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File No. 333-51541
Filed pursuant to Rule 424(b)(3)
Prospectus Supplement
(to Prospectus dated June 19, 1998)
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 26, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD TO .
COMMISSION FILE NUMBER
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NEBCO EVANS HOLDING COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 06-1444203
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
545 STEAMBOAT ROAD
GREENWICH, CT 06830
(Address of principal executive offices)
(203) 661-2500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part II of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting shares of common
stock held by non-affiliates of the registrant is not applicable as there is not
a public market for such stock. All shares of the registrant's common stock are
held by one affiliate. As of March 24, 1999, there were 8,241,000 shares of
Class B Common Stock of the registrant outstanding.
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The date of this Prospectus Supplement is March 29, 1999.
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FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding the business strategy, operations, cost-saving initiatives,
economic performance, financial condition and liquidity and capital resources of
Nebco Evans Holding Company ("NEHC") or AmeriServe Food Distribution, Inc.
(which, unless the context indicates or otherwise requires, including its
predecessors, is referred to in this Annual Report on Form 10-K as "AmeriServe"
or the "Company"). Such statements are subject to various risks and
uncertainties. Actual results could differ materially from those projected in
such forward-looking statements and readers are cautioned not to place undue
reliance on the forward-looking statements which speak only as of the date
hereof. Certain factors that could cause NEHC's or the Company's actual results
to differ materially from expected, implied or historical results include the
factors set forth under "Cautionary Statements" in Item 7 of this Annual Report
on Form 10-K (this "Report"), the additional factors set forth under "Risk
Factors" in NEHC's amended Registration Statement on Form S-4 filed with the
Securities and Exchange Commissions (the "SEC") on May 1, 1998 (the "NEHC
Registration Statement") and NEHC's other filings with the SEC as well as
general economic and business and market conditions, especially in the chain
restaurant business, and increased competitive and/or customer pressure. Neither
NEHC nor the Company undertakes any obligations to update these forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence or nonoccurrence of anticipated events.
ITEM 1. BUSINESS
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.
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"). 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. ("NEBCO") in 1986. NEBCO acquired Evans Brothers Company ("Evans")
in January 1990 and the combined company was renamed NEBCO EVANS Distribution,
Inc. ("NEBCO EVANS"). NEBCO EVANS acquired L.L. Distribution Systems Inc. in
1990, Condon Supply Company in 1991 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 "PFS Acquisition") the U.S. and
Canadian operations of PFS ("PFS"), a division of PepsiCo, Inc. ("PepsiCo"). PFS
distributed food products and supplies and restaurant equipment to franchised
and company-operated restaurants in the Pizza Hut, Taco Bell and KFC systems.
These systems were spun-off by PepsiCo in October 1997 and are now operating as
TRICON Global
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Restaurants, Inc. ("Tricon"). In addition, in connection with the PFS
Acquisition, the Company entered into a distribution agreement (the
"Distribution Agreement") whereby it became the exclusive distributor of
selected products until July 11, 2002 to the approximately 9,800 Pizza Hut, Taco
Bell and KFC restaurants in the continental United States owned by Pizza Hut,
Inc., Taco Bell Corp., Kentucky Fried Chicken Corporation and, Kentucky Fried
Chicken of California, Inc. (all subsidiaries of Tricon) and their subsidiaries
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, certain of the Company's
subsidiaries (the "Subsidiary Guarantors") and State Street Bank and Trust
Company as Trustee (the "Senior Subordinated Note Indenture"). The Senior
Subordinated Notes were sold pursuant to exemptions from, or in transactions not
subject to, the registration requirements of the Securities Act of 1933, as
amended, (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 Consolidated Financial
Statements.)
Also on July 11, 1997, NEHC issued and sold $100.4 million in aggregate
principal amount at maturity of its 12 3/8% Senior Discount Notes due 2007 (the
"Senior Discount Notes") pursuant to an Indenture, dated as of July 11, 1997, by
and among NEHC and State Street Bank and Trust Company, as trustee. The Senior
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
Consolidated Financial Statements.
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 (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 $148 million of the net proceeds of the
Offering was used by NEHC to repurchase all of its 13 1/2% Senior Exchangeable
Preferred Stock due 2009 (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, 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
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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"). 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 Consolidated Financial
Statements, 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
Consolidated Financial Statements.
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
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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 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:
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<CAPTION>
1998 1997
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<S> <C> <C>
Burger King................................................. 25% 5%
Taco Bell................................................... 17% 29%
Pizza Hut................................................... 16% 27%
KFC......................................................... 7% 12%
Red Lobster................................................. 7% --
Arby's...................................................... 4% 7%
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.
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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 Consolidated Financial
Statements.)
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 PFS Acquisition and ProSource Acquisition, 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" under
Item 7 of this Report.)
Product Replenishment
While the Company is responsible for purchasing products to be delivered to
its customers, chain restaurants typically approve the vendors and negotiate the
price for their proprietary products. The Company determines the distribution
centers that will warehouse products for each customer and the quantities in
which such products will be purchased. Order quantities for each product are
systematically determined for each distribution center, taking into account both
recent sales history and projected customer demand. The distribution centers
selected to serve a customer are based on the location of the restaurants to be
serviced.
Product Storage
The Company currently warehouses approximately 1,100 to 5,500 stock keeping
units ("SKU's") (excluding the redistribution and equipment distribution
centers) for its customers at 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.
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Rather, customer orders are filled from the common inventory at the relevant
distribution center. The Company's computer systems continuously monitor
inventory levels in an effort to maintain optimal levels, taking into account
required service levels, buying opportunities and capital requirements. Each
distribution center contains ambient, refrigerated (including cool docks) and
frozen space, as well as offices for operations, sales and customer service
personnel and a computer network, accessing systems at other distribution
centers and the Company's corporate support centers.
