 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 Section 301(c) of the
Code 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 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.
Section 1059 of the Code requires a corporate stockholder to reduce its
basis (but not below zero) in shares of New Preferred Stock by the "nontaxed
portion" of any "extraordinary dividend" if the holder has not held its New
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 Section 243 of the Code (relating to the dividends
received deduction described above). An extraordinary dividend on the New
Preferred Stock would include a dividend that (i) equals or exceeds 5% of the
holder's adjusted tax basis in the New 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 New 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
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the case of a redemption of the New Preferred Stock that is not pro rata as to
all stockholders, without regard to the period the holder held the New 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 New Preferred Stock in the year in which the extraordinary dividend is
received.
Redemption for Cash
If NEHC redeems the holder's shares of New Preferred Stock for cash, the
following would be applicable. Under the rules of Section 302 of the Code a
redemption of shares of New 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 Section 302(b)(3) of the Code), (ii) is "substantially
disproportionate" (within the meaning of Section 302(b)(2) of the Code) with
respect to the holder or (iii) is "not essentially equivalent to a dividend"
(within the meaning of Section 302(b)(1) of the Code). In determining whether
any of Section 302(b) of the Code 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 New 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 New 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. Based on a published Internal Revenue Service
ruling, the redemption of a shareholder's New 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 New 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 New Preferred Stock for Exchange Debentures is
treated as a dividend, the 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 New 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 New Preferred Stock. If neither the New
Preferred Stock nor the Exchange Debentures are regularly traded on an
established securities market, gain realized on the exchange of New Preferred
Stock for Exchange Debentures may qualify for installment-sale treatment.
If the amount received in a redemption of New 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
New Preferred Stock will be transferred to any remaining stockholdings of such
holder in NEHC. If the shareholder does not retain any stock ownership in NEHC,
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 New 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.
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Original Issue Discount
If the shares of New 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 New 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 New Preferred
Stock at the time of the exchange. If neither the New 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 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
142
<PAGE> 144
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 New 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 New
Preferred Stock will generally be equal to the 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. 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.
Applicable 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
143
<PAGE> 145
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 New 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, New 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 New 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 New 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 New 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.
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 New 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
144
<PAGE> 146
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 NEW 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 NEW 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.
PLAN OF DISTRIBUTION
This Prospectus is to be used by DLJ in connection with offers and sales of
the New Notes and 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 30% (subject to adjustment as defined in agreement) of the common
stock of NEHC through warrants. 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 Credit Facility for which it received certain customary fees
and expenses. In addition, DLJ received merger advisory fees of $4.0 million and
$3.25 million in cash from the Company in connection with the acquisitions of
PFS and ProSource, respectively. DLJ has informed NEHC that it does not intend
to confirm sales of the New Notes and 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 intends to make a market in the New Notes and 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 Notes and New Preferred Stock."
DLJ has, from time to time, provided investment banking and other financial
advisory services to 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 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 $2.2 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.
145
<PAGE> 147
LEGAL MATTERS
Certain legal matters in connection with the New Notes and New Preferred
Stock offered hereby will be passed upon for NEHC by Wachtell, Lipton, Rosen &
Katz, New York, New York.
EXPERTS
The consolidated financial statements of NEHC at December 27, 1997 and
December 26, 1998 and for each of the three years in the period ended December
26, 1998 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 26, 1998 included 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 in reliance upon such report 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 included herein and in the Registration
Statement and in reliance upon the report of KPMG LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
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 included herein and in the Registration Statement and in reliance upon
the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and in the Registration Statement and upon the authority of
said firm as experts in accounting and auditing.
146
<PAGE> 148
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Accounts Receivable Program.... 54
Affiliate Transaction.......... 67, 96, 116
AFR............................ 142
AmeriServ...................... 33
AmeriServe..................... 3
AmeriServe Funding............. 54
Asset Sale Offer............... 62, 91, 110
Bank of America NT&SA.......... 54
Base Amount.................... 55
Base Rate...................... 40
Calculation Date............... 79, 101, 125
Carrying Cost Receivables
Reserve...................... 40
Certificate of Incorporation... 17
change of circumstances........ 136
Change of Control.............. 60
Change of Control Offer........ 60, 89, 108
Change of Control Payment...... 60, 89, 109
Change of Control Payment
Date......................... 60, 90, 109
Code........................... 139
Company........................ 3, 106
Covenant Defeasance............ 70, 119
Credit Facility................ 55
DGCL........................... 86
Distribution Agreement......... 3
Distribution Shares............ 139
Dividend Payment Date.......... 86
DLJ............................ 68
DLJMBII........................ 52
DLJSC.......................... 45
DTC............................ 72
Effectiveness Target Date...... 134
Excess Proceeds................ 110
Exchange Act................... 2
Exchange Date.................. 106
Exchange Debenture Indenture... 106
Financial Institution.......... 137
Global New Certificates........ 130
Global New Notes............... 72
Guarantors..................... 55
HWPI........................... 3
HYDOs.......................... 143
IDA............................ 43
Incorporated................... 50
incur.......................... 93
Indirect Participants.......... 73, 131
Initial Debenture.............. 142
Invested Amount................ 54
Issue Date..................... 8
Junior Preferred Stock......... 4
Junior Securities.............. 85
</TABLE>
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Legal Defeasance............... 70, 119
Liquidation Preference......... 85
Mandatory Redemption Date...... 85
Named Executive Officers....... 45
Nebraska AmeriServe............ 33
NED............................ 33
NEHC........................... 3
NEHC Class A Common Stock...... 47
Net Eligible Receivables....... 55
New Regulations................ 138
Offering....................... 4, 131
OID............................ 142
Old NEHC Notes................. 52
Options........................ 46
Parity Securities.............. 85
Participants................... 73
Payment Blockage Period........ 107
Payment Default................ 69, 118
Payment Notice................. 107
Permitted Debt................. 64, 93, 113
PFS Acquisition................ 3
PIK Debenture.................. 142
Post Holdings.................. 52
Preferred Stock................ 4
ProSource...................... 4
Purchasers..................... 54
Receivables.................... 54
Record Date.................... 86
Registration Default........... 134
Restricted Payments............ 62, 91
Securities Act................. 2
Senior Discount Notes
Offering..................... 53
Senior Note Indenture.......... 34
Senior Notes................... 34
Senior Preferred Stock......... 4
Senior Subordinated Note
Indenture.................... 33
SERP........................... 48
SKU's.......................... 37
Stock Option Plan.............. 46
Subsidiary Guarantors.......... 33
The Certificate of
Designations................. 84
TIN............................ 144
Transfer Agent................. 85
Transfer Restricted
Securities................... 134
Trust.......................... 54
Trust Indenture Act............ 59
Voting Rights Triggering
Event........................ 87
</TABLE>
147
<PAGE> 149
INDEX TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
NEBCO EVANS HOLDING COMPANY
Unaudited Pro Forma Consolidated Statement of Operations for
the Fiscal Year 1998...................................... P-2
Notes to Unaudited Pro Forma Consolidated Statement of
Operations for Fiscal Year 1998........................... P-3
</TABLE>
P-1
<PAGE> 150
NEBCO EVANS HOLDING COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 26, 1998
(IN THOUSANDS)
The following sets forth the Unaudited Pro Forma Consolidated Statement of
Operations of Nebco Evans Holding Company after giving effect to the ProSource
acquisition, as if such acquisition had been consummated at the beginning of
fiscal year 1998. The Unaudited Pro Forma Consolidated Financial Statement of
Operations of NEHC does not purport to present the results of operations of NEHC
had the acquisition occurred on the date indicated, nor is it necessarily
indicative of the results of operations which may be expected to occur in the
future.
<TABLE>
<CAPTION>
HISTORICAL
PROSOURCE PRO FORMA
DECEMBER 28, ADJUSTMENTS
HISTORICAL 1997 THROUGH FOR
NEHC MAY 21, 1998 ACQUISITION PRO FORMA
---------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales.............................. $7,420,951 $1,660,073 $ 2,450(a) $9,083,474
Cost of goods sold..................... 6,740,926 1,528,693 -- 8,269,619
---------- ---------- --------- ----------
Gross profit........................... 680,025 131,380 2,450 813,855
---------- ---------- --------- ----------
Operating expenses:
Distribution, selling and
administrative.................... 560,696 123,019 685,765
Depreciation......................... 31,500 3,955 (2,020)(b) 33,435
Amortization......................... 34,074 901 1,847(c) 36,822
Restructuring and other unusual
costs............................. 90,087 -- 90,087
---------- ---------- --------- ----------
Total operating expenses............... 716,357 127,875 (173) 844,059
---------- ---------- --------- ----------
Operating income (loss)................ (36,332) 3,505 2,623 (30,204)
Interest expense, net.................. (89,489) (5,258) 1,078(d) (93,669)
Loss on sale of accounts receivable.... (24,906) -- (6,446)(e) (31,352)
---------- ---------- --------- ----------
Loss before income taxes............... (150,727) (1,753) (2,745) (155,225)
Provision (credit) for income taxes.... 1,563 (685) 770(f) 1,648
---------- ---------- --------- ----------
Net loss............................... $ (152,290) $ (1,068) $ (3,515) $ (156,873)
========== ========== ========= ==========
</TABLE>
See accompanying notes to
unaudited pro forma consolidated statement of operations.
P-2
<PAGE> 151
NEBCO EVANS HOLDING COMPANY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED 1998
(IN THOUSANDS)
(a) Represents amortization of liability arising in ProSource purchase price
allocation for below market customer contracts.
