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PROSPECTUS
[LOGO]
OFFER TO EXCHANGE
UP TO $165,000,000 OF
8 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B
FOR ANY AND ALL OF THE OUTSTANDING
8 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIES A
OF
NASH-FINCH COMPANY
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME
ON AUGUST 4, 1998, UNLESS EXTENDED
Nash-Finch Company, a Delaware corporation (the "Company"), hereby offers,
upon the terms and conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (the "Letter of Transmittal" and, together with this
Prospectus, the "Exchange Offer"), to exchange an aggregate of up to
$165,000,000 principal amount of 8 1/2% Senior Subordinated Notes due 2008,
Series B (the "Exchange Notes"), which have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), for an identical face amount of
the issued and outstanding 8 1/2% Senior Subordinated Notes due 2008, Series A
(the "Series A Notes" and, together with the Exchange Notes, the "Notes") of the
Company from the Holders (as defined herein) thereof in integral multiples of
$1,000. As of the date of this Prospectus, there is $165,000,000 in aggregate
principal amount of the Series A Notes outstanding. The terms of the Exchange
Notes are identical in all material respects to the Series A Notes, except that
the Exchange Notes have been registered under the Securities Act, and therefore
will not bear legends restricting their transfer and will not contain certain
provisions providing for an increase in the interest rate payable on the Series
A Notes under certain circumstances relating to the Registration Rights
Agreement (as defined herein), which provisions will terminate as to all of the
Notes upon the consummation of the Exchange Offer. The Exchange Notes will be
obligations of the Company evidencing the same indebtedness as the Series A
Notes, and will be entitled to the benefits of the same Indenture (as defined
herein). See "The Exchange Offer."
Interest on the Exchange Notes will be payable semi-annually on May 1 and
November 1 of each year, commencing November 1, 1998. The Exchange Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after May 1, 2003, at the redemption prices set forth herein, plus accrued and
unpaid interest thereon, if any, to the date of redemption. In addition, on or
prior to May 1, 2001, the Company may redeem up to 35% of the originally issued
aggregate principal amount of the Exchange Notes at a redemption price of 108.5%
of the principal amount thereof, plus accrued and unpaid interest thereon, if
any, to the date of redemption, with the net proceeds of a Public Equity
Offering (as defined herein); PROVIDED, HOWEVER, that at least $107.25 million
in aggregate principal amount of Exchange Notes is outstanding immediately after
giving effect to such redemption. Following the occurrence of a Change of
Control (as defined herein), each holder of Exchange Notes will have the right
to require the Company to purchase all or a portion of such holder's Exchange
Notes at a purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the date of purchase. See
"Description of the Exchange Notes."
The Exchange Notes will represent unsecured senior subordinated obligations
of the Company and will be subordinated in right of payment to all existing and
future Senior Indebtedness (as defined herein) of the Company. The Exchange
Notes will rank PARI PASSU in right of payment with all other existing and
future senior subordinated indebtedness, if any, of the Company and senior in
right of payment to all existing and future subordinated indebtedness, if any,
of the Company. The Company has not issued, and does not have any current
arrangements to issue, any significant indebtedness to which the Exchange Notes
would be senior, subordinate or rank PARI PASSU in right of payment. The
Exchange Notes will be effectively subordinate to essentially all of the
currently outstanding indebtedness of the Company and its subsidiaries. The
Exchange Notes will be guaranteed, jointly and severally, on a senior
subordinated basis (the "Guarantees"), by all of the Company's existing material
subsidiaries (and not by the Company's special purpose financing subsidiary)
(the "Guarantors" and, together with the Company, the "Issuers"). The Guarantees
will be unsecured senior subordinated obligations of the Guarantors and will be
subordinated to all existing and future Senior Indebtedness of the Guarantors.
See "Description of the Exchange Notes--Subordination." As of March 28, 1998, on
an as adjusted basis for the offering of the Series A Notes and the application
of the estimated net proceeds therefrom, the Issuers would have had an aggregate
of approximately $221.5 million of Senior Indebtedness outstanding. See "Use of
Proceeds."
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
UNTIL OCTOBER 4, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
The Date of this Prospectus is July 6, 1998.
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The Company will accept for exchange any and all validly tendered Series A
Notes on or prior to the Expiration Date (as defined herein). Any Series A Notes
tendered pursuant to the Exchange Offer may be withdrawn at any time prior to or
on the Expiration Date, after which tenders of Series A Notes are irrevocable.
The Exchange Offer is not conditioned upon any minimum principal amount of
Series A Notes being tendered for exchange. For certain conditions to the
Exchange Offer, see "The Exchange Offer--Conditions."
The Series A Notes were offered and sold on April 24, 1998 at a price of
$992.00 per $1,000 principal amount of the Series A Notes (the "Series A Note
Offering"). For federal income tax purposes, the amount of original issue
discount on the Series A Notes is considered to be DE MINIMIS and is treated as
zero. See "Description of Certain Federal Income Tax Consequences of an
Investment in the Notes."
The Series A Notes were offered and sold in a transaction not registered
under the Securities Act in reliance upon an exemption from the registration
requirements thereof. In general, the Series A Notes may not be offered or sold
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act.
The Exchange Notes are being offered hereby in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement dated
April 24, 1998 (the "Registration Rights Agreement") by and among the Issuers
and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Nesbitt Burns Securities
Inc. and Piper Jaffray Inc. (the "Initial Purchasers"). The Company has agreed
to pay the expenses of the Exchange Offer. Based on interpretations by the staff
of the Securities and Exchange Commission (the "Commission") set forth in
no-action letters issued to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer in exchange for Series A
Notes may be offered for resale, resold or otherwise transferred by any Holder
thereof (other than any such Holder that is an "affiliate" of the Company within
the meaning of Rule 405 promulgated under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
Holder's business and such Holder does not intend to participate and has no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes. In some cases, certain broker-dealers may be required to
deliver a prospectus in connection with the resale of such Exchange Notes.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with any resale of Exchange Notes
received in exchange for such Series A Notes where such Series A Notes were
acquired by such broker-dealer for its own account as a result of market-making
activities or other trading activities (other than Series A Notes acquired
directly from the Company). The Company has agreed that it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale.
Prior to this Exchange Offer, there has been no public market for the Series
A Notes or Exchange Notes. If a market for the Exchange Notes should develop,
the Exchange Notes could trade at a discount from their principal amount. The
Company does not intend to list the Exchange Notes on any securities exchange,
nor does the Company intend to apply for quotation of the Exchange Notes on the
Nasdaq National Market or other quotation system. The Initial Purchasers have
indicated to the Company that they intend to make a market in the Notes, but are
not obligated to do so and such market-making activities may be discontinued at
any time. As a result, no assurance can be given that an active trading market
for the Exchange Notes will develop.
The Exchange Notes issued pursuant to this Exchange Offer will be issued in
the form of a Global Security (as defined herein), which will be deposited with,
or on behalf of, The Depository Trust Company (the "Depository" or "DTC") and
registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the Global Security representing the Exchange Notes will be shown
on, and transfers thereof will be effected through, records maintained by the
DTC and its participants. Notwithstanding the foregoing, Series A Notes held in
certificated form will be exchanged solely for Certificated Securities (as
defined herein). After the initial issuance of the Global Security, Certificated
Securities will be issued in exchange for interests in the Global Security only
on the terms set forth in the Indenture. See "Book-Entry; Delivery and Form."
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The reports, proxy statements and other information filed by the
Company with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and should be available at the Commission's Regional
Offices at 7 World Trade Center, 13th Floor, New York, New York 10048, and 500
West Madison Street, Suite 1400, Chicago, Illinois 60621 and at the offices of
the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006. Copies
of such material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the Commission maintains a Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
While any Series A Notes remain outstanding, the Company will make
available, upon request, to any holder and any prospective purchaser of Series A
Notes the information required pursuant to Rule 144A(d)(4) under the Securities
Act during any period in which the Company is not subject to Section 13 or 15(d)
of the Exchange Act. Any such request should be directed to the Company at 7600
France Avenue South, P.O. Box 355, Minneapolis, Minnesota 55440-0355.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended January 3,
1998;
2. The Company's Quarterly Report on Form 10-Q for the twelve weeks ended
March 28, 1998; and
3. The Company's Current Report on Form 8-K dated April 6, 1998.
All documents subsequently filed by the registrant pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the consummation of the
Exchange Offer, shall be deemed to be incorporated by reference herein.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
UNTIL OCTOBER 4, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
NORMAN R. SOLAND, VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL, NASH FINCH
COMPANY, 7600 FRANCE AVENUE SOUTH, P.O. BOX 355, MINNEAPOLIS, MINNESOTA
55440-0355 (612) 832-0534. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY REQUEST SHOULD BE RECEIVED BY JULY 28, 1998 (DATE FIVE BUSINESS DAYS PRIOR
TO THE DATE ON WHICH THE FINAL INVESTMENT DECISION MUST BE MADE).