A majority of the Company's distribution centers are between 100,000 to
200,000 square feet with approximately 20% refrigerated storage space, 30%
frozen storage space and 50% dry storage area. The Company uses sophisticated
logistics programs to strategically locate new distribution centers in areas
near key highways with specific consideration given to the proximity of
customers and suppliers. The Company also employs consultants in distribution
center layout and product flow to design the distribution center with the
objective of maximizing product throughput. The Company estimates that each
distribution center can effectively service customers within a 350 mile radius,
although the Company's objective is to service 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.
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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 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" under Item 7 of this Report.
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.
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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 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.
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.
9
<PAGE> 10
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.
ITEM 2. PROPERTIES
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).......................................... 240,000 Leased
Lemont, IL.................................................. 105,000 Leased
Lenexa, KS(4)............................................... 105,600 Leased
Lenexa, KS(4)............................................... 35,778 Leased
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET LEASED/OWNED
-------- ----------- ------------
<S> <C> <C>
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.
ITEM 3. LEGAL PROCEEDINGS
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
11
<PAGE> 12
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on NEHC or the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
In December 1998, NEHC, as the sole voting stockholder of AmeriServe, and
AmeriServe as the sole voting stockholder of ProSource, approved the merger
whereby ProSource was merged into AmeriServe.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the common stock of NEHC is owned by NED and there is no public
trading market for such security. In connection with the PFS Acquisition, on
July 11, 1997, NEHC issued and sold 2,400,000 shares of Senior Preferred Stock,
2,200,000 shares of Junior Preferred Stock, and warrants to purchase shares of
NEHC Class A Common Stock, with an exercise price of $0.01 per share,
representing the right to acquire an aggregate of up to 22.5% of the Common
Stock of NEHC on a fully diluted basis for aggregate consideration of $115.0
million. The Senior Preferred Stock and the Junior Preferred Stock and warrants
were sold to DLJ Merchant Banking Partners II, L.P. and certain of its
affiliates ("DLJMBII"). The offering was a private placement.
Under the indenture relating to the Senior Discount Notes and the
Certificate of Designations relating to the Preferred Stock, NEHC is restricted
from paying cash dividends on its capital stock, subject to certain exceptions.
For additional information regarding these restrictions, see the Indenture,
dated as of July 11, 1997, by and between NEHC and State Street Bank and Trust
Company, relating to the Senior Discount Notes and the Certificate of
Designations relating to the Preferred Stock, included as an amendment to NEHC's
Amended and Restated Certificate of Incorporation, each of which has been
incorporated by reference as an exhibit hereto.
Under the Third Amended and Restated Credit Agreement dated as of May 21,
1998 among the Company and various financial institutions, as amended by the
First Amendment thereto (the "Credit Agreement"), the Company is restricted from
paying cash dividends on its capital stock until January 11, 2003, except to the
extent necessary to enable NEHC to pay corporate overhead expenses. From and
after January 11, 2003, the Company may pay additional dividends of up to
$13,000,000 annually, subject to certain conditions, to enable NEHC to service
the Senior Discount Notes. The indentures relating to the Senior Notes and the
Senior Subordinated Notes also limit the Company's ability to pay cash
dividends. For additional information regarding these restrictions, see the
Credit Agreement, the Senior Note Indenture and the Senior Subordinated Note
Indenture, each of which has been incorporated by reference as an exhibit
hereto. There are currently no restrictions on the ability of the Company's
wholly owned subsidiaries, other than AmeriServe Funding, to pay cash dividends
to the Company.
12
<PAGE> 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------------------
1998(a) 1997(b) 1996(c) 1995 1994
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $7,420,951 $3,508,332 $1,389,601 $400,017 $358,516
Gross profit................. 680,025 348,975 140,466 40,971 37,914
Operating expenses........... 716,357(d) 358,958(e) 122,430 36,695 34,488
---------- ---------- ---------- -------- --------
Operating income (loss)...... (36,332) (9,983) 18,036 4,276 3,426
Interest expense, net........ (90,824) (54,016) (16,423) (3,936) (3,294)
Loss on sale of accounts
receivable(f)............. (24,906) (6,757) -- -- --
Interest
income -- affiliates...... 1,335 632 528 749 533
Minority interest............ -- -- (2,345) -- --
---------- ---------- ---------- -------- --------
Income (loss) before income
taxes and extraordinary
loss...................... (150,727) (70,124) (204) 1,089 665
Provision for income taxes... 1,563 1,030 1,300 583 523
---------- ---------- ---------- -------- --------
Income (loss) before
extraordinary loss........ (152,290) (71,154) (1,504) 506 142
Extraordinary loss on early
extinguishment of debt.... -- 15,935 -- -- --
---------- ---------- ---------- -------- --------
Net income (loss)............ $ (152,290) $ (87,089) $ (1,504) $ 506 $ 142
========== ========== ========== ======== ========
BALANCE SHEET DATA AT END OF
YEAR:
Cash and cash equivalents.... $ 37,646 $ 231,450 $ 2,224 $ 575 $ 1,025
Total assets................. 1,935,812 1,478,790 314,946 77,503 79,218
Long-term debt, including
current portion........... 988,184 948,736 164,444 32,779 32,160
Total stockholders' equity
(deficit)................. (283,354) 44,802 18,519 10,157 17,205
</TABLE>
- ---------------
(a) Includes the effects of the acquisition of ProSource on May 21, 1998.
(b) Includes the effects of the acquisition of PFS effective June 11, 1997.
(c) Includes the effects of the acquisition of AmeriServ on January 25, 1996.
(d) Includes $90.1 million in restructuring and other unusual costs. See Note 3
to the Consolidated Financial Statements.
(e) Includes $52.4 million in restructuring and other unusual costs. See Note 3
to the Consolidated Financial Statements.