(b) Represents reduction or depreciation expense as a result of the
impairment of certain assets, due primarily to the planned closures of
certain warehouse facilities, related to the ProSource acquisition as
follows:
<TABLE>
<S> <C>
ProSource warehouse facilities.............................. $ 2,145
The Company's warehouse facilities.......................... 549
Depreciation reduction in historical NEHC................... (674)
-------
$ 2,020
=======
</TABLE>
(c) Represents the additional amortization of goodwill and other intangibles
related to the purchase price allocation for ProSource as follows:
<TABLE>
<S> <C>
Amortization related to acquired intangibles................ $ 3,681
Reduction in amortization due to writedowns of existing
ProSource intangibles..................................... (1,030)
Additional amortization in historical NEHC.................. (804)
-------
$ 1,847
=======
</TABLE>
(d) Represents decrease to net interest expense as follows:
<TABLE>
<S> <C>
Elimination of interest income on excess cash used in the
ProSource acquisition..................................... $(4,450)
Elimination of interest on borrowings against credit
facilities replaced by discount on additional proceeds
from sales of accounts receivable (see note e)............ 308
Elimination of interest expense in historical ProSource..... 5,220
-------
$ 1,078
=======
</TABLE>
(e) Represents discount on additional proceeds from sales of accounts
receivable as follows:
<TABLE>
<S> <C>
$125 million at time of ProSource acquisition (7% for 9
months)................................................... $ 3,646
$80 million received in July 1998 (7% for 6 months)......... 2,800
-------
$ 6,446
=======
</TABLE>
(f) Represents elimination of credit for federal income taxes in historical
ProSource, netting a current provision for state income taxes of $85.
NEHC's net deferred tax assets are offset by a valuation allowance,
reflecting NEHC's significant net operating loss carryforward position.
P-3
<PAGE> 152
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 27, 1997 and
December 26, 1998...................................... F-3
Consolidated Statements of Operations for each of the
three fiscal years in the period ended December 26,
1998................................................... F-4
Consolidated Statements of Stockholders' Equity for each
of the three fiscal years in the period ended December
26, 1998............................................... F-5
Consolidated Statements of Cash Flows for each of the
three fiscal years in the period ended December 26,
1998................................................... F-6
Notes to Consolidated Financial Statements................ F-7
Schedule II -- Valuation and Qualifying Accounts.......... F-23
PFS
Report of KPMG LLP, Independent Auditors.................. F-24
Balance Sheets as of December 27, 1995 and December 25,
1996, and as of June 11, 1997 (unaudited).............. F-25
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-26
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-27
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-28
Notes to Financial Statements............................. F-29
PROSOURCE, INC
Independent Auditors' Report.............................. F-34
Consolidated Balance Sheets as of December 28, 1996 and
December 27, 1997...................................... F-35
Consolidated Statements of Operations for each of the
three fiscal years in the period ended December 27,
1997................................................... F-36
Consolidated Statements of Stockholders' Equity for each
of the three fiscal years in the period ended December
27, 1997............................................... F-37
Consolidated Statements of Cash Flows for each of the
three fiscal years in the period ended December 27,
1997................................................... F-38
Notes to Consolidated Financial Statements................ F-40
</TABLE>
F-1
<PAGE> 153
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 27, 1997 and December 26, 1998 and the
related consolidated statements of operations, stockholder's equity, and cash
flows for each of the three years in the period ended December 26, 1998. Our
audits also included the financial statement schedule listed in the Index to
Historical Financial Statements. These financial statements and schedule are the
responsibility of NEHC's management. Our responsibility is to express an opinion
on these financial statements and schedule 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 27, 1997 and December 26, 1998 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 26, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
March 22, 1999
F-2
<PAGE> 154
NEBCO EVANS HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 231,450 $ 37,646
Accounts receivable....................................... 43,625 55,402
Undivided interest in accounts receivable trust........... 154,371 208,451
Allowance for doubtful accounts........................... (15,566) (23,852)
Inventories............................................... 150,148 292,255
Prepaid expenses and other current assets................. 17,034 14,196
---------- ----------
Total current assets.............................. 581,062 584,098
Property and equipment, net................................. 142,138 235,426
Intangible assets, net...................................... 737,870 1,087,079
Other noncurrent assets..................................... 17,720 29,209
---------- ----------
$1,478,790 $1,935,812
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt......................... $ 5,127 $ 8,768
Accounts payable.......................................... 345,603 700,105
Accrued liabilities....................................... 101,219 183,764
---------- ----------
Total current liabilities......................... 451,949 892,637
Long-term debt.............................................. 943,609 979,416
Other noncurrent liabilities................................ 38,430 85,006
11 1/4% Senior redeemable exchangeable preferred stock...... -- 262,107
Stockholders' equity (deficit):
8% Senior Convertible preferred stock, $.01 par value per
share; 300 shares authorized, 235 shares outstanding,
$2,350 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 at
December 27, 1997...................................... -- --
Class B nonvoting common stock, $.01 par value per share;
20,000 shares authorized, 1,733 shares outstanding at
December 27, 1997...................................... -- --
Class A nonvoting common stock, $.01 par value per share;
1,000,000 shares authorized, none outstanding.......... -- --
Class B voting common stock, $.01 par value per share;
14,000,000 shares authorized, 8,241,000 outstanding at
December 26, 1998...................................... -- 82
Paid-in capital........................................... 4,889 --
Accumulated deficit....................................... (93,442) (285,786)
---------- ----------
Total stockholders' equity (deficit).............. 44,802 (283,354)
---------- ----------
$1,478,790 $1,935,812
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 155
NEBCO EVANS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................................... $1,389,601 $3,508,332 $7,420,951
Cost of goods sold...................................... 1,249,135 3,159,357 6,740,926
---------- ---------- ----------
Gross profit............................................ 140,466 348,975 680,025
Distribution, selling and administrative expenses....... 112,058 272,016 560,696
Depreciation of property and equipment.................. 5,523 17,663 31,500
Amortization of intangible assets....................... 4,849 16,830 34,074
Restructuring and other unusual costs................... -- 52,449 90,087
---------- ---------- ----------
Operating income (loss)................................. 18,036 (9,983) (36,332)
Other income (expense):
Interest expense, net................................. (16,423) (54,016) (90,824)
Loss on sale of accounts receivable................... -- (6,757) (24,906)
Interest income -- affiliates......................... 528 632 1,335
Minority interest..................................... (2,345) -- --
---------- ---------- ----------
(18,240) (60,141) (114,395)
---------- ---------- ----------
Loss before income taxes and extraordinary loss......... (204) (70,124) (150,727)
Provision for income taxes.............................. 1,300 1,030 1,563
---------- ---------- ----------
Loss before extraordinary loss.......................... (1,504) (71,154) (152,290)
Extraordinary loss...................................... -- 15,935 --
---------- ---------- ----------
Net loss................................................ $ (1,504) $ (87,089) $ (152,290)
========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 156
NEBCO EVANS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
8%
SENIOR JUNIOR
13 1/2% PREFERRED 15% PREFERRED
SENIOR STOCK JUNIOR STOCK
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 30, 1995......... $ -- $ -- $ -- $ -- $ 15,000 $ 6 $ -- $ (4,849)
Formation of NEHC................ -- -- -- 15,000 (15,000) (6) 6 --
Issuance 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
common stock 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)
Stock dividends on preferred
stock.......................... 3,666 -- 3,752 -- -- -- (4,889) (2,529)
Preferred stock accretion........ 2,599 -- -- -- -- -- -- (2,599)
Cash dividends on preferred
stock.......................... -- -- -- -- -- -- -- (188)
Redemption of preferred stock.... (65,451) -- (60,571) (15,000) -- -- -- (12,549)
Senior redeemable exchangeable
preferred stock dividends and
accretion...................... -- -- -- -- -- -- -- (22,107)
Common stock recapitalization.... -- -- -- -- -- 82 -- (82)
Net loss......................... -- -- -- -- -- -- -- (152,290)
-------- ------ -------- -------- -------- --- ------- ---------
BALANCE, DECEMBER 26, 1998......... $ -- $2,350 $ -- $ -- $ -- $82 $ -- $(285,786)
======== ====== ======== ======== ======== === ======= =========
<CAPTION>
TOTAL
---------
<S> <C>
BALANCE, DECEMBER 30, 1995......... $ 10,157
Formation of NEHC................ --
Issuance 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
common stock 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
Stock dividends on preferred
stock.......................... --
Preferred stock accretion........ --
Cash dividends on preferred
stock.......................... (188)
Redemption of preferred stock.... (153,571)
Senior redeemable exchangeable
preferred stock dividends and
accretion...................... (22,107)
Common stock recapitalization.... --
Net loss......................... (152,290)
---------
BALANCE, DECEMBER 26, 1998......... $(283,354)
=========
</TABLE>
See accompanying notes.