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION CONTAINED IN THIS PROSPECTUS AND
THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED AND
INCORPORATED HEREIN BY REFERENCE. UNLESS OTHERWISE INDICATED, ALL REFERENCES IN
THIS PROSPECTUS TO THE "COMPANY" REFER TO NASH FINCH COMPANY, A DELAWARE
CORPORATION, AND ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED, INDUSTRY DATA
CONTAINED HEREIN IS DERIVED FROM PUBLICLY AVAILABLE INDUSTRY TRADE JOURNALS,
REPORTS AND OTHER PUBLICLY AVAILABLE SOURCES, WHICH THE COMPANY HAS NOT
INDEPENDENTLY VERIFIED, OR FROM COMPANY ESTIMATES WHICH THE COMPANY BELIEVES TO
BE REASONABLE BUT WHICH HAVE NOT BEEN INDEPENDENTLY VERIFIED. UNLESS OTHERWISE
INDICATED, ALL INFORMATION CONTAINED HEREIN WITH RESPECT TO THE NUMBERS OF THE
COMPANY'S RETAIL STORES AND THE SQUARE FOOTAGE OF SUCH STORES IS AS OF JANUARY
3, 1998. ALL REFERENCES TO FISCAL YEARS IN THIS PROSPECTUS REFER TO THE FISCAL
YEAR ENDING ON THE SATURDAY CLOSEST TO DECEMBER 31 OF THE YEAR INDICATED (E.G.,
FISCAL 1997 REFERS TO THE FISCAL YEAR ENDED JANUARY 3, 1998). THE COMPANY'S
FISCAL YEAR GENERALLY CONSISTS OF 52 WEEKS, EXCEPT FOR CERTAIN YEARS SUCH AS
FISCAL 1997, WHICH CONSISTED OF 53 WEEKS.
THE COMPANY
Nash Finch Company, organized in 1921 as the successor to a business founded
in 1885, is the third largest publicly traded wholesale food distributor in the
United States (based on 1997 estimates), serving primarily the Midwestern and
Southeastern regions of the United States. In addition, the Company operates 97
conventional and warehouse supermarkets in 13 states. The Company's wholesale
operations, which include 21 distribution centers serving approximately 2,250
affiliated and independent supermarkets, U.S. military commissaries and other
customers in approximately 30 states, accounted for 79.8% of the Company's total
revenues in fiscal 1997, while its retail operations accounted for 18.7%. In
fiscal 1997, the Company had total revenues of $4.4 billion and EBITDA (as
defined herein) of $113.1 million.
The Company's wholesale operations serve two primary markets: (i)
supermarkets (70.4% of wholesale revenues in fiscal 1997), where the Company
combines a wide offering of national brand and private label products with
comprehensive support services to develop strong relationships with customers;
and (ii) military commissaries (29.6% of wholesale revenues in fiscal 1997),
where the Company believes it is currently the largest distributor of groceries
and related products to such facilities in the United States. The Company's
broad product offering includes dry groceries, fresh fruits and vegetables,
frozen foods, fresh and processed meat products and dairy products, as well as a
wide variety of non-food products, including health and beauty care, tobacco,
paper products, cleaning supplies and small household items. Private label
products are branded primarily under the Our Family-Registered Trademark-
trademark, a long-standing private label of the Company, and
Fame-Registered Trademark-, a trademark acquired in the acquisition of Super
Food Services, Inc. ("Super Food") in November 1996. The Company offers a wide
range of support services to its independent retailers to help them compete more
effectively in their markets and to build customer loyalty, including
supermarket merchandising support, accounting services, price management
systems, retail technology support, advertising and promotional programs,
training and human resource development services, market research and store
development services.
The Company's retail stores, as well as many of the retail outlets supplied
by the Company's wholesale operations, are located primarily in small to
midsized markets and rural areas. The Company's retail operations consist of 66
conventional supermarkets, averaging approximately 23,300 square feet in size,
operating principally under the Sun Mart-TM-, Easter Foods-TM- and Food
Folks-Registered Trademark- trade names; 27 warehouse stores, averaging
approximately 42,900 square feet in size, operating principally under the
Econofoods-Registered Trademark- trade name; and four combination general
merchandise/food stores averaging approximately 43,000 square feet in size,
operating under the Family Thrift Center-TM- trade name.
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COMPANY STRENGTHS
LEADING WHOLESALE FOOD DISTRIBUTOR. Through recent acquisitions, the
Company has become the third largest publicly traded wholesale food distributor
in the United States (based on 1997 estimates) with geographically dispersed
operations serving primarily the Midwestern and Southeastern regions of the
United States. The Company serves a diversified group of approximately 2,250
affiliated and independent supermarkets, U.S. military commissaries and other
customers, none of which accounted for more than 2.5% of the Company's total
revenues in fiscal 1997. The Company believes it is the largest wholesale
distributor of groceries and related products to military commissaries in the
United States. The Company derives increased purchasing power and economies of
scale from its large sales volume and distribution network.
INTEGRATED AND EFFICIENT DISTRIBUTION NETWORK. The Company has and
continues to develop a highly integrated and efficient distribution network by
realizing synergies from acquisitions and implementing innovative logistical
techniques. The Company continues to pursue opportunities to increase volume
through strategic acquisitions and to realize greater efficiencies in its
distribution network through consolidation of distribution centers. The Company
believes it is an industry leader in the development of advanced information
systems and the application of innovative logistics, such as port of entry
purchasing in full truck load quantities, cross docking and redistribution,
which have resulted in price and freight savings and operating efficiencies.
EXPERTISE IN PRIVATE LABEL PRODUCTS AND PERISHABLES. The Company has
developed extensive expertise in marketing and distributing a wide range of
private label products, including approximately 1,600 SKUs under the Our Family
private label and approximately 1,300 SKUs under the Fame private label. The
Company's private labels enjoy strong brand name recognition in the Company's
markets. Sales and transfers of private label products accounted for 9.8% of the
Company's non-military wholesale revenues in fiscal 1997. The Company has also
developed significant expertise in handling, marketing and distributing
perishables, including produce and dairy products. The Company's commitment to
distributing perishables enables it to provide a full spectrum of quality
products to customers. The Company believes that offering high quality private
label products and perishables provides it with certain competitive advantages
in attracting and retaining independent retailers and consumers. Private label
products and perishables generally result in higher margins than branded
products and other food categories.
STRONG RETAIL STORE BASE. The Company's 97 retail stores serve primarily
small to midsized markets and rural areas. The Company believes that
approximately 70% of the Company's stores are in markets where the Company is
first or second in market share. The Company believes its strong market share
positions result primarily from offering a variety of store formats and retail
concepts targeted to different geographical markets under several store names,
including Sun Mart, Easter Foods, Food Folks, Econofoods and Food
Bonanza-Registered Trademark-. In addition, the Company believes its retail
store base enhances the Company's wholesale operations by enabling it to (i)
better understand the needs of independent retailers, thereby improving customer
service; and (ii) test retail concepts and innovations, including advertising
and promotional programs, in the Company's stores before they are rolled out to
independent retailers. The Company's retail stores are typically located close
to distribution centers, thereby creating certain operating efficiencies and
logistical savings.
LEADING DISTRIBUTOR TO DOMESTIC MILITARY COMMISSARIES. The Company believes
that it is the largest wholesale distributor of groceries and related products
to domestic military commissaries. The Company's military distribution centers
also provide products for distribution to U.S. military commissaries in Europe
and to ships afloat. The Company serves as a third party distributor to
commissaries, contracting with a variety of food producers and other
manufacturers to procure and warehouse products for distribution to
commissaries. The Company's military distribution operations generally result in
higher net margins than the Company's civilian distribution operations due
primarily to lower operating expenses.
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REPUTATION FOR SUPERIOR CUSTOMER SERVICE. The Company's 113 year operating
history, centered on the theme "CUSTOMER SATISFACTION IS ALWAYS
FIRST!"-Registered Trademark-, has resulted in strong relationships with
long-standing customers. To further enhance its reputation and strengthen
customer relationships, the Company offers a wide range of support services to
customers to help them compete more effectively in their markets, including
supermarket merchandising support, accounting services, price management
systems, retail technology support, advertising and promotional programs,
training and human resource development services, market research and store
development services.
EXPERIENCED MANAGEMENT TEAM. The Company is led by a strong and experienced
executive management team, the members of which have on average 20 years with
the Company and 24 years of industry expertise across all facets of wholesale
distribution, marketing, merchandising and retail operations.
COMPANY STRATEGY
Management believes that the role of the distributor will continue to change
from the warehousing of goods toward a greater emphasis on the strategic
facilitation of goods and services for customers in a manner that provides
greater efficiencies. In addition, the Company believes that food retailers will
be required to offer a wider variety of goods and services at attractive prices
to compete effectively. Accordingly, the Company's goals are to (i) profitably
build the competitive strength of the Company's wholesale customers by being a
reliable cost-effective provider of superior products and services, and (ii)
achieve critical mass of profitable Company retail stores in target markets. To
achieve these goals, the Company has adopted the following strategic
initiatives:
COST SAVINGS AND VALUE ADDED INITIATIVES. The Company has implemented and
will continue to focus on a wide range of cost savings and value added
initiatives, including (i) maximizing the Company's substantial purchasing power
through centralized buying; (ii) consolidating operations and distribution
centers to achieve operating efficiencies and economies of scale; (iii) reducing
the Company's investment in working capital through strategic partnerships with
suppliers and more aggressive management of receivables; (iv) implementing
innovations in logistics and supply chain management to reduce procurement
costs, freight charges, inventory levels and delivery lead times; (v)
emphasizing greater cost consciousness among the Company's workforce; and (vi)
identifying underperforming assets and adopting an aggressive "fix, sell or
close" approach.