(f) Relates to an ongoing program to provide additional financing capacity
through sales of accounts receivable. See Note 8 to the Consolidated
Financial Statements.
13
<PAGE> 14
ITEM 7. 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.
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 Consolidated Financial
Statements), 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 Consolidated Financial Statements) 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.
14
<PAGE> 15
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 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
Consolidated Financial Statements.) 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.
15
<PAGE> 16
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.
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 Consolidated Financial
Statements.)
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.
16
<PAGE> 17
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 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
17
<PAGE> 18
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 Consolidated Financial
Statements, particularly the Consolidated Statements of Operations and the
Consolidated Statements of Cash Flows.
The following table presents certain financial information of the Company,
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales....................................... 100.0% 100.0% 100.0%
Cost of goods sold.............................. 90.8 90.1 89.9
----- ----- -----
Gross profit.................................... 9.2 9.9 10.1
Distribution, selling and administrative
expenses...................................... 7.6 7.8 8.1
----- ----- -----
Operating income before depreciation of property
and equipment, amortization of intangible
assets and restructuring and other unusual
costs......................................... 1.6% 2.2% 2.0%
===== ===== =====
</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.
18
<PAGE> 19
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 result of the acquisition of ProSource. (See Note 3 to
the Consolidated Financial Statements.)
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 Consolidated Financial Statements). 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 26, DECEMBER 27,
1998 % 1997 %
------------ ----- ------------ -----
<S> <C> <C> <C> <C>
Net sales....................................... $9,081.0 100.0 $8,907.6 100.0
Cost of goods sold.............................. 8,269.6 91.1 8,093.4 90.9
-------- ----- -------- -----
Gross profit.................................... 811.4 8.9 814.2 9.1
Distribution, selling and administrative
expenses...................................... 683.6 7.5 674.1 7.6
-------- ----- -------- -----
Operating income before depreciation,
amortization and restructuring and other
unusual costs................................. $ 127.8 1.4 $ 140.1 1.6
======== ===== ======== =====
</TABLE>
Management fees to Holberg Industries, Inc. included in distribution,
selling and administrative expenses were $4.0 million in both years.
19
<PAGE> 20
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 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
20
<PAGE> 21
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 Consolidated Financial
Statements.)
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 Consolidated Financial Statements).
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
21
<PAGE> 22
$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.
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 Consolidated Financial Statements.)
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 Consolidated Financial Statements). 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
22
<PAGE> 23
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. 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 and Senior Subordinated Notes and NEHC's Senior
Discount 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 7 and 8 to the Consolidated Financial Statements.)
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. 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 the "Risk Factors"
set forth in NEHC's Senior Redeemable Exchangeable Preferred Stock Registration
Statement on Form S-4, filed with the Securities and Exchange Commission on May
1, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are attached to and are
hereby incorporated into this Report.
23
<PAGE> 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of March 24, 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.
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.
24
<PAGE> 25
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.
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.
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<PAGE> 26
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 are elected annually and each serves until his
successor has been elected and qualified, or until his or her death, resignation
or removal. The officers of NEHC are elected by the Board of Directors, and each
serves until his or her successor is elected and qualified, or until his or her
death, resignation or removal.
ITEM 11. 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.
26
<PAGE> 27
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM OTHER
-------------------- COMPENSATION ANNUAL
FISCAL SALARY BONUS SECURITIES 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 (the "NEHC Board"), 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 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.
27
<PAGE> 28
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 $0.01 per share, of NEHC (the
"NEHC Class A Common Stock") made to each of the Named Executive Officers during
1998. No grants of stock options occurred prior to 1998.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED(#) YEAR ($/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 $450,000 at the rate of 10% per annum from March 1,
1999.
28
<PAGE> 29
The table below sets forth information concerning each exercise of options
for NEHC Class A Common Stock during 1998 by the Named Executive Officers, the
number of exercisable and unexercisable options for NEHC Class A Common Stock
held by them and the fiscal year-end value of such exercisable and unexercisable
options.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR-END(#) YEAR-END($)
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
January 29, 2000.
29
<PAGE> 30
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.
ITEM 12. 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
30
<PAGE> 31
as otherwise indicated in the footnotes, each beneficial owner has the sole
power to vote and to dispose of all shares held by such holder.
<TABLE>
<CAPTION>
PERCENT
AMOUNT AND NATURE OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP OUTSTANDING
- ---------------- ----------------------- -----------
<S> <C> <C>
NED.................................... 8,241,000 shares of Class B Common
Stock 100%(+)
Orkla ASA ("Orkla").................... (1)
DLJ Merchant Banking Partners, L.P. and
certain of its affiliates Warrants to purchase 3,910,000 shares
("DLJMB")......................... of
Class B Common Stock 30%(++)
Holberg................................ Warrants to purchase 753,300 shares of
Class B Common Stock 6%(++)
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.
(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.
31
<PAGE> 32
(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.
ITEM 13. 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 6 to the Consolidated
Financial Statements) 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 in 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.
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.
32
<PAGE> 33
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 Consolidated Financial
Statements.)
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 January 29, 2000.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
1. Financial Statements.
Report of Independent Auditors
Audited Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
33
<PAGE> 34
2. Financial statement schedule.
Schedule II -- Valuation and Qualifying Accounts
3. Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
2.1 -- Asset Purchase Agreement between PepsiCo, Inc. and Nebco
Evans Holding Company (incorporated by reference to
Exhibit 2.2 to the Registrant's Registration Statement
Form S-4 No. 333-33225 filed August 8, 1997).
2.2 -- Agreement and Plan of Merger, dated as of January 29,
1998, by and among AmeriServe Food Distribution, Inc.,
Steamboat Acquisition Corp. and ProSource, Inc.
(incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K, dated January
29, 1998).