F-5
<PAGE> 157
NEBCO EVANS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $ (1,504) $ (87,089) $(152,290)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization........................... 10,372 34,493 65,574
Gain on sale of property................................ (4,652) -- --
Interest accreted on subordinated debt.................. 4,193 5,513 7,425
Minority interest in subsidiary......................... 2,345 -- --
Impairment of property, equipment and other assets...... -- 12,404 17,880
Extraordinary loss-noncash portion...................... -- 2,156 --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and undivided interest in accounts
receivable trust..................................... (5,510) (2,981) (55,678)
Inventories........................................... (5,657) (14,090) 8,908
Prepaid expenses and other current assets............. 823 (13,578) 13,382
Accounts payable...................................... 7,030 74,663 47,176
Accrued liabilities................................... (7,083) 44,290 7,909
Payments charged to restructuring reserves............ -- (1,382) (14,944)
Noncurrent liabilities................................ 1,669 (4,402) (25,252)
Other................................................. 2,125 182 (27,347)
--------- ---------- ---------
Net cash provided by (used for) operating activities...... 4,151 50,179 (107,257)
--------- ---------- ---------
INVESTING ACTIVITIES
Businesses acquired, net of cash acquired................. (96,765) (851,019) (313,501)
Capital expenditures...................................... (12,701) (23,300) (68,534)
Proceeds from disposals of property and equipment......... 9,699 -- 1,763
Amounts received from affiliate........................... 11,121 20,485 13,693
Amounts paid to affiliates................................ (14,291) (23,878) (19,476)
Net increase in deposits with affiliates.................. (2,480) (2,355) --
--------- ---------- ---------
Net cash used in investing activities..................... (105,417) (880,067) (386,055)
--------- ---------- ---------
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................. -- 225,000 220,000
Proceeds from issuance of senior redeemable exchangeable
preferred stock......................................... -- -- 250,000
Proceeds from issuance of preferred stock................. -- 112,300 --
Redemption of preferred stock............................. -- -- (153,571)
Dividends on preferred stock.............................. -- -- (188)
Debt financing fees incurred.............................. -- (26,325) (10,000)
Net increase (decrease) in borrowings under revolving line
of credit............................................... 116,708 (77,374) 4,000
Repayments of long-term debt.............................. (43,793) (287,187) (10,733)
--------- ---------- ---------
Net cash provided by financing activities................. 102,915 1,059,114 299,508
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents...... 1,649 229,226 (193,804)
Cash and cash equivalents at beginning of year............ 575 2,224 231,450
--------- ---------- ---------
Cash and cash equivalents at end of year.................. $ 2,224 $ 231,450 $ 37,646
========= ========== =========
Supplemental cash flow information:
Cash paid during the year for:
Interest.............................................. $ 10,683 $ 24,468 $ 91,337
Income taxes, net of refunds.......................... 1,256 2,668 846
Businesses acquired:
Fair value of assets acquired......................... $ 210,357 $1,101,786 $ 782,736
Cash paid............................................. (96,765) (851,019) (313,501)
--------- ---------- ---------
Liabilities assumed................................... $ 113,592 $ 250,767 $ 469,235
========= ========== =========
Supplemental noncash investing and financing activities:
Property and equipment purchased with capital leases
(included in long-term debt)........................... $ 13,363 $ 22,029 $ 38,257
</TABLE>
See accompanying notes.
F-6
<PAGE> 158
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998
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. and Holberg Warehouse Properties, Inc. (HWPI). The Company
comprises substantially all of the operations of NEHC, as 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. The Company operates
within a single type of business activity, with no operating segments as defined
by Statement of Financial Accounting Standards (Statement) No. 131, "Disclosures
about Segments of an Enterprise and Related Information."
The Company services approximately 36,000 restaurants, the vast majority of
which are in the United States. The Company's major customers are owners and/or
franchisees operating restaurants in the Arby's, Burger King, Chick-fil-A,
Chili's, Dairy Queen, KFC, Lone Star Steakhouse, Long John Silver's, Olive
Garden, Pizza Hut, Red Lobster, Sonic, Taco Bell, TCBY and TGI Friday's systems.
For most of these concepts, the Company services all or a substantial majority
of the U.S. restaurants in the systems. 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., a privately
held diversified service company. In addition to NEHC, Holberg has subsidiaries
operating within the parking services industry 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 Calendar
The results for each of the fiscal years ended December 28, 1996 (fiscal
1996) December 27, 1997 (fiscal 1997) and December 26, 1998 (fiscal 1998)
reflect a 52-week period ending on the last Saturday of the calendar year. The
fixed year-end day of the Company's fiscal calendar results in a 53-week year
every five or six years.
The Company is in the process of adopting a 13-period accounting calendar
for all of its business. This change impacts the number of weeks in each fiscal
quarter but does not impact the number of weeks in the year or the year-end date
as described above. This calendar consists of 13 four-week periods, with each of
the first three quarters consisting of three periods, or 12 weeks, and the
fourth quarter consisting of four periods, or 16 weeks. As of the end of fiscal
1998, almost 50% of the business was on a 13-period calendar. The balance was on
a 12-period calendar with each quarter consisting of 13 weeks (a "4-4-5"
calendar). The conversion of the remaining business is expected to be completed
in 2000. Due to the phased nature of the conversion, the year-over-year
comparisons of quarterly results have not been and are not expected to be
materially impacted. The 13-period calendar is preferable for management
purposes because operating measures for the periods are not distorted by
differences in number of weeks per period.
Cash and Cash Equivalents
Cash equivalents represent funds temporarily invested (with original
maturities not exceeding three months) as part of managing day-to-day working
capital and/or as amounts held for general corporate purposes.
F-7
<PAGE> 159
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Certain inventories in the former ProSource, Inc. (ProSource) business
(see Note 2) are stated at cost determined using the weighted-average-cost
method.
Property and Equipment
Property and equipment are stated at cost, except for assets that have been
impaired. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. 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 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 office 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 the Company's products is recognized upon shipment
to the customer. Customer returns have historically been immaterial.
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.
F-8
<PAGE> 160
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
NEHC accounts for income taxes in accordance with 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 the Company's prior operating losses in certain of the
Company's taxable entities, a valuation allowance has been established to offset
the entire amount of the net deferred tax assets. (See Note 11)
Effective July 1997, the Company has been included in the consolidated
federal income tax return of NEHC. Prior to that date, the Company was part of
the Holberg consolidated group for income tax purposes and made tax sharing
payments to Holberg, under a tax sharing agreement, for those entities within
the Company's subgroup that had taxable income.
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 May 21, 1998, the Company acquired ProSource, Inc. for $313.5 million in
cash, which reflected $15.00 per share for all of the outstanding common stock,
repayment of existing indebtedness of ProSource of $159.5 million and direct
costs of the acquisition. ProSource, which reported net sales of $3.9 billion
for its fiscal year ended December 27, 1997, was in the foodservice distribution
business, specializing in quick service and casual dining chain restaurants.
ProSource serviced approximately 12,700 restaurants, principally in the United
States, in such chains as Burger King, Chick-fil-A, Chili's, Long John Silver's,
Olive Garden, Red Lobster, Sonic, TCBY and TGI Friday's. Funding of the
acquisition and related transactions included $125 million in proceeds from the
sale of ProSource accounts receivable (see Note 8), a $50 million capital
contribution to the Company from NEHC and cash and cash equivalents on hand.
The acquisition has been accounted for under the purchase method;
accordingly, its results are included in the consolidated financial statements
from the date of acquisition.
Following is the preliminary ProSource purchase price allocation (the final
purchase price allocation will be based on the final determination of the fair
values of assets acquired and liabilities assumed) (in millions):
<TABLE>
<S> <C>
Accounts receivable......................................... $ 224.0
Inventories................................................. 153.6
Property and equipment...................................... 33.5
Goodwill.................................................... 272.0
Identifiable intangible assets.............................. 83.4
Other assets................................................ 16.2
Accounts payable............................................ (307.3)
Accrued and other liabilities............................... (91.0)
Restructuring reserves...................................... (70.9)
-------
$ 313.5
=======
</TABLE>
The restructuring reserves of $70.9 million were included in the
preliminary purchase price allocation above in connection with the Company's
business restructuring plan to consolidate and integrate the
F-9
<PAGE> 161
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
operations of ProSource and the Company. The reserves consist of accruals for
severance and other employee-related costs ($34.8 million) and costs associated
with the closures of duplicative warehouse and other facilities ($36.1 million).
Payments charged against the ProSource restructuring reserves totaled $5.9
million as of December 26, 1998. See Note 3 for additional discussion.
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
$841.6 million in cash, including direct costs. PFS posted net sales of $3.4
billion for the fiscal year ended December 25, 1996. PFS was engaged in the
distribution of food products, supplies and equipment to approximately 17,000
company-owned and franchised restaurants in the Pizza Hut, Taco Bell and KFC
systems, which were spun-off by PepsiCo, Inc. in October 1997 as TRICON Global
Restaurants, Inc. (Tricon). Funding of the acquisition was provided by long-term
borrowings and sale of accounts receivable as described in Notes 7 and 8 and a
$130 million capital contribution to the Company from NEHC.
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.
The PFS 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...................................... 70.7
Goodwill.................................................... 563.1
Identifiable intangible assets.............................. 36.9
Other assets................................................ 1.4
Accounts payable............................................ (168.6)
Accrued and other liabilities............................... (45.1)
Restructuring reserves...................................... (22.2)
-------
$ 841.6
=======
</TABLE>
The restructuring reserves of $22.2 million were included in the purchase
price allocation above in connection with the Company's original business
restructuring plan, which was revised after the ProSource acquisition, to
consolidate and integrate the operations of PFS and the Company. The reserves
consist of accruals for severance and other employee-related costs ($6.9
million) and costs associated with the closures of duplicative warehouse and
other facilities ($15.3 million). Payments charged against the PFS restructuring
reserves totaled $4.1 million as of December 26, 1998. There have been no
material adjustments to the reserves as of December 26, 1998. See Note 3 for
additional discussion.
The following unaudited results of operations for fiscal 1997 assume the
acquisitions of both PFS and ProSource occurred at the beginning of that period
and for fiscal 1998 assume the acquisition of ProSource occurred at the
beginning of that period. (in millions):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Net sales................................................... $8,907.6 $9,081.0
Loss before extraordinary items and cumulative effect of a
change in accounting principle............................ (55.5) (153.2)
Net loss.................................................... (84.1) (153.2)
</TABLE>
This 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.
F-10
<PAGE> 162
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In October 1997, the Company acquired the stock of a food distribution
business in Mexico for approximately $8 million in cash. The business
distributed food products and supplies to company-owned and franchised
restaurants in Tricon's Pizza Hut and KFC systems. The acquisition was accounted
for under the purchase method. The operating results of the business are not
material to the consolidated results of the Company.