IMPLEMENTATION OF HORIZONS INFORMATION SYSTEM. The Company, working in
conjunction with SAP America and a number of other vendors and consultants, has
committed significant resources over the last two years to develop and implement
HORIZONS, a client server based enterprise management and financial information
system. The HORIZONS system will be a fully integrated and scalable system that
management believes will provide the Company with competitive advantages that
can be aggressively marketed to independent retailers. Implementation of the
HORIZONS system is scheduled to be substantially completed in 1999 and is
expected to provide (i) a solution to the Company's Year 2000 software issues,
(ii) greater flexibility for the changing business environment, (iii) greater
connectivity opportunities with customers and suppliers, (iv) the ability to
integrate and standardize information systems throughout the Company, (v) timely
and easy-to-use information, (vi) greater business process and workflow
efficiencies, and (vii) more powerful decision-making and analysis tools. To
parallel the development and implementation of the HORIZONS project, management
has led a cultural change and training initiative designed to prepare the
Company's workforce for changes in the industry and in the use of the HORIZONS
system to address these changes.
GROWTH THROUGH STRATEGIC ACQUISITIONS AND ALLIANCES. The Company has grown
significantly in recent years through strategic acquisitions that have (i)
enhanced the Company's purchasing power, (ii) expanded the Company's geographic
scope and breadth of product offering, (iii) increased the volume and efficiency
of several of the Company's distribution centers, (iv) significantly enhanced
the Company's presence in the military commissary market, and (v) added retail
stores in the Company's target markets. The Company
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will continue to strive to achieve additional synergies through further
integration of recent acquisitions. In addition, the Company will continue to
seek new opportunities for strategic acquisitions and alliances that will
provide a superior return on investment and achieve one or more of the criteria
described above.
STRENGTHEN RETAIL STORE BASE. The Company will continue to focus on
improving the profitability and contribution of the Company's retail store base
by investing to achieve critical mass and market dominance in the Company's key
retail markets, including seeking acquisition opportunities that provide
synergies, constructing new stores, remodeling and expanding existing stores and
remodeling, selling or closing underperforming stores. In the past two years,
the Company has acquired seven stores, remodeled 16 stores, sold seven stores
and closed 16 stores. In addition, the Company has and will continue to develop
and utilize a number of different retail formats in its retail stores. The
Company believes that multiple retail formats enable the Company to more
effectively respond to competition in the varied markets in which it operates.
Addressing each market individually has resulted in the strong market position
the Company enjoys in the majority of the Company's retail markets. Multiple
formats also allow the Company to test different concepts prior to extending
such concepts to independent retail customers.
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THE SERIES A NOTE OFFERING
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The Series A Notes................ The Series A Notes were sold by the Company to the
Initial Purchasers in the Series A Note Offering on
April 24, 1998, and were subsequently resold by the
Initial Purchasers pursuant to Rule 144A and Regulation
S under the Securities Act and other available
exemptions under the Securities Act.
Registration Rights Agreement..... In connection with the Series A Note Offering, the
Company entered into the Registration Rights Agreement,
which grants Holders of the Series A Notes certain
exchange and registration rights. The Exchange Offer is
intended to satisfy such exchange and registration
rights, which generally terminate upon the consummation
of the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered................ $165,000,000 in aggregate principal amount of 8 1/2%
Senior Subordinated Notes due 2008, Series B.
The Exchange Offer................ $1,000 principal amount of the Exchange Notes in
exchange for each $1,000 principal amount of Series A
Notes. As of the date hereof, $165,000,000 in aggregate
principal amount of Series A Notes are outstanding. The
Company will issue the Exchange Notes to Holders on or
promptly after the Expiration Date. The terms of the
Exchange Notes are substantially identical in all
material respects (including principal amount, interest
rate and maturity) to the terms of the Series A Notes
for which they may be exchanged pursuant to the Exchange
Offer, except that the Exchange Notes are freely
transferable by holders thereof (other than as provided
herein), and are not subject to any covenant regarding
registration under the Securities Act. See "The Exchange
Offer." Other than compliance with applicable federal
and state securities laws, there are no material federal
or state regulatory requirements to be complied with in
connection with the Exchange Offer.
Interest Payments................. The Exchange Notes will bear interest from April 24,
1998, the date of issuance of the Series A Notes, or the
most recent interest payment date to which interest on
such Series A Notes has been paid, whichever is later.
Accordingly, Holders of Series A Notes that are accepted
for exchange will not receive interest on such Series A
Notes that is accrued but unpaid at the time of tender,
but such interest will be payable on the first interest
payment date after the Expiration Date.
Minimum Condition................. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Series A Notes being
tendered for exchange.
Expiration Date................... 5:00 p.m., New York City time, on August 4, 1998 unless
the Exchange Offer is extended, in which case the term
"Expiration Date" means the latest date and time to
which the Exchange Offer is extended.
Exchange Date..................... The date of acceptance for exchange of the Series A
Notes will be the first business day following the
Expiration Date.
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Withdrawal Rights................. Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders."
Acceptance of Series A Notes and
Delivery of Exchange Notes...... The Company will accept for exchange any and all Series
A Notes which are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes issued pursuant to
the Exchange Offer will be delivered promptly following
the Expiration Date. See "The Exchange Offer--Terms of
the Exchange Offer."
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See "The
Exchange Offer--Conditions."
Procedures for Tendering Series A
Notes........................... To tender pursuant to the Exchange Offer, a Holder must
complete, sign and date the accompanying Letter of
Transmittal, or a facsimile thereof, have the signatures
therein guaranteed if required by instruction 4 of the
Letter of Transmittal, and mail or otherwise deliver
such Letter of Transmittal, or such facsimile, together
with the Series A Notes and any other required
documentation to the Exchange Agent (as defined herein)
at the address set forth herein prior to 5:00 p.m., New
York time, on the Expiration Date. See "The Exchange
Offer-- Procedures for Tendering" and "Plan of
Distribution." By executing the Letter of Transmittal,
each Holder will represent to the Company that, among
other things, the Holder or the person receiving such
Exchange Notes, whether or not such person is the
Holder, is acquiring the Exchange Notes in the ordinary
course of business and that neither the Holder nor any
such other person intends to participate or has any
arrangement or understanding with any person to
participate in the distribution of such Exchange Notes.
In lieu of physical delivery of the certificates
representing Series A Notes, tendering Holders may
transfer Series A Notes pursuant to the procedure for
book-entry transfer as set forth under "The Exchange
Offer--Procedures for Tendering."
Special Procedures for Beneficial
Owners.......................... Any beneficial owner whose Series A Notes are registered
in the name of a broker, commercial bank, trust company
or other nominee and who wishes to tender in the
Exchange Offer should contact such registered holder
promptly and instruct such registered holder to tender
on such beneficial owner's behalf. If such beneficial
owner wishes to tender on such beneficial owner's own
behalf, such beneficial owner must, prior to completing
and executing the Letter of Transmittal and delivering
the Series A Notes, either make appropriate arrangements
to register ownership of the Series A Notes in such
beneficial owner's name or obtain a properly completed
bond power from the registered holder. The transfer of
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
registered ownership may take considerable time. See
"The Exchange Offer--Procedures for Tendering."
Guaranteed Delivery Procedures.... Holders of Series A Notes who wish to tender their
Series A Notes and whose Series A Notes are not
immediately available or who cannot deliver their Series
A Notes, the Letter of Transmittal or any other
documents required by the Letter of Transmittal to the
Exchange Agent (or comply with the requirements for
book-entry transfer) prior to the Expiration Date must
tender their Series A Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."
Federal Income Tax Consequences... The issuance of the Exchange Notes to Holders pursuant
to the terms set forth in this Prospectus will not
constitute an exchange for federal income tax purposes.
Consequently, no gain or loss would be recognized by
Holders upon receipt of the Exchange Notes. See "The
Exchange Offer--Certain Federal Income Tax Consequences
of the Exchange Offer."
Use of Proceeds................... There will be no proceeds to the Company from the
exchange of Series A Notes pursuant to the Exchange
Offer.
Exchange Agent.................... U.S. Bank Trust National Association is serving as
exchange agent (the "Exchange Agent") in connection with
the Exchange Offer. See "The Exchange Offer--Exchange
Agent."
</TABLE>
SUMMARY OF TERMS OF EXCHANGE NOTES
The form and terms of the Exchange Notes are the same as the form and terms
of the Series A Notes (which they replace) except that (i) the issuance of the
Exchange Notes will have been registered under the Securities Act and,
therefore, the Exchange Notes will not bear legends restricting the transfer
thereof, and (ii) the holders of Exchange Notes generally will not be entitled
to further registration rights under the Registration Rights Agreement, which
rights generally will be satisfied when the Exchange Offer is consummated. The
Exchange Notes will evidence the same debt as the Series A Notes and will be
entitled to the benefits of the Indenture. See "Description of the Exchange
Notes."
<TABLE>
<S> <C>
Securities Offered................ $165,000,000 aggregate principal amount of 8 1/2% Senior
Subordinated Notes due 2008, Series B.
Maturity Date..................... May 1, 2008.