3.1 -- Restated Certificate of Incorporation of NEHC
(incorporated by reference to Exhibit 3.1 to the
Registrant's Annual Report on Form 10-K filed on March
27, 1998
3.2 -- By-Laws of NEHC (incorporated by reference to Exhibit 3.2
to the Registrant's Registration Statement on Form S-4,
No. 333-33223 filed August 8, 1997).
4.1 -- Indenture, dated as of October 15, 1997, by and among the
Company, the Subsidiary Guarantors and State Street Bank
and Trust Company, with respect to the Senior Notes
(incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-4 No.
333-38337 filed October 21, 1997).
4.2 -- Form of New Senior Discount Notes (incorporated by
reference to Exhibit 4.2 to the Registrant's Registration
Statement on Form S-4, No. 333-33223 filed August 8,
1997).
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).
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
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).
4.9 -- Second 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
(incorporated by reference to Exhibit 4.3 to the
Registrant's Current Report on Form 8-K dated May 21,
1998).
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 filed 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 filed 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 filed 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 filed 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 and 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 filed March 25, 1999).
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
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 filed 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 filed 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 filed 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 filed 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.
21 -- Subsidiaries of the Registrant. (incorporated by
reference to Exhibit 21 to the Registrant's Annual Report
on Form 10-K filed March 25, 1999).
27.1 -- Financial Data Schedule.*
99.1 -- AmeriServe Food Distribution, Inc. Press Release dated
March 24, 1999 announcing Fourth Quarter and Full Year
1998 Operating Results.*
</TABLE>
- ---------------
* Filed herewith.
36
<PAGE> 37
NEBCO EVANS HOLDING COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Audited Consolidated Financial Statements:
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Stockholders' Equity
(Deficit).............................................. F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 38
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 26, 1998 and December 27, 1997, 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 at
Item 14(a). 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 26, 1998 and December 27, 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 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> 39
NEBCO EVANS HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 27,
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 37,646 $ 231,450
Accounts receivable....................................... 55,402 43,625
Undivided interest in accounts receivable trust........... 208,451 154,371
Allowance for doubtful accounts........................... (23,852) (15,566)
Inventories............................................... 292,255 150,148
Prepaid expenses and other current assets................. 14,196 17,034
---------- ----------
Total current assets.............................. 584,098 581,062
Property and equipment, net............................... 235,426 142,138
Intangible assets, net.................................... 1,087,079 737,870
Other noncurrent assets................................... 29,209 17,720
---------- ----------
$1,935,812 $1,478,790
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt......................... $ 8,768 $ 5,127
Accounts payable.......................................... 700,105 345,603
Accrued liabilities....................................... 183,764 101,219
---------- ----------
Total current liabilities......................... 892,637 451,949
Long-term debt.............................................. 979,416 943,609
Other noncurrent liabilities................................ 85,006 38,430
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....................................... (285,786) (93,442)
---------- ----------
Total stockholders' equity (deficit).............. (283,354) 44,802
---------- ----------
$1,935,812 $1,478,790
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 40
NEBCO EVANS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................................... $7,420,951 $3,508,332 $1,389,601
Cost of goods sold...................................... 6,740,926 3,159,357 1,249,135
---------- ---------- ----------
Gross profit............................................ 680,025 348,975 140,466
Distribution, selling and administrative expenses....... 560,696 272,016 112,058
Depreciation of property and equipment.................. 31,500 17,663 5,523
Amortization of intangible assets....................... 34,074 16,830 4,849
Restructuring and other unusual costs................... 90,087 52,449 --
---------- ---------- ----------
Operating income (loss)................................. (36,332) (9,983) 18,036
Other income (expense):
Interest expense, net................................. (90,824) (54,016) (16,423)
Loss on sale of accounts receivable................... (24,906) (6,757) --
Interest income -- affiliates......................... 1,335 632 528
Minority interest..................................... -- -- (2,345)
---------- ---------- ----------
(114,395) (60,141) (18,240)
---------- ---------- ----------
Loss before income taxes and extraordinary loss......... (150,727) (70,124) (204)
Provision for income taxes.............................. 1,563 1,030 1,300
---------- ---------- ----------
Loss before extraordinary loss.......................... (152,290) (71,154) (1,504)
Extraordinary loss...................................... -- 15,935 --
---------- ---------- ----------
Net loss................................................ $ (152,290) $ (87,089) $ (1,504)
========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 41
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> 42
NEBCO EVANS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $(152,290) $ (87,089) $ (1,504)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization........................... 65,574 34,493 10,372
Gain on sale of property................................ -- -- (4,652)
Interest accreted on subordinated debt.................. 7,425 5,513 4,193
Minority interest in subsidiary......................... -- -- 2,345
Impairment of property, equipment and other assets...... 17,880 12,404 --
Extraordinary loss-noncash portion...................... -- 2,156 --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and undivided interest in accounts
receivable trust.................................... (55,678) (2,981) (5,510)
Inventories........................................... 8,908 (14,090) (5,657)
Prepaid expenses and other current assets............. 13,382 (13,578) 823
Accounts payable...................................... 47,176 74,663 7,030
Accrued liabilities................................... 7,909 44,290 (7,083)
Payments charged to restructuring reserves............ (14,944) (1,382) --
Noncurrent liabilities................................ (25,252) (4,402) 1,669
Other................................................. (27,347) 182 2,125
--------- ---------- ---------
Net cash provided by (used for) operating activities...... (107,257) 50,179 4,151
--------- ---------- ---------
INVESTING ACTIVITIES
Businesses acquired, net of cash acquired................. (313,501) (851,019) (96,765)
Capital expenditures...................................... (68,534) (23,300) (12,701)
Proceeds from disposals of property and equipment......... 1,763 -- 9,699
Amounts received from affiliate........................... 13,693 20,485 11,121
Amounts paid to affiliate................................. (19,476) (23,878) (14,291)
Net increase in deposits with affiliates.................. -- (2,355) (2,480)
--------- ---------- ---------
Net cash used in investing activities..................... (386,055) (880,067) (105,417)
--------- ---------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of subordinated loans.............. -- -- 22,484
Proceeds from issuance of warrants........................ -- 2,700 7,516
Proceeds from issuance of long-term debt.................. -- 1,110,000 --
Proceeds from sale of accounts receivable................. 220,000 225,000 --
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.............................. (10,000) (26,325) --
Net increase (decrease) in borrowings under revolving line
of credit............................................... 4,000 (77,374) 116,708
Repayments of long-term debt.............................. (10,733) (287,187) (43,793)
--------- ---------- ---------
Net cash provided by financing activities................. 299,508 1,059,114 102,915
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents...... (193,804) 229,226 1,649
Cash and cash equivalents at beginning of year............ 231,450 2,224 575
--------- ---------- ---------
Cash and cash equivalents at end of year.................. $ 37,646 $ 231,450 $ 2,224
========= ========== =========
Supplemental cash flow information:
Cash paid during the year for:
Interest.............................................. $ 91,337 $ 24,468 $ 10,683
Income taxes, net of refunds.......................... 846 2,668 1,256
Businesses acquired:
Fair value of assets acquired......................... $ 782,736 $1,101,786 $ 210,357
Cash paid............................................. (313,501) (851,019) (96,765)
--------- ---------- ---------
Liabilities assumed................................... $ 469,235 $ 250,767 $ 113,592
========= ========== =========
Supplemental noncash investing and financing activities:
Property and equipment purchased with capital leases
(included in long-term debt).......................... $ 38,257 $ 22,029 $ 13,363
</TABLE>
See accompanying notes.