3. RESTRUCTURING AND OTHER UNUSUAL COSTS
Included in "Restructuring and other unusual costs" in the accompanying
consolidated statements of operations for fiscal 1997 and 1998 are the following
(in millions):
<TABLE>
<CAPTION>
1997 1998
----- -----
<S> <C> <C>
Restructuring charges, principally exit costs for future
lease terminations and employee severance................. $13.4 $12.7
Impairment of property, equipment and other assets.......... 12.4 16.7
Financing-related fees and other one-time indirect costs
incurred in connection with the ProSource and PFS
acquisitions.............................................. 13.6 8.6
Costs incurred to integrate acquisitions, and other unusual
items..................................................... 13.0 52.1
----- -----
$52.4 $90.1
===== =====
</TABLE>
In the second quarter of 1998, the Company recorded restructuring reserves
and noncash impairment charges reflecting actions to be taken with respect to
the Company's then existing facilities as a result of the ProSource acquisition.
During the second quarter of 1998, management performed an extensive review of
the then existing and recently acquired ProSource operations with the objective
of developing a business restructuring plan for the consolidation and
integration of the organizations. The restructuring plan, which was approved by
the Company's Board of Directors in the second quarter of 1998 and represented a
revision of the plan developed at the time of the PFS acquisition in 1997,
identified a number of actions designed to improve the efficiency and
effectiveness of the combined organization's warehouse and transportation
network as well as administrative and other support functions. These actions, a
substantial majority of which will be completed by mid-2000, include
construction of new strategically located warehouse facilities, closures of a
number of existing warehouse facilities and expansions/reconfigurations of
others, dispositions of property and equipment, conversions of computer systems,
reductions in workforce, relocation of employees and centralization of support
functions largely at the Dallas, Texas headquarters.
In the third quarter of 1997, the Company recorded restructuring reserves
and noncash impairment charges associated with the Company's original business
restructuring plan, which was revised after the ProSource acquisition, to
consolidate and integrate the operations of PFS and the Company.
As of December 26, 1998, payments charged against the restructuring
reserves established in fiscal 1998 and 1997 totaled $6.3 million, and there
have been no material adjustments to the reserves.
The last category in the above table includes costs arising from
integration and consolidation actions associated with the PFS, ProSource and
previous acquisitions. These costs, which are incremental in nature and expensed
as incurred, relate primarily to start-up of new warehouse facilities,
activities to realign and centralize administrative and other support functions
and delivery fleet modifications. Also included in this category are costs to
implement a major new computer software and hardware platform as well as
remediate the Year 2000 computer program code problem in existing systems.
Included in the impairment and unusual items categories above are charges
totaling $7.2 million, largely recorded in the second quarter of 1998,
associated with the discontinuance of service to the Wendy's concept, consisting
primarily of costs related to equipment lease terminations and employee
F-11
<PAGE> 163
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
severance. Service to Wendy's restaurants represented approximately $600 million
in annual net sales. The discontinuance, which was completed by late 1998,
resulted from a decision by Wendy's International, Inc. to transfer its business
to a competitor.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
Land........................................................ $ 3,833 $ 7,542
Buildings and improvements.................................. 44,612 77,236
Delivery and automotive equipment........................... 86,879 97,339
Warehouse equipment......................................... 11,359 21,943
Furniture, fixtures and office equipment.................... 17,393 84,146
Construction in progress.................................... 5,538 4,520
-------- --------
169,614 292,726
Less accumulated depreciation and amortization.............. 27,476 57,300
-------- --------
$142,138 $235,426
======== ========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
Goodwill, less accumulated amortization of $15,849 and
$34,937................................................... $661,570 $ 913,045
Assembled workforce, customer lists, deferred financing
costs and other intangibles, less accumulated amortization
of $9,861 and $22,906..................................... 76,300 174,034
-------- ----------
$737,870 $1,087,079
======== ==========
</TABLE>
6. 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,
15% junior exchangeable preferred stock, and junior nonconvertible 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.
On June 22, 1998, NEHC completed an offer to exchange all the outstanding
Preferred Stock with new stock with substantially identical terms that is
registered under the Securities Act of 1933, as amended.
F-12
<PAGE> 164
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
8 7/8% Senior Notes due 2006................................ $350,000 $350,000
10 1/8% Senior Subordinated Notes due 2007.................. 500,000 500,000
12 3/8% Senior Discount Notes due 2007...................... 58,200 65,624
Borrowings under credit facility............................ -- 4,000
Other notes payable......................................... 3,493 3,766
-------- --------
911,693 923,390
Capital lease obligations (see Note 15)..................... 37,043 64,794
-------- --------
948,736 988,184
Less current portion (capital lease obligations only)....... 5,127 8,768
-------- --------
$943,609 $979,416
======== ========
</TABLE>
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 agreement
providing for term loans totaling $205 million and a revolving credit facility
of up to $150 million. A portion of the proceeds was used to repay all
outstanding borrowings of $133.8 million (including accrued interest) under a
previous credit agreement. 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 related accrued interest.
Also 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
subordinated notes with a principal amount of $33.4 million (including accretion
of interest) issued in January 1996.
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
represented the unamortized balance of deferred financing costs and unaccreted
interest associated with the early extinguishment of debt by both 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 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.
F-13
<PAGE> 165
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
In May 1998, the Company entered into an amended credit agreement with a
group of financial institutions that provides for a credit facility, expiring in
2003, of up to $220 million. The amended credit facility replaces the previous
$150 million revolving credit facility. Interest rates on borrowings under the
facility are indexed to certain key variable rates. Availability under the
facility is based on levels of the Company's inventories of food and paper
products and supplies. Restrictive covenants under the agreement include minimum
interest coverage and maximum leverage. The Company is in compliance with the
covenants as of December 26, 1998. A commitment fee of up to .50% per annum is
payable on the unused portion of the facility. The availability under the credit
facility at December 26, 1998 was $151.2 million, against which borrowings were
$4.0 million (at an 8.5% interest rate) and outstanding letters of credit
totaled $35.9 million. Day-to-day cash flows can result in significant
fluctuations in the amount of borrowings under the facility. In late March 1999,
an amendment to the credit facility was completed that allows the Company up to
$30 million in letters of credit before usage of the facility is impacted,
resulting in additional current liquidity in this amount.
8. ACCOUNTS RECEIVABLE PROGRAM
In July 1997, the Company entered into an Accounts Receivable Program (the
Program), which initially provided $225 million in proceeds to partially fund
the acquisition of PFS. 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, a substantial majority of the trade accounts receivable 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 investor certificates by the Trust.
During 1998, the Company received additional proceeds of $220 million
primarily as a result of the addition of ProSource trade accounts receivable (in
May) and the completion of a restructuring of the Program and implementation of
additional reporting requirements (in July).
Transactions completed in December 1998 were designed primarily to
refinance a substantial portion of the bank-funded Trust certificates that
supported the proceeds previously received by the Company. The transactions,
which also resulted in additional financing capacity under the Program, included
a $280 million Rule 144A private placement of a three-year asset backed security
and the establishment of a bank-funded, three-year variable funding certificate
of up to $100 million.
After these transactions, the Program provides up to $485 million in
capacity, depending on accounts receivable levels. Because of the linkage to
accounts receivable levels, the availability at December 26, 1998 was $445
million, all of which the Company had received in proceeds as of that date. The
proceeds reflected $653 million of accounts receivable sold less Funding's
undivided interest in the assets of the Trust of $208 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
largely represents the return to investors in the Trust certificates, is
reported in the accompanying consolidated statements of operations as "Loss on
sale of accounts receivable." The weighted average of the variable interest
rates on the Trust certificates was 6.94% and 6.40% at December 27, 1997 and
December 26, 1998, respectively.
F-14
<PAGE> 166
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accompanying consolidated balance sheets reflect an allowance for
doubtful accounts that relates largely to the accounts receivable representing
the undivided interest in the Trust. The Company's accounts receivable generally
are unsecured.
9. 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 and fair
values of long-term debt at December 26, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
8 7/8% Senior Notes......................................... $350,000 $322,000
10 1/8% Senior Subordinated Notes........................... 500,000 435,000
12 3/8% Senior Discount Notes............................... 65,624 48,192
11 1/4% Senior Redeemable Exchangeable Preferred Stock...... 262,107 141,538
</TABLE>
Related party financial instruments are recorded at cost.
10. GUARANTOR SUBSIDIARIES
The Company's operating subsidiaries fully, unconditionally, jointly and
severally guarantee the Senior Subordinated Notes and the Senior Notes discussed
in Note 7.