Interest Payment Dates............ May 1 and November 1 of each year, commencing November
1, 1998.
Optional Redemption............... The Exchange Notes will be redeemable at the option of
the Company, in whole or in part, at any time on or
after May 1, 2003, at the redemption prices set forth
herein, plus accrued and unpaid interest thereon, if
any, to the date of redemption. In addition, on or prior
to May 1, 2001, the Company may redeem up to 35% of the
originally issued aggregate principal amount of the
Exchange Notes, at a redemption price of 108.5% of the
principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the date of redemption with
the net proceeds of a Public Equity Offering; PROVIDED,
HOWEVER, that at least $107.25 million in aggregate
principal amount of Exchange Notes is outstanding
immediately after giving effect to such
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
redemption. See "Description of the Exchange
Notes--Optional Redemption."
Guarantees........................ The Exchange Notes will be guaranteed, jointly and
severally, on a senior subordinated basis, by
substantially all of the Company's existing material
subsidiaries (and not by the Company's special purpose
financing subsidiary). See "Description of the Exchange
Notes--Subsidiary Guarantees."
Subordination..................... The Exchange Notes and the Guarantees will represent
unsecured senior subordinated obligations of the Company
and the Guarantors, as applicable, and will be
subordinated in right of payment to all existing and
future Senior Indebtedness of the Company or the
Guarantors, as applicable. The Exchange Notes will rank
PARI PASSU in right of payment with all other existing
and future senior subordinated indebtedness, if any, of
the Company and senior in right of payment to all
existing and future subordinated indebtedness, if any,
of the Company. The Company has not issued, and does not
have any current arrangements to issue, any significant
additional indebtedness to which the Exchange Notes
would be senior, subordinate or rank PARI PASSU in right
of payment. The Exchange Notes will be effectively
subordinate to essentially all of the currently
outstanding indebtedness of the Company and its
subsidiaries. As of March 28, 1998, and as adjusted for
the offering of the Series A Notes and the application
of the estimated net proceeds therefrom, the Issuers
would have had an aggregate of approximately $221.5
million of Senior Indebtedness outstanding. See
"Description of the Exchange Notes-- Subordination" and
"Use of Proceeds."
Change of Control................. Following the occurrence of a Change of Control, each
holder of Exchange Notes will have the right to require
the Company to purchase all or a portion of such
holder's Exchange Notes at a purchase price equal to
101% of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the date of
purchase. See "Description of the Exchange Notes--Change
of Control."
Certain Covenants................. The indenture under which the Exchange Notes will be
issued (the "Indenture") contains certain restrictive
covenants, including, but not limited to, covenants with
respect to the following matters: (i) limitation on
additional indebtedness; (ii) limitation on restricted
payments; (iii) limitation on transactions with
affiliates; (iv) limitation on liens; (v) limitation on
incurrence of senior subordinated indebtedness; (vi)
limitation on sale of assets; (vii) limitation on
issuances of guarantees by Restricted Subsidiaries (as
defined herein); (viii) limitation on preferred stock of
Restricted Subsidiaries; (ix) limitation on dividends
and other payment restrictions affecting Restricted
Subsidiaries; and (x) limitations on Unrestricted
Subsidiaries (as defined herein). See "Description of
the Exchange Notes--Certain Covenants."
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
The Indenture will provide that after the Notes achieve
an investment grade rating from both Standard & Poor's
Ratings Group and Moody's Investors Service, Inc., the
Company's obligation to comply with certain of the
restrictive covenants described herein will be
terminated. See "Description of the Notes--Certain
Covenants."
Exchange Offer; Registration
Rights.......................... In the event that applicable law or interpretations of
the staff of the Commission do not permit the Issuers to
file the Exchange Offer Registration Statement or to
effect the Exchange Offer, or if the Exchange Offer is
not consummated within 120 days after the Issue Date, or
if certain holders of the Notes notify the Issuers that
they are not permitted to participate in, or would not
receive freely tradable Notes pursuant to, the Exchange
Offer, the Issuers will use their best efforts to cause
to become effective a registration statement (the "Shelf
Registration Statement") with respect to the resale of
the Notes and to keep the Shelf Registration Statement
effective until up to two years after the effective date
thereof. If the Issuers default with respect to such
registration obligations, then the Issuers will pay
liquidated damages in cash to each holder of Transfer
Restricted Notes (as defined) in an amount equal to
0.25% per annum of the principal amount of the Notes for
the first 90-day period (or portion thereof) following
each such default and will increase by an additional
0.25% per annum with respect to each subsequent 90-day
period (or portion thereof) up to a maximum amount of
1.00% per annum until all registration defaults are
cured, whereupon the accrual of liquidated damages will
cease.
Absence of a Public Market for
the Notes....................... The Exchange Notes are new securities for which there is
currently no established trading market. The Company
does not intend to apply for listing of the Exchange
Notes on any securities exchange or for quotation of the
Exchange Notes on any automated dealer quotation system.
Although the Initial Purchasers have informed the
Company that they currently intend to make a market in
the Exchange Notes, they are not obligated to do so and
any such market-making may be discontinued at any time
without notice. Accordingly, there can be no assurance
as to the development or liquidity of any market for the
Exchange Notes. If an active trading market for the
Exchange Notes does not develop, the market price and
liquidity of the Exchange Notes may be adversely
affected. If the Exchange Notes are traded, they may
trade at a discount from their initial offering price,
depending on prevailing interest rates, the market for
similar securities, the performance of the Company and
certain other factors. See "Risk Factors--Lack of Prior
Market for the Exchange Notes."
</TABLE>
RISK FACTORS
See "Risk Factors" beginning on page 14 for a discussion of certain factors
that should be considered by holders of Series A Notes before deciding to tender
Series A Notes in the Exchange Offer.
12
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents summary consolidated financial data of the
Company. The annual historical financial data have been derived from the
Company's audited Consolidated Financial Statements. The summary consolidated
financial data for the fiscal quarters ended March 28, 1998 and March 22, 1997
are derived from the Unaudited Consolidated Financial Statements of the Company
included elsewhere in this Prospectus. Such Unaudited Consolidated Financial
Statements, in the opinion of the Company's management, include all adjustments
necessary (consisting of normal recurring accruals) for a fair presentation of
the financial condition and results of operations of the Company for such
periods and as of such dates. The summary consolidated financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the Consolidated Financial
Statements of the Company and the related notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED YEAR ENDED(A)
------------------------ ------------------------------------------------------------------
MARCH 28, MARCH 22, JANUARY 3, DECEMBER 28, DECEMBER 30, DECEMBER 31, JANUARY 1,
1998 1997 1998 1996 1995 1994 1994
----------- ----------- ----------- ------------ ------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues.................. $ 937,101 $ 947,832 $4,391,602 $3,375,485 $2,888,836 $2,832,000 $2,723,535
Cost of sales................... 820,360 825,189 3,826,377 2,932,709 2,469,841 2,410,292 2,325,249
----------- ----------- ----------- ------------ ------------ ------------ -----------
Gross profit.................... 116,741 122,643 565,225 442,776 418,995 421,708 398,286
Selling, general and
administrative, and other
operating expenses (b)........ 94,310 99,158 453,645 359,456 350,201 352,683 332,349
Special charges (c)............. -- -- 31,272 -- -- -- --
Depreciation and amortization... 11,078 10,905 47,697 34,759 29,406 31,831 29,145
Interest expense................ 6,860 7,321 32,845 14,894 10,793 11,384 10,114
----------- ----------- ----------- ------------ ------------ ------------ -----------
Income before income taxes and
extraordinary charge.......... 4,493 5,259 (234) 33,667 28,595 25,810 26,678
Income taxes.................... 1,865 2,203 994 13,635 11,181 10,330 10,804
Extraordinary charge (d)........ (5,569) -- -- -- -- -- --
----------- ----------- ----------- ------------ ------------ ------------ -----------
Net income (loss)............... $(2,941) $3,056 $(1,228 ) $20,032 $17,414 $15,480 $15,874
----------- ----------- ----------- ------------ ------------ ------------ -----------
----------- ----------- ----------- ------------ ------------ ------------ -----------
Net income (loss) per share:
Basic......................... (.26 ) .27 (.11 ) 1.83 1.60 1.42 1.46
----------- ----------- ----------- ------------ ------------ ------------ -----------
----------- ----------- ----------- ------------ ------------ ------------ -----------
Diluted....................... (.26 ) .27 (.11 ) 1.81 1.60 1.42 1.46
----------- ----------- ----------- ------------ ------------ ------------ -----------
----------- ----------- ----------- ------------ ------------ ------------ -----------
BALANCE SHEET DATA:
Working capital................. $186,114 $247,394 $199,931 $228,508 $104,002 $89,457 $79,904
Total assets.................... 912,423 935,806 904,883 945,477 514,260 531,604 521,654
Total debt, including
capitalized leases............ 381,185 433,527 383,270 427,617 95,889 143,045 140,167
Stockholders' equity............ 220,970 234,566 225,618 232,861 215,313 206,269 199,264
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges (e)................... 1.46 x 1.53 x 1.00 x 2.34 x 2.49 x 2.28 x 2.35 x
Capital expenditures (f)........ $13,474 $7,939 $67,725 $51,333 $33,264 $34,965 $36,382
</TABLE>
- ----------------------------------
(a) Fiscal year operating results include 52 weeks for each year except fiscal
1997, which consisted of 53 weeks.