F-6
<PAGE> 43
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. (the Company) 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. (Holberg), 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 26, 1998 (fiscal
1998) December 27, 1997 (fiscal 1997) and December 28, 1996 (fiscal 1996)
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> 44
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> 45
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 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
F-9
<PAGE> 46
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1998 assume the
acquisition of ProSource occurred at the beginning of that period, and for
fiscal 1997 assume the acquisitions of both PFS and ProSource occurred at the
beginning of that period (in millions):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net sales................................................ $9,081.0 $8,907.6
Loss before extraordinary items and cumulative effect of
a change in accounting principle....................... (153.2) (55.5)
Net loss................................................. (153.2) (84.1)
</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> 47
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 1998 and 1997 are the following
(in millions):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Restructuring charges, principally exit costs for future
lease terminations and employee severance................. $12.7 $13.4
Impairment of property, equipment and other assets.......... 16.7 12.4
Financing-related fees and other one-time indirect costs
incurred in connection with the ProSource and PFS
acquisitions.............................................. 8.6 13.6
Costs incurred to integrate acquisitions, and other unusual
items..................................................... 52.1 13.0
----- -----
$90.1 $52.4
===== =====
</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
severance. Service to Wendy's restaurants represented approximately $600 million
in annual net sales. The discontinuance, which
F-11
<PAGE> 48
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 26, DECEMBER 27,
1998 1997
------------ ------------
<S> <C> <C>
Land........................................................ $ 7,542 $ 3,833
Buildings and improvements.................................. 77,236 44,612
Delivery and automotive equipment........................... 97,339 86,879
Warehouse equipment......................................... 21,943 11,359
Furniture, fixtures and office equipment.................... 84,146 17,393
Construction in progress.................................... 4,520 5,538
-------- --------
292,726 169,614
Less accumulated depreciation and amortization.............. 57,300 27,476
-------- --------
$235,426 $142,138
======== ========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 27,
1998 1997
------------ ------------
<S> <C> <C>
Goodwill, less accumulated amortization of $34,937 and
$15,849................................................... $ 913,045 $661,570
Assembled workforce, customer lists, deferred financing
costs and other intangibles, less accumulated amortization
of $22,906 and $9,861..................................... 174,034 76,300
---------- --------
$1,087,079 $737,870
========== ========
</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> 49
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 26, DECEMBER 27,
1998 1997
------------ ------------
<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...................... 65,624 58,200
Borrowings under credit facility............................ 4,000 --
Other notes payable......................................... 3,766 3,493
-------- --------
923,390 911,693
Capital lease obligations (see Note 15)..................... 64,794 37,043
-------- --------
988,184 948,736
Less current portion (capital lease obligations only)....... 8,768 5,127
-------- --------
$979,416 $943,609
======== ========
</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.
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
F-13
<PAGE> 50
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 6.40% and 6.94% at December 26, 1998 and
December 27, 1997, respectively.
F-14
<PAGE> 51
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> 52
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 26, DECEMBER 27, DECEMBER 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal..................................... $ -- $ 515 $1,100
State....................................... 834 299 200
Foreign..................................... 173 95 --
------ ------ ------
1,007 909 1,300
Deferred (foreign in 1998 and 1997)........... 556 121 --
------ ------ ------
$1,563 $1,030 $1,300
====== ====== ======
</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 26, DECEMBER 27, DECEMBER 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Benefit at statutory rate....................... $(51,244) $(23,842) $ (69)
State income taxes, net of federal tax
benefit....................................... 550 197 129
Foreign income taxes............................ 729 143 --
Nondeductible goodwill.......................... 2,892 891 758
Increase in valuation allowance................. 47,735 23,571 --
Other........................................... 901 70 482
-------- -------- ------
Provision for income taxes...................... $ 1,563 $ 1,030 $1,300
======== ======== ======
</TABLE>
F-16
<PAGE> 53
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 26, DECEMBER 27,
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves........................................ $ 9,140 $ 9,987
Inventory reserves....................................... 13,121 4,669
Property and equipment................................... 12,663 4,758
Accrued liabilities...................................... 24,107 4,222
Restructuring reserves................................... 62,289 21,124
Acquisition costs........................................ 5,087 7,682
Net operating loss carryforward.......................... 119,184 39,558
Original issue discount.................................. 4,576 1,767
Other.................................................... 1,499 --
--------- --------
Total deferred tax assets........................ 251,666 93,767
Less valuation allowance................................. (196,997) (49,787)
--------- --------
Total deferred tax assets, net................... 54,669 43,980
========= ========
Deferred tax liabilities:
Intangibles.............................................. 53,399 43,980
Other.................................................... 1,270 --
--------- --------
Total deferred tax liabilities................... 54,669 43,980
--------- --------
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> 54
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 $6,598,000,
$961,000 and $515,000 in fiscal 1998, 1997 and 1996, 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.