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. 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 8). 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 1999, ProSource and its subsidiaries were merged
into the Company. Accordingly, the following summarized combined financial
information (in accordance with Rule 1-02(bb) of Regulation S-X) at December 26,
1998 and for the year then ended is for the guarantor subsidiaries of the
Company remaining after the merger (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 35,084
Current liabilities......................................... 15,981
Noncurrent assets........................................... 51,544
Noncurrent liabilities...................................... 21,256
Net sales................................................... $199,088
Operating income............................................ 5,373
Net income.................................................. 5,141
</TABLE>
F-15
<PAGE> 167
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal..................................... $1,100 $ 515 $ --
State....................................... 200 299 834
Foreign..................................... -- 95 173
------ ------ ------
1,300 909 1,007
Deferred (foreign in 1997 and 1998)........... -- 121 556
------ ------ ------
$1,300 $1,030 $1,563
====== ====== ======
</TABLE>
The provision for income taxes differs from the amount computed by applying
the federal statutory rate of 34% to loss before income taxes and extraordinary
loss, as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Benefit at statutory rate..................... $ (69) $(23,842) $(51,244)
State income taxes, net of federal tax
benefit..................................... 129 197 550
Foreign income taxes.......................... -- 143 729
Nondeductible goodwill........................ 758 891 2,892
Increase in valuation allowance............... -- 23,571 47,735
Other......................................... 482 70 901
------ -------- --------
Provision for income taxes.................... $1,300 $ 1,030 $ 1,563
====== ======== ========
</TABLE>
F-16
<PAGE> 168
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of NEHC's deferred income tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves........................................ $ 9,987 $ 9,140
Inventory reserves....................................... 4,669 13,121
Property and equipment................................... 4,758 12,663
Accrued liabilities...................................... 4,222 24,107
Restructuring reserves................................... 21,124 62,289
Acquisition costs........................................ 7,682 5,087
Net operating loss carryforward.......................... 39,558 119,184
Original issue discount.................................. 1,767 4,576
Other.................................................... -- 1,499
--------- --------
Total deferred tax assets........................ 93,767 251,666
Less valuation allowance................................. (49,787) (196,997)
--------- --------
Total deferred tax assets, net................... 43,980 54,669
--------- --------
Deferred tax liabilities:
Intangibles.............................................. 43,980 53,399
Other.................................................... -- 1,270
--------- --------
Total deferred tax liabilities................... 43,980 54,669
--------- --------
Deferred tax assets net of deferred tax
liabilities.................................... $ -- $ --
========= ========
</TABLE>
As of December 26, 1998, giving effect to the merger into the Company of
ProSource and its subsidiaries, NEHC has net operating loss carryforwards of
approximately $310 million. The net operating loss carryforwards will expire
between 2004 and 2019. Because of uncertainty as to whether full benefit will be
realized from the use of such losses and other deferred tax assets, a valuation
reserve has been provided to offset the net deferred tax asset. As of the date
of its acquisition by the Company, ProSource had tax benefits associated with
net operating losses and other deferred items (the Acquired Tax Attributes) of
$37 million that were entirely offset by a valuation reserve. The acquired
ProSource net operating losses of $76 million are subject to limitation 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 carryover period is limited. Goodwill will be
reduced to the extent of any tax benefit realized from the Acquired Tax
Attributes.
12. 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. Substantially all of the then existing plans were merged into a
single plan in August 1997.
Under this merged 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.
F-17
<PAGE> 169
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
\ The Company has not merged the ProSource retirement savings plan into its
existing plan. The ProSource plan has similar attributes but differing specific
terms as compared to the existing plan. The Company is reviewing alternatives
with respect to the possible merger of the two plans.
Company contributions expensed under the plans approximated $515,000,
$961,000 and $6,598,000 in fiscal 1996, 1997 and 1998, respectively.
In 1998, the Company adopted a deferred compensation benefit program for
eligible employees that allows participants to defer receipt of portions of
their annual salary and incentive compensation. Amounts deferred are credited
with earnings based on a key interest rate, which are expensed as accrued.
Obligations under this program totaled $1.1 million at December 26, 1998.
13. STOCK OPTION PLAN
In May 1998, NEHC adopted the 1998 Management Stock Option Plan (the Plan).
The Plan authorizes the issuance of up to one million shares of new Class A
common stock of NEHC through exercise of non-qualified stock options granted
primarily to key management employees of the Company. The shares offered have
been registered under The Securities Act of 1933, as amended, through a
Registration Statement on Form S-8 dated May 18, 1998.
Under The Plan, the Compensation Committee of the Board of Directors may
from time to time grant options, to be exercised within 10 years of the grant
date, at a price generally not less than the fair market value of the shares, as
determined by an independent appraisal firm.
On May 20, 1998, 438,410 options at an exercise price of $32.85 per share
were granted under the Plan. The per share price was based on an estimation by
an independent appraisal firm of the Company's value as of the end of 1997. The
options granted vest and become exercisable in two equal installments upon each
of the third and fourth anniversaries of the grant date; however, in the event
of an Initial Public Offering (IPO), as defined in the Plan, half of the then
outstanding and unvested options would become vested. A total of 27,540 options
have been forfeited as of December 26, 1998.
NEHC has elected to follow Accounting Principles Board Opinion No. 25 (APB
25) and related Interpretations in accounting for stock options. Under APB 25,
because the exercise price of the options granted is the estimated fair market
value of the underlying shares on the date of grant, no compensation expense has
been recognized.
Disclosures under Statement No. 123, "Accounting for Stock-Based
Compensation," require a calculation of the pro forma compensation cost
associated with the options had a fair value method been used to value the
options at the date of grant. Using the "minimum value" method as defined by
Statement No. 123, compensation expense associated with the option grant would
have been approximately $1.2 million annually over the four-year vesting period.
The key quantitative assumptions used in the calculation, which assumes no IPO,
are as follows:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 5.82%
Expected life............................................... 7 years
Expected dividend yield..................................... 0%
</TABLE>
Because option valuation methods require highly subjective assumptions,
NEHC believes that the calculation does not necessarily provide a reliable
single measure of the fair value of the options granted.
14. RELATED-PARTY TRANSACTIONS
NEHC and the Company have interest-bearing amounts due from Holberg
totaling $8,066,000 and $13,981,000 at December 27, 1997 and December 25, 1998,
respectively, resulting primarily from cash
F-18
<PAGE> 170
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
advances to Holberg. The Company also holds a note receivable from Holberg dated
December 1995 in the amount of $3,516,000. The note bears interest at 5% and is
due January 2007. These related party receivables are included in other
noncurrent assets in the accompanying consolidated balance sheets.
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. In connection with the insurance program,
the Company has deposits with an affiliate for insurance collateral purposes of
$4,835,000 at December 27, 1997 and December 26, 1998. This amount is included
in other noncurrent assets in the accompanying consolidated balance sheets.
In fiscal 1997 and 1998, distribution, selling and administrative expenses
include $4,000,000 in management fees to Holberg.
Interest income from Holberg and an affiliate of approximately $528,000,
$632,000 and $1,335,000 in fiscal 1996, 1997 and 1998, respectively, represents
interest on the amounts due from Holberg, including the note receivable, and
interest on the insurance deposits with an affiliate.
15. LEASE COMMITMENTS
NEHC 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. Rent expense was approximately $15,384,000,
$17,902,000 and $51,176,000 (including contingent rentals) in fiscal 1996, 1997
and 1998, respectively.
Property and equipment include the following amounts under capital leases
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
Land........................................................ $ 692 $ 692
Buildings and improvements.................................. 6,891 14,122
Delivery and automotive equipment........................... 28,778 37,551
Warehouse equipment......................................... 2,227 5,595
Furniture, fixtures and office equipment.................... 3,312 16,603
------- -------
41,900 74,563
Less accumulated amortization............................... 6,456 13,258
------- -------
Property and equipment under capital leases, net............ $35,444 $61,305
======= =======
</TABLE>
The following is a schedule of aggregate future minimum lease payments
(excluding contingent rentals) required under terms of the aforementioned leases
at December 26, 1998 (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL YEAR ENDING LEASES LEASES
- ------------------ --------- -------
<S> <C> <C>
1999........................................................ $ 49,917 $16,558
2000........................................................ 46,688 15,555
2001........................................................ 41,058 13,578
2002........................................................ 34,302 9,347
2003........................................................ 28,601 7,151
Thereafter.................................................. 136,148 37,452
-------- -------
Total....................................................... $336,714 99,641
========
Less amount representing interest........................... 34,847
Present value of net minimum lease commitments.............. $64,794
=======
</TABLE>
F-19
<PAGE> 171
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. CONCENTRATION OF CREDIT RISK
On a pro forma basis, as defined below, Tricon accounted for approximately
21% of the Company's 1998 net sales. Darden Restaurants, Inc., which owns all
the Red Lobster and Olive Garden restaurants, accounted for approximately 10% of
1998 pro forma net sales.
In connection with the PFS acquisition, the Company was assigned and
assumed a distribution agreement between PFS and the Pizza Hut, Taco Bell and
KFC businesses now comprising Tricon. The agreement provides that the Company is
the exclusive distributor of a substantial majority of food and supply products
purchased by Tricon's U.S. company-owned restaurants. In September 1998, Tricon
and the Company agreed to revise and extend the term of the agreement to seven
and one-half years from five years, with an additional two and one-half year
extension option. Including this option period, the agreement expires July 2007.
The Company provides service to Red Lobster and Olive Garden restaurants
under exclusive distribution agreements effective June 1997 and expiring in May
2002.
The table below presents the Company's net sales to major restaurant
concept served, including both company-owned and franchised units, as an
approximate percentage of the Company's total pro forma net sales. The pro forma
data for fiscal 1998 reflects inclusion of ProSource's net sales for the full
year, but exclusion of net sales to the Wendy's concept. The pro forma data for
fiscal 1997 reflects inclusion of PFS' net sales for the full year.
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Burger King................................................. 5% 25%
Taco Bell................................................... 29% 17%
Pizza Hut................................................... 27% 16%
KFC......................................................... 12% 7%
Red Lobster................................................. -- 7%
Arby's...................................................... 7% 4%
Wendy's..................................................... 11% --
</TABLE>
17. STOCKHOLDER'S EQUITY
On May 20, 1998, NEHC's Board of Directors approved the following
recapitalization actions:
(a) Fourteen million shares of new Class B voting common stock, par
value $.01 per share, were authorized.
(b) Each of the outstanding shares of Class A voting common stock
(6,508 shares) and Class B nonvoting common stock (1,733 shares) was
converted to 1,000 shares of new Class B voting common stock, resulting in
8,241,000 outstanding shares of the new Class B common stock. The
previously authorized 30,000 shares of Class A voting common stock and
20,000 shares of Class B nonvoting common stock were canceled.