(b) Includes expenses incurred in connection with HORIZONS estimated to be $1.8
million in the first quarter of fiscal 1998, $5.5 million in fiscal 1997 and
$1.6 million in fiscal 1996. See "Business--Information Systems."
(c) Includes $14.5 million for the consolidation of selected warehouses, $2.5
million of integration costs associated with the acquisition of the business
and assets of United-A.G. Cooperative, Inc. in Omaha, Nebraska, $5.2 million
from closing or consolidating underperforming retail stores, a $5.4 million
asset impairment charge relating to seven retail stores, a $1.0 million
asset impairment charge relating to the Company's produce marketing
operations, a $0.9 million write-off of current systems software being
replaced by HORIZONS and a $0.6 million loss relating to the sale of the
Company's investment in a Hungarian food wholesaler.
(d) Reflects prepayment premiums from early extinguishment of debt, net of
income tax benefits. See "Use of Proceeds."
(e) For purposes of computing the ratios, earnings represent income before
income taxes, the cumulative effect of accounting changes plus fixed
charges. Fixed charges represent interest expense and that portion of rent
expense under all lease commitments deemed to represent an appropriate
interest factor.
(f) Includes approximately $5.8 million, $2.1 million, $20.0 million and $8.1
million of capital expenditures incurred in connection with HORIZONS in the
first quarter of fiscal 1998, the first quarter of fiscal 1997, fiscal 1997
and fiscal 1996, respectively.
13
<PAGE>
RISK FACTORS
HOLDERS OF SERIES A NOTES SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE
DECIDING TO TENDER SERIES A NOTES IN THE EXCHANGE OFFER. THE RISK FACTORS SET
FORTH BELOW ARE GENERALLY APPLICABLE TO THE SERIES A NOTES AS WELL AS THE
EXCHANGE NOTES.
SUBSTANTIAL LEVERAGE
The Company has substantial indebtedness and, as a result, significant debt
service obligations. As of March 28, 1998, on an as adjusted basis for the
offering of the Series A Notes and the application of the estimated net proceeds
therefrom, the Company would have had approximately $370.3 million of long-term
indebtedness which would have represented approximately 62.6% of total
capitalization. See "Capitalization." In addition, the Indenture and the
Company's other debt instruments will allow the Company to incur additional
indebtedness, including secured indebtedness. As of March 28, 1998 and after
giving pro forma effect to the offering of the Series A Notes and the
application of the estimated net proceeds therefrom, a required reduction of the
Revolving Credit Facility (as defined below) from $360.0 million to $350.0
million and the expiration of the Company's bank credit facility with Wachovia
Bank of Georgia, N.A. effective as of June 9, 1998, the Company would have had
an aggregate of $339.2 million available for borrowing under the Company's
$350.0 million revolving credit facility with a variety of lending institutions
(the "Revolving Credit Facility") and under the Company's $160.0 million of
other bank credit facilities with Brinson Trust Company and Norwest Bank
Minnesota, N.A. (the "Other Bank Credit Facilities" and, together with the
Revolving Credit Facility, the "Bank Credit Facilities"). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Certain Other
Indebtedness."
Upon the issuance of the Series A Notes, the Company's interest expense
increased as compared with prior years. See "Capitalization." The ability of the
Company to pay interest and principal on the Notes and to satisfy its debt
obligations will be dependent on the future operating performance of the
Company, which could be affected by changes in economic conditions and
financial, competitive, legislative, regulatory and other factors, including
factors beyond the control of the Company. A failure to comply with the
covenants and other provisions of its debt instruments could result in events of
default under such instruments, which could permit acceleration of the debt
under such instruments and in some cases acceleration of debts under other
instruments that contain cross-default or cross-acceleration provisions. The
Company believes, based on current circumstances, that the Company's cash flow,
together with available borrowings under the Bank Credit Facilities, will be
sufficient to permit the Company to meet its operating expenses, to pay
dividends on its common stock and to service its debt requirements as they
become due for the foreseeable future. Significant assumptions underlie this
belief, including, among other things, that the Company will succeed in
implementing its business strategy and that there will be no material adverse
developments in the business, liquidity or capital requirements of the Company.
There can be no assurance that the Company will be able to generate sufficient
cash flow to service its interest payment obligations under its indebtedness or
that cash flows, future borrowings or equity financing will be available for the
payment or refinancing of the Company's indebtedness. If the Company is unable
to service its indebtedness, it will be required to adopt alternative
strategies, which may include actions such as reducing or delaying capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital. There can be no assurance that any of these
strategies could be effected on satisfactory terms, if at all.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including: (i) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired; (ii) a
substantial portion of the Company's cash flows from operations may be dedicated
to the payment of principal and interest on its indebtedness, thereby reducing
the funds available to the Company for its future operations; (iii) certain
14
<PAGE>
of the Company's indebtedness contains financial and other restrictive
covenants, including those restricting the incurrence of additional
indebtedness, the creation of liens, the payment of dividends, sales of assets
and minimum net worth requirements; (iv) certain of the Company's borrowings are
and will continue to be at variable rates of interest which exposes the Company
to the risk of greater interest rates; and (v) the Company's substantial
leverage may make it more vulnerable to changing economic conditions, limit its
ability to withstand competitive pressures and reduce its flexibility in
responding to changing business and economic conditions. As a result of the
Company's current level of indebtedness, its financial capacity to respond to
market conditions, capital needs and other factors may be limited.
SUBORDINATION OF THE NOTES AND THE GUARANTEES; ASSET ENCUMBRANCES
The payment of principal of, premium, if any, and interest on the Notes will
be subordinated to the prior payment in full of all existing and future Senior
Indebtedness of the Company, which includes all indebtedness under the Bank
Credit Facilities. Therefore, in the event of a liquidation, dissolution,
insolvency, bankruptcy, reorganization or any similar proceeding regarding the
Company, the assets of the Company will be available to pay obligations on the
Notes only after Senior Indebtedness has been paid in full, and there may not be
sufficient assets to pay amounts due on all or any of the Notes. In addition,
the Company may not pay principal of, premium, if any, interest on or any other
amounts owing in respect of the Notes, make any deposit pursuant to defeasance
provisions or purchase, redeem or otherwise retire the Notes, if any Senior
Indebtedness is not paid when due or any other default on Senior Indebtedness
occurs and the maturity of such indebtedness is accelerated in accordance with
its terms unless, in either case, such default has been cured or waived, any
such acceleration has been rescinded or such indebtedness has been repaid in
full. Moreover, under certain circumstances, if any non-payment default exists
with respect to Designated Senior Indebtedness (as defined herein), the Company
may not make any payments on the Notes for a specified time, unless such default
is cured or waived, any acceleration of such indebtedness has been rescinded or
such indebtedness has been repaid in full. See "Description of the Exchange
Notes--Subordination." The Guarantees by the Guarantors will be subordinated to
all existing and future guarantees by the Guarantors of Senior Indebtedness of
the Company and to any other Senior Indebtedness of the Guarantors on a similar
basis. As of March 28, 1998, on an as adjusted basis for the Prepayments, the
offering of the Series A Notes and the application of the estimated net proceeds
therefrom, the Issuers would have had an aggregate of approximately $221.5
million in aggregate principal amount of Senior Indebtedness outstanding which
ranked senior in right of payment to the Notes and the Guarantees and the
ability to borrow an additional $339.2 million of Senior Indebtedness under the
Bank Credit Facilities. Under the terms of the Indenture, and the Company's
other debt instruments, the Company may incur additional indebtedness, including
Senior Indebtedness or secured indebtedness, in the future. See "Description of
the Exchange Notes--Certain Covenants."
The Notes will not be secured by any of the Company's assets. Certain of the
Company's other indebtedness is secured, to the extent permitted by law, by
certain of the Company's assets, and the terms of the Indenture and the
instruments governing the Company's other indebtedness permit the Company to
incur additional secured indebtedness. The Bank Credit Facilities contain
restrictive covenants and financial maintenance tests and the Company's ability
to comply therewith may be affected by events beyond its control. A breach of
any of these covenants could result in an event of default under the Bank Credit
Facilities allowing the lenders thereunder to elect to declare all outstanding
amounts thereunder to be immediately due and payable. If the Company becomes
insolvent or is liquidated, or if payment under any of the instruments governing
the Company's secured indebtedness is so accelerated, the lenders under such
instruments would be entitled to exercise the remedies available to a secured
lender under applicable law and pursuant to instruments governing such
indebtedness. Accordingly, such lenders will have a prior claim on the Company's
assets securing their indebtedness. In any of such events, because the Notes
will not be secured by any of the Company's assets, it is possible that there
would be no assets remaining from which claims of the holders of the Notes could
be satisfied or, if any such assets remained, such assets might be insufficient
to satisfy such claims in full. See "Description of Certain Other Indebtedness."