F-18
<PAGE> 55
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. RELATED-PARTY TRANSACTIONS
NEHC and the Company have interest-bearing amounts due from Holberg
totaling $13,981,000 and $8,066,000 at December 26, 1998 and December 27, 1997,
respectively, resulting primarily from cash 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 26, 1998 and December 27, 1997. This amount is included
in other noncurrent assets in the accompanying consolidated balance sheets.
In fiscal 1998 and 1997, distribution, selling and administrative expenses
include $4,000,000 in management fees to Holberg.
Interest income from Holberg and an affiliate of approximately $1,335,000,
$632,000 and $528,000 in fiscal 1998, 1997 and 1996, 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 $51,176,000,
$17,902,000 and $15,384,000 (including contingent rentals) in fiscal 1998, 1997
and 1996, respectively.
Property and equipment include the following amounts under capital leases
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Land........................................................ $ 692 $ 692
Buildings and improvements.................................. 14,122 6,891
Delivery and automotive equipment........................... 37,551 28,778
Warehouse equipment......................................... 5,595 2,227
Furniture, fixtures and office equipment.................... 16,603 3,312
------- -------
74,563 41,900
Less accumulated amortization............................... 13,258 6,456
------- -------
Property and equipment under capital leases, net............ $61,305 $35,444
======= =======
</TABLE>
F-19
<PAGE> 56
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
CAPITAL OPERATING
FISCAL YEAR ENDING LEASES LEASES
- ------------------ ------- ---------
<S> <C> <C>
1999........................................................ $16,558 $ 49,917
2000........................................................ 15,555 46,688
2001........................................................ 13,578 41,058
2002........................................................ 9,347 34,302
2003........................................................ 7,151 28,601
Thereafter.................................................. 37,452 136,148
------- --------
Total....................................................... 99,641 $336,714
========
Less amount representing interest........................... 34,847
-------
Present value of net minimum lease commitments.............. $64,794
=======
</TABLE>
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>
1998 1997
---- ----
<S> <C> <C>
Burger King................................................. 25% 5%
Taco Bell................................................... 17% 29%
Pizza Hut................................................... 16% 27%
KFC......................................................... 7% 12%
Red Lobster................................................. 7% --
Arby's...................................................... 4% 7%
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.
F-20
<PAGE> 57
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
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 26, DECEMBER 27,
1998 1997
------------ ------------
<S> <C> <C>
Condensed balance sheets:
Cash and cash equivalents................................. $ 32,979 $ 320
Due from affiliate........................................ 11,897 5,046
Investment in subsidiaries................................ 226,500 176,500
Other assets.............................................. 300 --
-------- --------
$271,676 $181,866
======== ========
Accounts payable and accrued liabilities.................. $ 373 $ 188
Due to affiliate.......................................... 1,081 --
Subordinated loans........................................ 65,625 58,199
Senior redeemable exchangeable preferred stock............ 262,107 --
Stockholders' equity (deficit)............................ (57,510) 123,479
-------- --------
$271,676 $181,866
======== ========
Condensed statements of income (loss):
Selling, general and administrative expenses.............. $ 20 $ 177
Interest expense, net..................................... 4,881 5,821
Income taxes.............................................. 222 --
Extraordinary loss........................................ -- 6,562
-------- --------
$ (5,123) $(12,560)
======== ========
</TABLE>
F-21
<PAGE> 58
NEBCO EVANS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 27,
1998 1997
------------ ------------
<S> <C> <C>
Condensed statements of cash flows:
Net cash provided by (used in) operating activities....... $ 2,188 $(11,007)
-------- --------
Investing activities:
Business acquired, net of cash acquired................ -- (1,500)
Investment in subsidiary............................... (50,000) (130,000)
Due from affiliates.................................... (5,769) --
-------- --------
Net cash used in investing activities..................... (55,769) (131,500)
-------- --------
Financing activities:
Proceeds from issuance of preferred stock and
warrants.............................................. 250,000 115,000
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................... 86,240 142,827
-------- --------
Net increase in cash and cash equivalents................... 32,659 320
Cash and cash equivalents at beginning of year.............. 320 --
-------- --------
Cash and cash equivalents at end of year.................... $ 32,979 $ 320
======== ========
</TABLE>
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> 59
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.