(c) One million shares of new Class A nonvoting common stock, par
value $.01 per share, were authorized in connection with the adoption of
the 1998 Management Stock Option Plan (the Plan -- see Note 13). The Class
A common stock would become voting in the event of an initial Public
Offering (as defined in the Plan).
The previously outstanding 13 1/2% senior exchangeable preferred stock, 15%
junior exchangeable preferred stock and junior nonconvertible preferred stock
were redeemed in March 1998 upon the issuance of 11 1/4% senior redeemable
exchangeable preferred stock (see Note 6).
Accumulated preferred stock dividends in arrears were $1,875,000 at
December 27, 1997. There were no preferred stock dividends in arrears at
December 26, 1998.
F-20
<PAGE> 172
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Warrants to purchase up to an aggregate 4,663,000 shares of the new Class B
voting common stock were outstanding at December 26, 1998, of which 1,759,000
expire in 2006 and the remainder expire in 2009.
18. CONDENSED UNCONSOLIDATED FINANCIAL STATEMENTS
Provided below are the condensed unconsolidated financial statements of
NEHC (parent company only).
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
Condensed balance sheets:
Cash and cash equivalents................................. $ 320 $ 32,979
Due from affiliate........................................ 5,046 11,897
Investment in subsidiaries................................ 176,500 226,500
Other assets.............................................. -- 300
--------- ---------
$ 181,866 $ 271,676
========= =========
Accounts payable and accrued liabilities.................. $ 188 $ 373
Due to affiliate.......................................... -- 1,081
Subordinated loans........................................ 58,199 65,625
Senior redeemable exchangeable preferred stock............ -- 262,107
Stockholders' equity (deficit)............................ 123,479 (57,510)
--------- ---------
$ 181,866 $ 271,676
========= =========
Condensed statements of income (loss):
Selling, general and administrative expenses.............. $ 177 $ 20
Interest expense, net..................................... 5,821 4,881
Income taxes.............................................. -- 222
Extraordinary loss........................................ 6,562 --
--------- ---------
$ (12,560) $ (5,123)
========= =========
Condensed statements of cash flows:
Net cash provided by (used in) operating activities....... $ (11,007) $ 2,188
--------- ---------
Investing activities:
Business acquired, net of cash acquired................ (1,500) --
Investment in subsidiary............................... (130,000) (50,000)
Due from affiliates.................................... -- (5,769)
--------- ---------
Net cash used in investing activities..................... (131,500) (55,769)
--------- ---------
Financing activities:
Proceeds from issuance of preferred stock and
warrants.............................................. 115,000 250,000
Financing fees incurred................................ -- (10,000)
Redemption of preferred stock.......................... -- (153,760)
Proceeds from issuance of long-term debt............... 55,000 --
Repayment of debt...................................... (27,173) --
--------- ---------
Net cash provided by financing activities................... 142,827 86,240
--------- ---------
Net increase in cash and cash equivalents................... 320 32,659
Cash and cash equivalents at beginning of year.............. -- 320
--------- ---------
Cash and cash equivalents at end of year.................... $ 320 $ 32,979
========= =========
</TABLE>
F-21
<PAGE> 173
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. CONTINGENCIES
NEHC is subject to various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of
business. Management believes that the ultimate liability, if any, in excess of
amounts already recognized arising from such claims or contingencies is not
likely to have a material adverse effect on NEHC's annual results of operations
or financial condition.
F-22
<PAGE> 174
NEBCO EVANS HOLDING COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER ACQUISITIONS AT END
OF YEAR EXPENSES ACCOUNTS BALANCE DEDUCTIONS(1) OF YEAR
---------- ---------- ---------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 28, 1996:
Allowance for doubtful
accounts................... $ 1,170 $1,306 -- $ 3,385 $ (525) $ 5,336
Year ended December 27, 1997:
Allowance for doubtful
accounts................... $ 5,336 $2,019 -- $10,032 $(1,821) $15,566
Year ended December 26, 1998:
Allowance for doubtful
accounts................... $15,566 $4,746 -- $ 7,541 $(4,001) $23,852
</TABLE>
- ------------------------------
(1) Represents uncollectible accounts written off, net of recoveries.
F-23
<PAGE> 175
REPORT OF KPMG 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 LLP
Dallas, Texas
April 18, 1997
F-24
<PAGE> 176
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 25, JUNE 11,
1995 1996 1997
ASSETS ------------ -------------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
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-25
<PAGE> 177
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,
1994 1995 1996 JUNE 12, JUNE 11,
(53 WEEKS) (52 WEEKS) (52 WEEKS) 1996 1997
------------ ------------ -------------- ---------- ----------
(IN THOUSANDS) (UNAUDITED)
<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-26
<PAGE> 178
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-27
<PAGE> 179
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS
YEARS ENDED ENDED
------------------------------------------ -------------------
DECEMBER 28, DECEMBER 27, DECEMBER 25,
1994 1995 1996 JUNE 12, JUNE 11,
(53 WEEKS) (52 WEEKS) (52 WEEKS) 1996 1997
------------ ------------ ------------ -------- --------
(IN THOUSANDS) (UNAUDITED)
<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-28
<PAGE> 180
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) 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-29
<PAGE> 181
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 a 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-30
<PAGE> 182
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-31
<PAGE> 183
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.
F-32
<PAGE> 184
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(8) RETIREMENT PLANS
PFS participates in two defined benefit noncontributory pension plans for
salaried and nonsalaried employees which are administered directly or indirectly
by the Parent. Substantially all 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-33
<PAGE> 185
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 LLP
Miami, Florida
February 20, 1998
F-34
<PAGE> 186
PROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1996 AND DECEMBER 27, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
<TABLE>
<CAPTION>
1996 1997
ASSETS -------- --------
<S> <C> <C>
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-35
<PAGE> 187
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-36
<PAGE> 188
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-37
<PAGE> 189
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>
F-38
<PAGE> 190
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-39
<PAGE> 191
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND DECEMBER 27, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) THE BUSINESS
ProSource, Inc. (for this section only 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., ProSource Receivables Corporation ("PRC"), and PSD
Transportation Services, Inc.. 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, 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-40
<PAGE> 192
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
F-41
<PAGE> 193
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
all periods have been presented, and where appropriate, restated to conform with
the requirements of SFAS No. 128.
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
F-42
<PAGE> 194
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$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 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
F-43
<PAGE> 195
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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>
F-44
<PAGE> 196
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
(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
F-45
<PAGE> 197
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. 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>
F-46
<PAGE> 198
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
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
F-47
<PAGE> 199
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-48
<PAGE> 200
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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>
F-49
<PAGE> 201
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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
F-50
<PAGE> 202
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 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 Burger King-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
F-51
<PAGE> 203
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 PRICE
COMMON STOCK SHARES PER SHARE EXPIRATION
------------------------ ---------------- ----------------
<S> <C> <C> <C>
Options -- 1995
288,650 shares -- Class
Option Plan................. B $10.00 or $11.00 December 2000
Options -- 1996 November 2006 to
340,500 shares -- Class
Option Plan................. B $ 14.00 January 2007
Options -- 1997
Directors Plan.............. 10,500 shares -- Class A $ 5.25 April 2007
283,425 shares -- Class
Stock Warrants................ 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. 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-52
<PAGE> 204
- ------------------------------------------------------
- ------------------------------------------------------
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>
Prospectus Summary...................... 3
Risk Factors............................ 12
Use of Proceeds......................... 19
Capitalization.......................... 20
Selected NEHC Historical Financial
Data.................................. 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 22
The Business............................ 33
Management.............................. 43
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Security Ownership of Certain Beneficial
Holders and Management................ 50
Certain Relationships and Related
Transactions.......................... 51
Description of Indebtedness............. 53
Description of Securities............... 59
Description of Certain Federal Income
Tax Consequences...................... 135
Plan of Distribution.................... 145
Legal Matters........................... 146
Experts................................. 146
Index of Certain Defined Terms.......... 147
Index to Unaudited Pro Forma
Consolidated Financial Statements..... P-1
Index to Historical Financial
Statements............................ F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
NEBCO Evans Holding Company
12 3/8% New Senior
Discount Notes
Due 2007
11 1/4% Senior
Redeemable Exchangeable
Preferred Stock
Due 2008
-------------------
PROSPECTUS
-------------------
APRIL , 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 205
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Inapplicable.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the General Corporation Law of the State of Delaware
(the "DGCL"), provides that a corporation (in its original certificate of
incorporation or an amendment thereto) may eliminate or limit the personal
liability of a director (or certain persons who, pursuant to the provisions of
the certificate of incorporation, exercise or perform duties conferred or
imposed upon directors by the DGCL) to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provisions shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockbrokers,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL
(providing for liability of directors for unlawful payment of dividends or
unlawful stock purchases or redemptions) or (iv) for any transaction from which
the director derived an improper personal benefit. Article VIII, Section 1 of
the Company's Certificate of Incorporation limits the liability of directors
thereof to the extent permitted by Section 102(b)(7) of the DGCL.
Under Section 145 of the DGCL, in general, a corporation may indemnify its
directors, officers, employees or agents against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties to which they may be made parties by reason of their being or
having been directors, officers, employees or agents and shall so indemnify such
persons if they acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interest of the corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful. Article VIII, Section 2(a) of the Company's Restated
Certificate of Incorporation provides that the Company shall indemnify its
officers, directors, employees and agents to the full extent permitted by
Delaware law.