15
<PAGE>
DEPENDENCE UPON OPERATIONS OF SUBSIDIARIES; POSSIBLE INVALIDITY OF GUARANTEES;
POTENTIAL RELEASE OF GUARANTEES
The Notes are the obligations of the Company. As of the date of this
Prospectus, a substantial portion of the consolidated assets of the Company were
held by the Guarantors and a substantial portion of the Company's cash flow and
net income was generated by the Guarantors. Therefore, the Company's ability to
make interest and principal payments when due to holders of the Notes is
dependent, in part, upon the receipt of sufficient funds from its subsidiaries.
The payment of dividends or the making of loans or advances to the Company by
its subsidiaries may be subject to statutory restrictions and are contingent
upon the earnings of those subsidiaries.
The Company's obligations under the Notes will be guaranteed, jointly and
severally, on a senior subordinated basis by each of the Guarantors, which
consist of all of the Company's existing material subsidiaries (and not the
Company's special purpose financing subsidiary). To the extent that a court were
to find, pursuant to federal or state fraudulent transfer laws or otherwise,
that (i) a Guarantee was incurred by a Guarantor with intent to hinder, delay or
defraud any present or future creditor or the Guarantor contemplated insolvency
with a design to prefer one or more creditors to the exclusion in whole or in
part of others; or (ii) such Guarantor did not receive fair consideration or
reasonably equivalent value for issuing its Guarantee and such Guarantor (a) was
insolvent, (b) was rendered insolvent by reason of the issuance of such
Guarantee, (c) was engaged or about to engage in a business or transaction for
which the remaining assets of such Guarantor constituted unreasonably small
capital to carry on its business or (d) intended to incur, or believed that it
would incur, debts beyond its ability to pay such debts as they matured, the
court could avoid or subordinate such Guarantee in favor of the Guarantor's
other creditors. Among other things, a legal challenge of a Guarantee on
fraudulent conveyance grounds may focus on the benefits, if any, realized by the
Guarantor as a result of the issuance by the Company of the Notes. The measure
of insolvency of a Guarantor for purposes of the foregoing will vary depending
upon the law of the relevant jurisdiction. Generally, however, a company would
be considered insolvent for purposes of the foregoing if the sum of the
company's debts were greater than all of the company's property at a fair
valuation, or if the present fair salable value of the company's assets were
less than the amount that will be required to pay its probable liability on its
existing debts as they become absolute and mature. There can be no assurance as
to what standards a court would apply to determine whether a Guarantor was
solvent at the relevant time. To the extent any Guarantee were to be avoided as
a fraudulent conveyance or held unenforceable for any other reason, holders of
the Notes would cease to have any claim in respect of such Guarantor and would
be creditors solely of the Company and any Guarantor whose Guarantee was not
avoided or held unenforceable. In such event, the claims of the holders of the
Notes against the issuer of an invalid Guarantee would effectively be
subordinated to all indebtedness and other liabilities and commitments and
subject to the prior payment in full of such indebtedness, other liabilities and
commitments of such Guarantor. There can be no assurance that, after providing
for all prior claims, there would be sufficient assets to satisfy the claims of
the holders of the Notes relating to any voided Guarantee.
Based upon financial and other information currently available to it, the
Company believes that the Exchange Notes and the Guarantees are being incurred
for proper purposes and in good faith and that the Company and each Guarantor is
solvent and will continue to be solvent after issuing the Exchange Notes or its
Guarantee, as the case may be, will have sufficient capital for carrying on its
business after such issuance and will be able to pay its debts as they mature.
See "Description of the Exchange Notes," "Description of Certain Other
Indebtedness" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Any Guarantee of a Guarantor may be released at any time upon any sale,
exchange or transfer by the Company of the stock of such Guarantor or all or
substantially all of the assets of such Guarantor to a non-affiliate in
compliance with the terms of the Indenture. See "Description of the Exchange
Notes-- Subsidiary Guarantees."
16
<PAGE>
LOW MARGIN BUSINESS; INCREASING COMPETITION AND MARGIN PRESSURE
The wholesale food distribution and retail grocery industries in which the
Company operates are characterized by low profit margins. As a result, the
Company's results of operations are sensitive to, and may be materially
adversely impacted by, among other things, competitive pricing pressures, vendor
selling programs, increasing interest rates and food price deflation. There can
be no assurance that one or more of such factors will not have a material
adverse affect the Company's business, financial condition or results of
operations. See "Business--Competition."
The wholesale food distribution industry is undergoing change as producers,
manufacturers, distributors and retailers seek to lower costs and increase
services in an increasingly competitive environment of relatively static
over-all demand, resulting in increasing pressure on the industry's already low
profit margins. Alternative format food stores (such as warehouse stores and
supercenters) have gained market share at the expense of traditional supermarket
operators, including independent operators, many of whom are customers of the
Company. Vendors, seeking to ensure that more of their promotional dollars are
used by retailers to increase sales volume, increasingly direct promotional
dollars to large self-distributing chains. The Company believes that these
changes have led to reduced margins and lower profitability among many of its
customers and at the Company itself. In response to these changes, the Company
is pursuing a multi-faceted strategy that includes various cost savings and
value added initiatives, growth through strategic acquisitions and alliances,
and the development and implementation of the HORIZONS enterprise management and
financial information system. The Company believes that its ultimate success
will depend on its ability to pursue and execute these strategic initiatives,
and on the effectiveness of these strategic initiatives in reducing costs of
operations and enhancing operating margins. Any significant delay or failure in
the implementation of these strategic initiatives could result in diminished
sales and operating margins. No assurance can be given that the Company's
strategic initiatives, if implemented, will result in increased sales or
enhanced profit margins.
ACQUISITION STRATEGY
Partly in response to changes in the wholesale food distribution industry
discussed above, the Company has for several years pursued a strategy of
aggressive growth through acquisitions in the wholesale food distribution
market, including both general and military distribution operations, and in
retail store operations. The Company intends to continue to pursue strategic
acquisition opportunities in these business segments, both in existing and new
geographic markets. In pursuing this acquisition strategy, the Company faces
risks commonly encountered with growth through acquisitions, including completed
acquisitions. These risks include, but are not limited to, incurring
significantly higher than anticipated capital expenditures and operating
expenses, failing to assimilate the operations and personnel of acquired
businesses, failing to install and integrate all necessary systems and controls,
losing customers, entering markets in which the Company has no or limited
experience, disrupting the Company's ongoing business and dissipating the
Company's management resources. Realization of the anticipated benefits of a
strategic acquisition may take several years or may not occur at all. The
Company's acquisition strategy has placed, and will continue to place, a
significant strain on the Company's management, operational, financial and other
resources. The success of the Company's acquisition strategy will depend on many
factors, including the ability of the Company to (i) identify suitable
acquisition opportunities, (ii) successfully close acquisition opportunities at
valuations that will provide superior returns on invested capital, (iii)
successfully integrate acquired operations quickly and effectively in order to
realize operating synergies, and (iv) obtain necessary financing on satisfactory
terms. There can be no assurance that the Company will be able to successfully
execute and manage its acquisition strategy, and any failure to do so could have
a material adverse effect on the Company's business, financial condition and
results of operations.
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NEW INFORMATION SYSTEM; YEAR 2000 SOFTWARE
Over the last two years, the Company has invested significant financial and
other resources in pursuing the development and implementation of HORIZONS. The
Company currently expects to spend approximately $76 million between 1996 and
2004 on the design and installation of, and training for, the HORIZONS project,
approximately half of which has been spent through the end of fiscal 1997. No
assurance can be given that the Company will be able to successfully develop and
implement the HORIZONS system or that, if successfully implemented, the HORIZONS
system will result in any operating efficiencies or competitive advantages. The
primary elements of the HORIZONS system have not yet been activated, and the
continuing development and implementation of the HORIZONS system can be expected
to require substantial additional financial and other resources and may be
subject to unforeseen delays or interruptions in development or implementation.
The HORIZONS system has been designed and is being developed by a team
consisting of outside vendors and Company business personnel and management
information systems personnel. The loss of a key vendor to the HORIZONS project
or the loss of key Company personnel involved in the HORIZONS project could
result in a significant loss of expertise and delays in the implementation of
the HORIZONS system. Any significant delay or failure in the implementation of
the HORIZONS system could have a material adverse effect on the Company's
business, financial condition and results of operations.
Although the Company expects that HORIZONS will address Year 2000 software
issues, the Company also plans to develop a contingency system in the event of
any significant delays in implementation of HORIZONS. Nonetheless, the Company
could still encounter significant business risks from the failure of any of its
vendors or customers, or the failure of governmental agencies, to adequately
address Year 2000 software issues. Any material failure of information systems
on the part of such vendors, customers or governmental agencies, or the
Company's contingency system in the event HORIZONS is not implemented by 2000,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
POTENTIAL CREDIT LOSSES FROM LOANS TO RETAILERS
From time to time, the Company extends secured loans to independent
retailers, often in conjunction with the establishment or expansion of supply
arrangements with such retailers. Such loans are generally extended to small
businesses which are unrated, and such loans are highly illiquid. The
acquisition of Super Food included a large loan and trade receivable portfolio
that resulted from a credit policy different from the policy historically used
by the Company. As a result, the Company has taken additional reserves against
certain receivables of Super Food. Provisions for doubtful accounts, including
reserves for losses from receivables and loans to independent retailers, were
approximately $26.2 million at March 28, 1998, approximately $26.7 million at
January 3, 1998 and approximately $28.0 million at December 28, 1996. The
Company's portfolio of loans to independent retailers had an aggregate balance
of approximately $39.4 million at March 28, 1998, approximately $39.0 million at
January 3, 1998 and approximately $37.3 million at December 28, 1996. See Notes
4 and 10 of Notes to the Consolidated Financial Statements. The Company also
from time to time provides financial assistance to independent retailers by
guaranteeing loans from financial institutions and leases entered into directly
with lessors. As of March 28, 1998, the Company guaranteed approximately $28.2
million of loans and leases of its independent retailers. The Company intends to
continue, and possibly increase, the amount of loans and guarantees to
independent retailers, and there can be no assurance that credit losses from
existing or future loans or commitments will not have a material adverse effect
on the Company's business, financial condition and results of operations.