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NEBCO EVANS HOLDING COMPANY
(Registrant)
By: /s/ JOHN V. HOLTEN
----------------------------------
John V. Holten
Chairman and Chief Executive
Officer
Date: March 25, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- --------------
<C> <S> <C>
/s/ JOHN V. HOLTEN Director, Chairman and Chief March 25, 1999
- ----------------------------------------------------- Executive Officer
John V. Holten
/s/ DIANA M. MOOG Executive Vice President and March 25, 1999
- ----------------------------------------------------- Chief Financial Officer
Diana M. Moog
/s/ STANLEY J. SZLAUDERBACH Vice President and Chief March 25, 1999
- ----------------------------------------------------- Accounting Officer
Stanley J. Szlauderbach
/s/ JOHN R. EVANS Director and Vice Chairman March 25, 1999
- -----------------------------------------------------
John R. Evans
/s/ RAYMOND E. MARSHALL Director, Executive Vice March 25, 1999
- ----------------------------------------------------- President and Vice Chairman
Raymond E. Marshall
/s/ DAVID R. PARKER Director and Vice Chairman March 25, 1999
- -----------------------------------------------------
David R. Parker
/s/ THOMAS C. HIGHLAND Director, Executive Vice March 25, 1999
- ----------------------------------------------------- President and Vice Chairman
Thomas C. Highland
/s/ GUNNAR E. KLINTBERG Director and Assistant March 25, 1999
- ----------------------------------------------------- Secretary
Gunnar E. Klintberg
/s/ LEIF F. ONARHEIM Director March 25, 1999
- -----------------------------------------------------
Leif F. Onarheim
/s/ PETER T. GRAUER Director March 25, 1999
- -----------------------------------------------------
Peter T. Grauer
/s/ BENOIT JAMAR Director March 25, 1999
- -----------------------------------------------------
Benoit Jamar
/s/ DANIEL W. CRIPPEN Director March 25, 1999
- -----------------------------------------------------
Daniel W. Crippen
</TABLE>
<PAGE> 61
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
27.1 -- Financial Data Schedule.*
99.1 -- AmeriServe Food Distribution, Inc. Press Release dated
March 24, 1999 announcing Fourth Quarter and Full Year
1998 Operating Results.*
</TABLE>
- ---------------
* Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> DEC-26-1998
<CASH> 37,646
<SECURITIES> 0
<RECEIVABLES> 55,402
<ALLOWANCES> 23,852
<INVENTORY> 292,255
<CURRENT-ASSETS> 584,098
<PP&E> 292,726
<DEPRECIATION> 57,300
<TOTAL-ASSETS> 1,935,812
<CURRENT-LIABILITIES> 892,637
<BONDS> 850,000
0
2,350
<COMMON> 82
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,935,812
<SALES> 7,420,951
<TOTAL-REVENUES> 7,420,951
<CGS> 6,740,926
<TOTAL-COSTS> 6,740,926
<OTHER-EXPENSES> 716,357
<LOSS-PROVISION> 4,746
<INTEREST-EXPENSE> 90,824
<INCOME-PRETAX> (150,727)
<INCOME-TAX> 1,563
<INCOME-CONTINUING> (152,290)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (152,290)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
FOR IMMEDIATE RELEASE
Contact: Stan Szlauderbach
VP, Investor Relations and Chief Accounting Officer
(972) 364-2238
AMERISERVE ANNOUNCES FOURTH QUARTER
AND FULL YEAR OPERATING RESULTS
DALLAS, March 24, 1999 - AmeriServe Food Distribution, Inc., the
nation's largest foodservice distributor specializing in chain restaurants,
today announced fourth quarter 1998 net sales of $2.4 billion, about even with
pro forma net sales in 1997. Fourth quarter EBITDA (as defined below) was $34.3
million in 1998 and $38.0 million on a pro forma basis in 1997. The sales
performance reflected growth in the existing customer base and the addition of
new business, offset by the previously disclosed discontinuance of the Wendy's
business in the third quarter of 1998. Adjusting for the discontinued business,
net sales would have increased by about $130 million or 5.3% over 1997.
For the 1998 year, pro forma net sales were $9.1 billion, an increase
of $173.4 million or 1.9% over 1997. Pro forma EBITDA was $149.4 million in
both 1998 and in 1997.
"We are very encouraged by the financial results for the year and the
strategic customer and restructuring activities we have completed," said John
V. Holten, AmeriServe's Chairman and Chief Executive Officer. "We now have over
75% of our business under long-term contracts. We have converted 50% of our
quick service business to the JDEdwards software platform and with our newly
constructed and reconfigured centers, 25% of the quick service business sales
volume has now been fully consolidated."
- more -
<PAGE> 2
-2-
"Consolidating the AmeriServe, PFS and ProSource operations will yield
significant operating efficiencies by increasing both the sales per
distribution center and the density of customers' restaurants within a center's
delivery range. We will also realize cost savings as we consolidate
administrative and other support processes. Despite an aggressive schedule, we
continue to hit the targets set in our restructuring plan, and we remain on
track to achieve a run rate of $100 million in annual cost savings beginning
mid-2000," Mr. Holten continued.
The following restructuring and other efficiency initiatives have been
completed to date:
o Seventeen distribution centers, including seven ProSource centers, have
been closed and the business transferred to new or existing facilities.
Another 20 closures are planned for the balance of 1999.
o Operations have commenced at three new state-of-the art distribution
centers in Orlando, FL, Denver, CO and Memphis, TN. The remaining four
additional new centers planned for completion in 1999 are under
construction and on schedule.
o Five centers have been expanded and/or reconfigured, and four of the
remaining five planned for completion in 1999 are in process and on
schedule.
o As a result of the above activities, centers that are complete with
respect to consolidation of business represent approximately 25% of quick
service net sales. Integration of delivery routes from these centers is
now in process.
o Twelve centers (of a final 21 planned) are operating with the new
JDEdwards integrated applications software platform, with the remaining
nine scheduled to be converted by the third quarter of 1999.
o Plans have been finalized for the integration of ProSource's casual
dining operations.
o Administrative support activities continue to be centralized at the new
Dallas headquarters facility, including information technology, product
supply and finance. The transfer of the majority of support activities
from the former ProSource headquarters is scheduled to be completed by
the first quarter of 2000.
- more -
<PAGE> 3
-3-
Commenting further on AmeriServe's accomplishments, Mr. Holten said,
"Concurrent with the restructuring activities, we have been working hard to
strengthen relationships with our customers. The new or revised contracts we
have secured not only help to ensure long-term partnerships, but also provide
incentives to boost efficiency and profitability for both parties. These
alliances reflect a commitment to work together to drive costs out of the
supply chain and improve service to our respective customers.