Article VIII, Section 2(a) of the Company's Restated Certificate of
Incorporation also provides that the Company shall indemnify any such person
seeking indemnification in connection with a proceeding initiated by such person
only if such proceeding was authorized by the Board. Any rights to
indemnification conferred in Section 2 are contract rights, and include the
right to be paid by the Company the expenses incurred in defending any such
proceeding in advance of its final disposition, except that, if the DGCL
requires, the payment of such expenses incurred by a director or officer in such
capacity in advance of final disposition shall be made only upon delivery to the
Company of an undertaking by or on behalf of such director or officer, to repay
all amounts so advanced if it is ultimately determined that such director or
officer is not entitled to be indemnified under Section 2 or otherwise. By
action of the board of directors, the Company may extend such indemnification to
employees and agents of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On July 11, 1997, the Registrant consummated the offering of $100,387,000
principal amount at maturity of its 12 3/8% Senior Discount Notes due 2007 (the
"Senior Discount Notes") 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. The net proceeds of the sale were
approximately $52.5 million (after deducting discounts and commissions and
estimated expenses of the offering) and were used by NEHC to partially finance
the contribution of $130.0 million of cash to AmeriServe, the redemption of the
12 1/2% Senior Secured Notes of NEHC, the acquisition of HWPI and for other
general corporate purposes. On December 12, 1997, the Registrant consummated an
exchange
II-1
<PAGE> 206
offer pursuant to which all of the outstanding unregistered Senior Discount
Notes were exchanged for new Senior Discount Notes registered under the
Securities Act, but otherwise having substantially identical terms and
conditions.
On March 6, 1998, the Registrant consummated the offering of $250 million
of its 11 1/4% Senior Redeemable Exchangeable Preferred Stock due 2009 (the
"Preferred Stock") 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 $148 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 AmeriServe.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<S> <C>
2.1 Purchase Agreement, by and among NEHC and Donaldson, Lufkin
& Jenrette Securities Corporation, dated as of July 9,
1997.*
2.2 Asset Purchase Agreement between PepsiCo, Inc. and Nebco
Evans Holding Company.*
2.3 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).
2.4 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 dated March 27, 1998).
3.2 By-Laws of NEHC.*
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.*
4.2 Form of New Senior Discount Note.*
4.3 Supplemental 8 7/8% New Senior Notes Indenture, dated as of
December 23, 1997, by and among AmeriServe Food
Distribution, Inc., AmeriServ Food Company, and State Street
Bank and Trust Company, as Trustee (incorporated by
reference to Exhibit 4.2 to the Registrant's Current Report
on Form 8-K, dated December 28, 1997).
4.4 Indenture, dated as of July 11, 1997, by and among the
Company, the Subsidiary Guarantors and State Street Bank and
Trust Company, with respect to the new Senior Subordinated
Notes (incorporated by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form S-4 No.
333-33225 filed August 8, 1997).
4.5 Supplemental 10 1/8% New Senior Subordinated Notes
Indenture, dated as of December 23, 1997, by and among
AmeriServe Food Distribution, Inc., AmeriServ Food Company,
and State Street Bank and Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K, dated December 28,
1997).
4.6 Purchase Agreement, by and among the Registrant, the
Subsidiary Guarantors, Donaldson, Lufkin & Jenrette
Securities Corporation and BancAmerica Securities dated as
of July 9, 1997 (incorporated by reference to Exhibit 4.4 to
the Registrant's Registration Statement Form S-4 No.
333-33225 filed August 8, 1997).
</TABLE>
II-2
<PAGE> 207
<TABLE>
<S> <C>
4.7 Purchase Agreement, by and among the Registrant, the
Subsidiary Guarantors, Donaldson, Lufkin & Jenrette
Securities Corporation and BancAmerica Robertson Stephens
dated as of October 8, 1997 (incorporated by reference to
Exhibit 4.4 to the Registrant's Registration Statement on
Form S-4 No. 333-38337 filed October 21, 1997).
4.8 Second Supplemental 8 7/8% New Senior Notes Indenture, dated
as of May 21, 1998, by and among AmeriServe Food
Distribution, Inc. and State Street Bank and Trust Company
(incorporated by Reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated May 21, 1998).
5.1 Opinion of Wachtell, Lipton, Rosen & Katz.*
10.1 Registration Rights Agreement, dated as of July 11, 1997, by
and among the Registrant, the Subsidiary Guarantors and
Donaldson, Lufkin & Jenrette Securities Corporation
(incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-4 No.
333-33225 filed August 8, 1997).
10.2 Registration Rights Agreement, dated as of October 15, 1997,
by and among the Registrant, the Subsidiary Guarantors and
Donaldson, Lufkin & Jenrette Securities Corporation
(incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-4 No.
333-38337 filed October 21, 1997).
10.3 Employment Agreement, dated as of December 23, 1986 between
the Company and Raymond E. Marshall, as amended by Amendment
to Employment Agreement, dated as of January 1, 1995
(incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-4 No.
333-33225 filed August 8, 1997).
10.4 Employment Agreement, dated as of July 1, 1998 between the
Company and Thomas C. Highland (incorporated by reference to
Exhibit 10.4 to the Registrant's Annual Report on Form 10-K
dated March 25, 1999).
10.5 Employment Agreement, dated as of November 26, 1997 between
the Company and Kenneth R. Lane (incorporated by reference
to Exhibit 10.5 to the Registrant's Annual Report on Form
10-K dated March 25, 1999).
10.6 Employment Agreement, dated as of August 15, 1997 between
the Company and Diana M. Moog (incorporated by reference to
Exhibit 10.6 to the Registrant's Annual Report on Form 10-K
dated March 25, 1999).
10.7 Amended and Restated Sales and Distribution Agreement dated
as of November 1, 1998, by and among PFS, Pizza Hut, Taco
Bell, Kentucky Fried Chicken Corporation and Kentucky Fried
Chicken of California, Inc. (incorporated by reference to
Exhibit 10.7 to the Registrant's Annual Report on Form 10-K
dated March 25, 1999).
10.8 Third Amended and Restated Credit Agreement, dated as of May
21, 1998 among AmeriServe Food Distribution, Inc., Bank of
America National Trust and Savings Association, as
Administrative Agent, Donaldson, Lufkin & Jenrette
Securities Corporation, as Documentation Agent, Bank of
America National Trust and Savings Association, as Letter of
Credit Issuing Lender and the Other Financial Institutions
Party Thereto, Arranged by BancAmerica Robertson Stephens
(incorporated by reference to Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q filed November 10,
1998).
10.9 First Amendment to Third Amended and Restated Credit
Agreement, dated as of July 24, 1998 (incorporated by
reference to Exhibit 10.9 to the Registrant's Annual Report
on Form 10-K dated March 25, 1999).
10.10 Amended and Restated Pooling and Servicing Agreement, dated
as of July 28, 1998 among AmeriServe Funding Corporation,
AmeriServe Food Distribution, Inc. and Norwest Bank
Minnesota, N.A. (incorporated by reference to Exhibit 10.10
to the Registrant's Annual Report on Form 10-K dated March
25, 1999).
</TABLE>
II-3
<PAGE> 208
<TABLE>
<S> <C>
10.11 Series 1998-1 Supplement to Pooling and Servicing Agreement, dated as of July 28, 1998 among AmeriServe
Funding Corporation, AmeriServe Food Distribution, Inc. and Norwest Bank Minnesota, N.A. (incorporated by
reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K dated March 25, 1999).
10.12 Series 1998-3 Supplement to Pooling and Servicing Agreement, dated as of December 18, 1998 among
AmeriServe Funding Corporation, AmeriServe Food Distribution, Inc. and Norwest Bank Minnesota, N.A.
(incorporated by reference to Exhibit 10.12 to the Registrant's Annual Report on Form 10-K dated March 25,
1999).
10.13 Series 1998-4 Supplement to Pooling and Servicing Agreement, dated as of December 18, 1998 among
AmeriServe Funding Corporation, AmeriServe Food Distribution, Inc. and Norwest Bank Minnesota, N.A.
(incorporated by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K dated March 25,
1999).
10.14 Nebco Evans Holding Company 1998 Management Stock Option Plan (incorporated by reference to Exhibit 4.2 to
the Registrant's Registration Statement on Form S-8 No. 333-53095 filed on May 20, 1998.
12.1 Statements re computation of ratios.
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the Registrant's Annual Report
on Form 10-K dated March 25, 1999).
23.1 Consent of Ernst & Young LLP.
23.2 Consent of KPMG LLP.
23.3 Consent of KPMG LLP.
23.4 Consent of Wachtell, Lipton, Rosen & Katz (contained in Exhibit 5.1).*
24.1 Power of Attorney.*
25.1 Statement of Eligibility and Qualification of Trustee on Form T-1 of State Street Bank and Trust Company
under the Trust Indenture Act of 1939.*
27.1 Financial Data Schedule (incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on
Form 10-K dated March 25, 1999).
</TABLE>
- ------------------------------
* Previously filed.
(b) Financial Statement Schedule.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
II-4
<PAGE> 209
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE> 210
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of New York, State of New
York, on April 28, 1999.
NEBCO EVANS HOLDING COMPANY
(Registrant)
By: *
------------------------------------
John V. Holten
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE
<C> <S>
* Director, Chairman and Chief Executive Officer
- ---------------------------------------------------
John V. Holten
/s/ DIANA M. MOOG Executive Vice President and Chief Financial
- --------------------------------------------------- Officer
Diana M. Moog
/s/ STANLEY J. SZLAUDERBACH Vice President and Chief Accounting Officer
- ---------------------------------------------------
Stanley J. Szlauderbach
* Director and Vice Chairman
- ---------------------------------------------------
John R. Evans
* Director, Executive Vice President and Vice
- --------------------------------------------------- Chairman
Raymond E. Marshall
* Director and Assistant Secretary
- ---------------------------------------------------
Gunnar E. Klintberg
* Director
- ---------------------------------------------------
Leif F. Onarheim
* Director
- ---------------------------------------------------
Peter T. Grauer
* Director
- ---------------------------------------------------
Benoit Jamar
* Director
- ---------------------------------------------------
Daniel W. Crippen
*By: /s/ A. PETTER OSTBERG
---------------------------------------------
A. Petter Ostberg
Attorney-in-fact
</TABLE>
II-6
<PAGE> 211
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
2.1 Purchase Agreement, by and among NEHC and Donaldson, Lufkin
& Jenrette Securities Corporation, dated as of July 9,
1997.*
2.2 Asset Purchase Agreement between PepsiCo, Inc. and Nebco
Evans Holding Company.*
2.3 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).