MILITARY COMMISSARY SALES
Approximately 23.6% of the Company's sales in fiscal 1997 resulted from
distribution of products to domestic and foreign U.S. military commissaries and
ships afloat. No assurance can be given that the U.S. military commissary system
will not undergo significant changes in the foreseeable future, such as further
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base closings, privatization of the military commissary system or a reduction in
the number of persons having access to such commissaries. Such changes could
result in disruptions to existing supply arrangements or reductions in volumes
of purchases and could have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
The food marketing and distribution industry is highly competitive. The
Company faces competition from national, regional and local food distributors on
the basis of price, quality, breadth and availability of products offered,
strength of private label brands offered, schedules and reliability of
deliveries and the range and quality of services provided. In addition, food
wholesalers compete based on willingness to invest capital in their customers.
Such investments present substantial risks as described above under the caption
"--Potential Credit Losses from Loans to Retailers." The Company also competes
with retail supermarket chains that provide their own distribution function,
purchasing directly from producers and distributing products to their
supermarkets for sale to consumers.
In its retail operations, the Company competes with other food outlets on
the basis of price, quality and assortment, store location and format, sales
promotions, advertising, availability of parking, hours of operation and store
appeal. Traditional mass merchandisers have gained a growing market share with
alternative store formats, such as warehouse stores and supercenters, which
depend on concentrated buying power and low-cost distribution technology. Market
share of stores with alternative formats is expected to continue to grow in the
future. To meet the challenges of a rapidly changing and highly competitive
retail environment, the Company must maintain operational flexibility and
develop effective strategies across many market segments. The inability to adapt
to changing environments could have a material adverse effect on the Company's
business, financial condition and results of operations.
Some of the Company's competitors have greater financial and other resources
than the Company. In addition, consolidation in the industry, heightened
competition among the Company's suppliers, new entrants and trends toward
vertical integration could create additional competitive pressures that reduce
margins and adversely affect the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to continue to compete effectively in its industry. See "Business--Competition."
COMPETITIVE LABOR MARKET; INCREASING LABOR COSTS
The Company's continued success depends on its ability to attract and retain
qualified personnel in all areas of its business. The Company competes with
other businesses in its markets with respect to attracting and retaining
qualified employees. The labor market is currently very tight and the Company
expects the tight labor market to continue. A shortage of qualified employees
may require the Company to continue to enhance its wage and benefits package in
order to compete effectively in the hiring and retention of qualified employees
or to hire more expensive temporary employees. No assurance can be given that
the Company's labor costs will not continue to increase, or that such increases
can be recovered through increased prices charged to customers. Any significant
failure of the Company to attract and retain qualified employees, to control its
labor costs, or to recover any increased labor costs through increased prices
charged to customers could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON MANAGEMENT
The Company depends on the services of its executive officers for the
management of the Company. The loss or interruption of the continued full-time
services of certain of these executives could have a material adverse effect on
the Company and there can be no assurance that the Company will be able to find
replacements with equivalent skills or experience at acceptable salaries.
Generally, the Company does
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not have employment contracts with its executive officers, other than agreements
providing certain benefits upon certain changes in control of the Company.
RISK OF ENVIRONMENTAL LIABILITY
The Company is subject to increasingly stringent federal, state and local
laws, regulations and ordinances that (i) govern activities or operations that
may have adverse environmental effects, such as discharges to air and water, as
well as handling and disposal practices for solid and hazardous wastes and (ii)
impose liability for the costs of cleaning up, and certain damages resulting
from, sites of past spills, disposals or other releases of hazardous materials
(together, "Environmental Laws"). In particular, under applicable Environmental
Laws, the Company 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 facilities and the
land on which its facilities are situated, regardless of whether the Company
leases or owns the facilities or land in question and regardless of whether such
environmental conditions were created by the Company or by a prior owner or
tenant. Although the Company typically conducts a limited environmental review
prior to acquiring or leasing new facilities or raw land, there can be no
assurance that known or unknown environmental conditions relating to prior,
existing or future facility sites or the activities of the Company or its
predecessor in interest will not have a material adverse effect on the Company.
It is difficult to predict future environmental costs as the costs of
environmental compliance vary significantly depending on the extent, source and
location of the contamination, geological and hydrological conditions, available
reimbursement by state agencies, the enforcement policies of regulatory agencies
and other factors.
ADVERSE PUBLICITY; PRODUCT LIABILITY
The packaging, marketing and distribution of food products entails an
inherent risk of product liability, product recall and resultant adverse
publicity. There can be no assurance that such claims will not be asserted
against the Company or that the Company will not be obligated to perform such a
recall in the future. While the Company as a general practice receives
indemnification guarantees from its suppliers whereby the supplier agrees to
indemnify the Company from such claims and obligations, there can be no
assurance that such indemnification will be sufficient or that such claims or
obligations will not create adverse publicity that will have a material adverse
effect on the Company's ability to successfully market its products and on the
Company's business, financial condition and results of operations.
POTENTIAL FAILURE TO MAKE PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes may
require the Company to purchase all or a portion of such holder's Notes at 101%
of the principal amount of the Notes, together with accrued and unpaid interest,
if any, to the date of purchase. In such circumstances, each of the Company and
the Guarantors may be required to (i) repay all or a portion of the outstanding
principal of, and pay any accrued interest on, its indebtedness, including
indebtedness under the Bank Credit Facilities or (ii) obtain any requisite
consent from its lenders to permit the purchase. If the Company is unable to
repay all of such indebtedness or is unable to obtain the necessary consents,
the Company may be unable to offer to purchase the Notes, which will constitute
an Event of Default under the Indenture. There can be no assurance that the
Company or the Guarantors will have sufficient funds available at the time of
any Change of Control to make any debt payment (including purchases of Notes) as
described above or that the Company or the Guarantors will be able to refinance
their respective outstanding indebtedness in order to permit it to repurchase
the Notes or, if such refinancing were to occur, that such financing will be on
terms favorable to the Company and the Guarantors. See "Description of the
Exchange Notes-- Change of Control."
The events that constitute a Change of Control under the Indenture may also
be events of default under the Bank Credit Facilities or other borrowings. Such
events may permit the holders under such debt
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instruments to reduce the borrowing base thereunder or accelerate the debt and,
if the debt is not paid, to commence litigation that could ultimately result in
a sale or liquidation of certain assets of the Company, thereby limiting the
Company's ability to purchase the Notes and receive the special benefit of the
offer to purchase provisions to the holders of the Notes.
LACK OF PRIOR MARKET FOR THE EXCHANGE NOTES
The Exchange Notes are being offered to the holders of the Series A Notes.
The Series A Notes were offered and sold in April 1998 pursuant to Rule 144A and
Regulation S under the Securities Act and are eligible for trading in the
Private Offerings, Resales and Trading through Automated Linkages ("PORTAL")
market.
The Exchange Notes will be new securities for which there currently is no
established trading market. The Company does not intend to apply for listing of
the Exchange Notes on any national securities exchange or for quotation of the
Exchange Notes on any automated dealer quotation system. Although the Initial
Purchasers have informed the Company that they currently intend to make a market
in the Exchange Notes, the Initial Purchasers are not obligated to do so, and
any such market-making may be discontinued at anytime without notice. In
addition, such market-making activity will be subject to limits imposed by the
Securities Act and the Securities Exchange Act of 1934, as amended (together
with the rules and regulations promulgated thereunder, the "Exchange Act"), and
may be further limited during the Exchange Offer and the pendency of any Shelf
Registration Statement (as defined herein). Although it is anticipated that the
Exchange Notes will be eligible for trading in the PORTAL market, there can be
no assurance as to the development of any market or the liquidity of any market
that may develop. The liquidity of any market for the Exchange Notes will depend
upon the number of holders of the Exchange Notes, the interest of securities
dealers in making a market in the Exchange Notes and other factors. If an active
trading market for the Exchange Notes does not develop, the market price and
liquidity of the Exchange Notes may be adversely affected. If the Exchange Notes
are traded, they may trade at a discount from their initial offering price,
depending upon prevailing interest rates, the market for similar securities, the
performance of the Company and certain other factors. The liquidity of, and
trading markets for, the Exchange Notes may also be adversely affected by
general declines in the market for non-investment grade debt. Such declines may
adversely affect the liquidity of, and trading markets for, the Exchange Notes,
independent of the financial performance of or prospects for the Company.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the Exchange Notes. There can be no assurance that the market, if
any, for the Exchange Notes will not be subject to similar disruptions. Any such
disruptions may have an adverse effect on the holders of the Exchange Notes.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes for Series A Notes pursuant to the Exchange
Offer will be made only after timely receipt by the Exchange Agent of such
Series A Notes, a properly completed, duly executed Letter of Transmittal and
all other required documents. Therefore, Holders desiring to tender their Series
A Notes in exchange for Exchange Notes should allow sufficient time to ensure
timely delivery. The Company is under no duty to give notification of defects or
irregularities with respect to the tenders of Series A Notes for exchange. Any
Series A Notes that are not tendered or are tendered but not accepted will,
following the consummation of the Exchange Offer, continue to be subject to the
existing restrictions on transfer thereof and, upon consummation of the Exchange
Offer, the registration rights under the Registration Rights Agreement generally
will terminate. In addition, any Holder who tenders pursuant to the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
may be deemed to have received restricted securities and, if so, will be
required to comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale. Each broker-dealer that
receives Exchange Notes for its own account in exchange for Series A Notes,
where such Series A
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Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "The
Exchange Offer--Resale of the Exchange Notes."