Key customer activities have included the following:
o In September 1998, the distribution agreement with Tricon was revised and
extended to January 2005, with an option to July 2007. Service to Tricon
under this agreement represents $1.7 billion in annual sales.
o During the second half of 1998, long-term (largely five-year)
distribution agreements were secured with a substantial majority of
franchisees in the Taco Bell system.
o In February 1999, a new replacement distribution agreement was entered
into with Arby's Cooperative Purchasing. The contract, which expires
December 2003, covers a substantial majority of restaurants in the Arby's
system and represents $400 million in annual sales.
o Of our Burger King customer base, almost 80% is now under long-term
contracts.
o As a result of the above actions, 75% of AmeriServe's total business is
under long-term contracts compared to 45% in mid-1997. About 70% of
AmeriServe's total business is currently under contracts with three or
more years of remaining term.
o In conjunction with the above actions, AmeriServe now has about 70% of
its total business under fixed-fee per case pricing as opposed to
percentage mark-up (over cost) pricing. This compares to 25% in mid-1997.
This change more closely aligns AmeriServe's profitability to its ability
to control distribution costs, and insulates the Company from product
cost and mix variability.
o In the course of revising or entering into new contracts, AmeriServe in
cooperation with customers has identified supply chain efficiency
opportunities benefiting both parties. These include reduced deliveries
per week, after-hours delivery, electronic ordering and increasing the
time from order to delivery. Also, AmeriServe provides value-added
services to customers such as consolidating purchases of low volume
- more -
<PAGE> 4
-4-
items to reduce the cost of these products, and management of freight
costs in transporting products from vendors to AmeriServe centers, which
reduces the freight component of product costs.
"Looking ahead, 1999 will be another year of intense restructuring
activity, but we are energized by the successes to date. With the ramping-up of
network efficiencies and other profitability enhancing initiatives in the third
and fourth quarters of 1999, EBITDA growth for the year is expected to
approximate 10-15% over 1998. Sales growth should approximate 2%. As the
Company implements the value-added services described above, gross margin for
the year should approximate 9.0%. As we anticipate the turn of the century, we
believe the strategies we have put into motion will allow us to strengthen our
leadership position and participate fully in the exciting growth prospects for
the chain restaurant industry," concluded Mr. Holten.
The pro forma results presented in this announcement represent the total
combined historical operating results of AmeriServe, the PFS Division of
PepsiCo, Inc. (acquired effective June 1997) and ProSource, Inc. (acquired May
1998) for all periods discussed as if the acquisitions had occurred at the
beginning of fiscal 1997. Actual results reported on Forms 10-Q and 10-K filed
with the Securities and Exchange Commission include the results of the acquired
businesses only from their respective acquisition dates as required by the
purchase method of accounting.
EBITDA as discussed in this announcement excludes the impact of
restructuring costs associated with the consolidation and integration of the
acquired businesses, management fees assessed by an affiliated company and
certain operating cost inefficiencies.
- more -
<PAGE> 5
-5-
AmeriServe, headquartered in Dallas, employs approximately 8,000
people. It serves approximately 36,000 quick-service and casual dining
restaurants in the United States, Canada and Mexico, including 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,
Taco Bell, TCBY and TGI Friday's. AmeriServe is a subsidiary of Holberg
Industries, Inc., a diversified service company located in Greenwich, CT., with
1998 pro forma sales of more than $10 billion and 20,000 employees.
AmeriServe's 1998 Annual Report on Form 10-K to be filed on March 25,
1999 will be available on the Internet at www.sec.gov. If you wish to receive a
printed copy of the 10-K, please call (972) 364-2238. More information about
AmeriServe is available at www.ameriserve.com.
This press release contains certain forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934 and Section
27A of the Securities Act of 1933. Actual results could differ materially from
those projected in such forward-looking statements. Readers are cautioned not
to place undue reliance on the forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to update these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence or nonoccurrence of anticipated events.
Certain factors that could cause actual results to differ materially from
projected results can be found in the Management's Discussion and Analysis
section in the Company's 1998 Annual Report on Form 10-K, as well as other
documents referenced to therein.
- more -
<PAGE> 6
AmeriServe Food Distribution, Inc.
Results of Operations on a Pro Forma Basis
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
-------------------------------------------- ---------------------------------------------
December 26, December 27, December 26, December 27,
1998 % 1997 % 1998 % 1997 %
------------ ----- ------------ ----- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... $2,433.6 100.0 $2,440.1 100.0 $9,081.0 100.0 $8,907.6 100.0
Cost of goods sold................. 2,223.4(b) 91.4 2,217.2 90.9 8,269.6(b) 91.1 8,093.4 90.9
-------- ----- -------- ----- -------- ----- -------- -----
Gross profit....................... 210.2 8.6 222.9 9.1 811.4 8.9 814.2 9.1
Distribution, selling and
administrative expenses........ 184.3 7.6 190.7 7.8 684.9 7.5 675.2 7.6
-------- ----- -------- ----- -------- ----- -------- -----
Operating income before
depreciation, amortization
and restructuring and other
unusual costs.................. 25.9 1.1 32.2 1.3 126.5 1.4 139.0 1.6
Cost inefficiencies (a) and
management fees to Holberg..... 8.4 5.8 22.9 10.4
-------- -------- -------- --------
EBITDA as reported................. $ 34.3 1.4 $ 38.0 1.6 $ 149.4 1.6 $ 149.4 1.7
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
(a) Cost inefficiencies represent management's estimate of operating cost
reductions that could be achieved within the distribution networks of
AmeriServe (pre-acquisitions) and ProSource, even before savings from the
integration of the AmeriServe, PFS and ProSource networks. No amounts
were estimated 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.
(b) Includes $4.0 million in unusual, one-time charges.