2.4 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 dated March 27, 1998).
3.2 By-Laws of NEHC.*
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.*
4.2 Form of New Senior Discount Note.*
4.3 Supplemental 8 7/8% New Senior Notes Indenture, dated as of
December 23, 1997, by and among AmeriServe Food
Distribution, Inc., AmeriServ Food Company, and State Street
Bank and Trust Company, as Trustee (incorporated by
reference to Exhibit 4.2 to the Registrant's Current Report
on Form 8-K, dated December 28, 1997).
4.4 Indenture, dated as of July 11, 1997, by and among the
Company, the Subsidiary Guarantors and State Street Bank and
Trust Company, with respect to the new Senior Subordinated
Notes (incorporated by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form S-4 No.
333-33225 filed August 8, 1997).
4.5 Supplemental 10 1/8% New Senior Subordinated Notes
Indenture, dated as of December 23, 1997, by and among
AmeriServe Food Distribution, Inc., AmeriServ Food Company,
and State Street Bank and Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K, dated December 28,
1997).
4.6 Purchase Agreement, by and among the Registrant, the
Subsidiary Guarantors, Donaldson, Lufkin & Jenrette
Securities Corporation and BancAmerica Securities dated as
of July 9, 1997 (incorporated by reference to Exhibit 4.4 to
the Registrant's Registration Statement Form S-4 No.
333-33225 filed August 8, 1997).
4.7 Purchase Agreement, by and among the Registrant, the
Subsidiary Guarantors, Donaldson, Lufkin & Jenrette
Securities Corporation and BancAmerica Robertson Stephens
dated as of October 8, 1997 (incorporated by reference to
Exhibit 4.4 to the Registrant's Registration Statement on
Form S-4 No. 333-38337 filed October 21, 1997).
4.8 Second Supplemental 8 7/8% New Senior Notes Indenture, dated
as of May 21, 1998, by and among AmeriServe Food
Distribution, Inc. and State Street Bank and Trust Company
(incorporated by Reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated May 21, 1998).
5.1 Opinion of Wachtell, Lipton, Rosen & Katz.*
10.1 Registration Rights Agreement, dated as of July 11, 1997, by
and among the Registrant, the Subsidiary Guarantors and
Donaldson, Lufkin & Jenrette Securities Corporation
(incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-4 No.
333-33225 filed August 8, 1997).
</TABLE>
<PAGE> 212
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
10.2 Registration Rights Agreement, dated as of October 15, 1997,
by and among the Registrant, the Subsidiary Guarantors and
Donaldson, Lufkin & Jenrette Securities Corporation
(incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-4 No.
333-38337 filed October 21, 1997).
10.3 Employment Agreement, dated as of December 23, 1986 between
the Company and Raymond E. Marshall, as amended by Amendment
to Employment Agreement, dated as of January 1, 1995
(incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-4 No.
333-33225 filed August 8, 1997).
10.4 Employment Agreement, dated as of July 1, 1998 between the
Company and Thomas C. Highland (incorporated by reference to
Exhibit 10.4 to the Registrant's Annual Report on Form 10-K
dated March 25, 1999).
10.5 Employment Agreement, dated as of November 26, 1997 between
the Company and Kenneth R. Lane (incorporated by reference
to Exhibit 10.5 to the Registrant's Annual Report on Form
10-K dated March 25, 1999).
10.6 Employment Agreement, dated as of August 15, 1997 between
the Company and Diana M. Moog (incorporated by reference to
Exhibit 10.6 to the Registrant's Annual Report on Form 10-K
dated March 25, 1999).
10.7 Amended and Restated Sales and Distribution Agreement dated
as of November 1, 1998, by and among PFS, Pizza Hut, Taco
Bell, Kentucky Fried Chicken Corporation and Kentucky Fried
Chicken of California, Inc. (incorporated by reference to
Exhibit 10.7 to the Registrant's Annual Report on Form 10-K
dated March 25, 1999).
10.8 Third Amended and Restated Credit Agreement, dated as of May
21, 1998 among AmeriServe Food Distribution, Inc., Bank of
America National Trust and Savings Association, as
Administrative Agent, Donaldson, Lufkin & Jenrette
Securities Corporation, as Documentation Agent, Bank of
America National Trust and Savings Association, as Letter of
Credit Issuing Lender and the Other Financial Institutions
Party Thereto, Arranged by BancAmerica Robertson Stephens
(incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q filed November
10, 1998).
10.9 First Amendment to Third Amended and Restated Credit
Agreement, dated as of July 24, 1998 (incorporated by
reference to Exhibit 10.9 to the Registrant's Annual Report
on Form 10-K dated March 25, 1999).
10.10 Amended and Restated Pooling and Servicing Agreement, dated
as of July 28, 1998 among AmeriServe Funding Corporation,
AmeriServe Food Distribution, Inc. and Norwest Bank
Minnesota, N.A. (incorporated by reference to Exhibit 10.10
to the Registrant's Annual Report on Form 10-K dated March
25, 1999).
10.11 Series 1998-1 Supplement to Pooling and Servicing Agreement,
dated as of July 28, 1998 among AmeriServe Funding
Corporation, AmeriServe Food Distribution, Inc. and Norwest
Bank Minnesota, N.A. (incorporated by reference to Exhibit
10.11 to the Registrant's Annual Report on Form 10-K dated
March 25, 1999).
10.12 Series 1998-3 Supplement to Pooling and Servicing Agreement,
dated as of December 18, 1998 among AmeriServe Funding
Corporation, AmeriServe Food Distribution, Inc. and Norwest
Bank Minnesota, N.A. (incorporated by reference to Exhibit
10.12 to the Registrant's Annual Report on Form 10-K dated
March 25, 1999).
10.13 Series 1998-4 Supplement to Pooling and Servicing Agreement,
dated as of December 18, 1998 among AmeriServe Funding
Corporation, AmeriServe Food Distribution, Inc. and Norwest
Bank Minnesota, N.A. (incorporated by reference to Exhibit
10.13 to the Registrant's Annual Report on Form 10-K dated
March 25, 1999).
</TABLE>
<PAGE> 213
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
10.14 Nebco Evans Holding Company 1998 Management Stock Option
Plan (incorporated by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-8 No.
333-53095 filed on May 20, 1998.
12.1 Statement re computation of ratios.
21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21 to the Registrant's Annual Report on Form 10-K
dated March 25, 1999).
23.1 Consent of Ernst & Young LLP.
23.2 Consent of KPMG LLP.
23.3 Consent of KPMG LLP.
23.4 Consent of Wachtell, Lipton, Rosen & Katz (contained in
Exhibit 5.1).*
24.1 Power of Attorney.*
25.1 Statement of Eligibility and Qualification of Trustee on
Form T-1 of State Street Bank and Trust Company under the
Trust Indenture Act of 1939.*
27.1 Financial Data Schedule (incorporated by reference to
Exhibit 10.6 to the Registrant's Annual Report on Form 10-K
dated March 25, 1999).
</TABLE>
- ------------------------------
* Previously filed.
<PAGE> 1
EXHIBIT 12.1
NEBCO EVANS HOLDING COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(AMOUNTS IN THOUSANDS, EXCEPT RATIO DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes....... $ 665 $1,089 $ (204) $(70,124) $(150,727)
Fixed charges........................... 5,323 6,065 22,314 60,956 130,472
------ ------ ------- -------- ---------
Earnings................................ $5,988 $7,154 $22,110 $ (9,168) $ (20,255)
====== ====== ======= ======== =========
Interest expense........................ $3,294 $3,936 $16,423 $ 54,016 $ 89,489
Amortization of deferred financing
costs................................. 226 226 $ 763 1,678 2,650
Interest portion of rent expense........ 1,803 1,903 5,128 5,262 17,059
------ ------ ------- -------- ---------
Fixed charges........................... $5,323 $6,065 $22,314 $ 60,956 109,198
====== ====== ======= ========
Preferred stock dividend requirement.... 21,274
---------
Combined fixed charges and preferred
stock dividend requirement............ $ 130,472
=========
Ratio of earnings to fixed charges...... 1.12 1.18 Note 1 Note 1 Note 2
====== ====== ======= ======== =========
Pro forma ratio of earnings to combined
fixed charges and preferred stock
dividends.............................
</TABLE>
- ---------------
Note 1: Earnings were less than fixed charges by $204 and $70,124 for the fiscal
year 1996 and fiscal year 1997, respectively.
Note 2: Earnings were less than combined fixed charges and preferred stock
dividends by $150,727 for the fiscal year 1998.
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS
We consent to the references to our firm under the captions "Experts" and
"Selected NEHC Historical Financial Data" and to the use of our report dated
March 22, 1999, with respect to Nebco Evans Holding Company, in the
Post-effective Amendment No. 1 on Form S-1 to the Registration Statement (Form
S-4 No. 333-51541), and related Prospectus for the registration of 11 1/4%
Senior Redeemable Exchangeable Preferred Stock.
ERNEST & YOUNG LLP
Dallas, Texas
April 29, 1999
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
Management of PFS
(A Division of PepsiCo Held for Sale):
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG LLP
Dallas, Texas
April 29, 1999
-5-
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
ProSource, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG LLP
Miami, Florida
April 29, 1999
-6-