RESTRICTIONS ON TRANSFER
The Series A Notes were offered and sold by the Company in a private
offering exempt from registration pursuant to the Securities Act and have been
resold pursuant to Rule 144A and other exemptions under the Securities Act. As a
result, the Series A Notes may not be reoffered or resold by purchasers except
pursuant to an effective registration statement under the Securities Act, or
pursuant to an applicable exemption from such registration, and the Series A
Notes are legended to restrict transfer as aforesaid. Each Holder (other than
any Holder who is an affiliate or promoter of the Company) who duly exchanges
Series A Notes for Exchange Notes in the Exchange Offer will receive Exchange
Notes that are freely transferable under the Securities Act. Holders who
participate in the Exchange Offer should be aware, however, that if they accept
the Exchange Offer for the purpose of engaging in a distribution, the Exchange
Notes may not be publicly reoffered or resold without complying with the
registration and prospectus delivery requirements of the Securities Act. As a
result, each Holder accepting the Exchange Offer will be deemed to have
represented, by its acceptance of the Exchange Offer, that it acquired the
Exchange Notes in the ordinary course of business and that it is not engaged in,
and does not intend to engage in, a distribution of the Exchange Notes. If
existing Commission interpretations permitting free transferability of the
Exchange Notes following the Exchange Offer are changed prior to consummation of
the Exchange Offer, the Company will use its best efforts to register the Series
A Notes for resale under the Securities Act. See "Prospectus Summary--The
Exchange Offer" and "Exchange Offer; Registration Rights."
The Series A Notes currently may be sold pursuant to the restrictions set
forth in Rule 144A under the Securities Act or pursuant to another available
exemption under the Securities Act without registration under the Securities
Act. To the extent that Series A Notes are tendered and accepted in the Exchange
Offer, the trading market for the untendered and tendered but unaccepted Series
A Notes could be adversely affected.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements, including
statements regarding (i) anticipated trends in the Company's industry, (ii)
future expenditures for capital projects, and (iii) the Company's strategic
initiatives. Such forward-looking statements can be identified by the use of
forward-looking terminology, such as "believes," "expects," "may," "will,"
"should," "estimates," or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy.
Such statements are subject to certain risks and uncertainties, including those
discussed below, that could cause actual results to differ materially from those
that are expressed or implied from such forward-looking statements. These
forward-looking statements speak only as of the date hereof. The Company
undertakes no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
All of these forward-looking statements are based on estimates and assumptions
made by management of the Company, which although believed to be reasonable, are
inherently uncertain and difficult to predict; therefore, undue reliance should
not be placed upon such forward-looking statements. As a result, no assurance is
given that future results expressed or implied from such forward-looking
statements will be achieved.
The following important factors, among others, in addition to the
information described under Risk Factors, could cause the Company not to achieve
expressed or implied by forward-looking statements contained herein or otherwise
cause the Company's results of operations to be adversely affected in future
periods (i) continued or increased competitive pressures from existing
competitors and new entrants, (ii) unanticipated costs related to the
implementation of the Company's growth and operating strategies,
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(iii) loss or retirement of key members of management, (iv) inability to
negotiate favorable terms with customers and suppliers, (v) increases in
interest rates or the Company's cost of borrowing or a default under any
material debt agreements, (vi) inability of the Company to achieve its cost
savings initiatives, to achieve synergies from acquisitions or to strengthen its
retail store base, (vii) inability of the Company to achieve the objectives of
the Horizons project, (viii) prolonged labor disruption, (ix) deterioration in
general or regional economic conditions, (x) adverse state or federal
legislation or regulation that increases the costs of compliance, or adverse
findings by a regulator with respect to existing operations, (xi) adverse
determinations in connection with pending or future litigation or other material
claims and judgments against the Company, (xii) inability to achieve future
sales levels or other operating results that support the Company's cost savings
initiatives, and (xiii) the unavailability of funds for capital expenditures.
THE EXCHANGE OFFER
The following discussion sets forth or summarizes what the Company believes
are the material terms of the Exchange Offer, including those set forth in the
Letter of Transmittal distributed with this Prospectus. This summary is
qualified in its entirety by reference to the full text of the documents
underlying the Exchange Offer, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part, and are incorporated
by reference herein.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of Series A Notes pursuant to the Purchase
Agreement, dated April 20, 1998 (the "Purchase Agreement"), between the Company
and the Initial Purchasers, the Initial Purchasers became entitled to the
benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company must use its best
efforts to (a) file a registration statement in connection with a registered
exchange offer within 30 days after April 24, 1998, the date the Series A Notes
were issued (the "Issue Date"), (b) cause such registration statement to become
effective under the Securities Act within 90 days of the Issue Date, (c) keep
such registration statement effective until the closing of the Exchange Offer
and (d) cause the Exchange Offer to be consummated within 120 days after the
Issue Date. Within the applicable time periods, the Company will endeavor to
register under the Securities Act all of the Exchange Notes pursuant to a
registration statement under which the Company will offer each Holder of Series
A Notes the opportunity to exchange any and all of the outstanding Series A
Notes held by such Holder for Exchange Notes in an aggregate principal amount
equal to the aggregate principal amount of Series A Notes tendered for exchange
by such Holder. Subject to limited exceptions, the Exchange Offer being made
hereby, if commenced and consummated within such applicable time periods, will
satisfy the obligations of the Company under the Registration Rights Agreement
described above. In such event, any Series A Notes that are not tendered in the
Exchange Offer or not accepted for exchange by the Company under the terms of
the Exchange Offer would remain outstanding and would continue to accrue
interest, but would not retain any rights under the Registration Rights
Agreement. Holders of Series A Notes seeking liquidity in their investment would
have to register the Series A Notes, or otherwise transfer the Series A Notes
pursuant to an exemption, under applicable securities laws, including the
Securities Act. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
term "Holder" with respect to the Exchange Offer means any person in whose name
the Series A Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
holder.
Because the Exchange Offer is for any and all Series A Notes, the principal
amount of Series A Notes tendered and exchanged in the Exchange Offer will
reduce the principal amount of Series A Notes outstanding. Following the
consummation of the Exchange Offer, Holders who did not tender their Series A
Notes generally will not have any further registration rights under the
Registration Rights Agreement,
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and such Series A Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Series A Notes could
be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept all
Series A Notes properly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date. The Company will issue $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
outstanding Series A Notes accepted in the Exchange Offer. Holders may tender
some or all of their Series A Notes pursuant to the Exchange Offer.
The form and terms of the Exchange Notes are the same as the form and terms
of the Series A Notes except that (i) the issuance of the Exchange Notes will
have been registered under the Securities Act and, therefore, the Exchange Notes
will not bear legends restricting the transfer thereof and (ii) the holders of
Exchange Notes generally will not be entitled to certain rights under the
Registration Rights Agreement, which rights generally will terminate upon
consummation of the Exchange Offer. The Exchange Notes will evidence the same
debt as the Series A Notes and will be entitled to the benefits of the
Indenture.
Holders of Series A Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer.
The Company shall be deemed to have accepted validly tendered Series A Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Series A Notes for the purposes of receiving the Exchange Notes from the
Company and delivering Exchange Notes to such Holders.
If any tendered Series A Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted Series A Notes will be returned, without
expense, to the tendering Holder thereof as promptly as practicable after the
Expiration Date.
Holders of Series A Notes who tender pursuant to the Exchange Offer will not
be required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Series A Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes, in connection with the
Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Exchange Offer shall remain open for acceptance for a period of not less
than 30 days after notice is mailed to Holders (the "Exchange Period"). The
Expiration Date will be 5:00 p.m., New York City time, on August 4, 1998, unless
the Company, in its sole discretion, extends the Exchange Offer, in which case
the Expiration Date will be the latest business day to which the Exchange Offer
is extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the record
Holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date. Such
announcement may state that the Company is extending the Exchange Offer for a
specified period of time.
The Company reserves the right (i) to delay accepting any Series A Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept
Series A Notes not previously accepted if any of the conditions set forth under
"--Conditions" shall have occurred and shall not have been waived by the
Company, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent,
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or (ii) to amend the terms of the Exchange Offer in any manner. Any such delay
in acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment in a manner reasonably
calculated to inform the Holders of such amendment and the Company will extend
the Exchange Offer for a period of five to 10 business days, depending upon the
significance of the amendment and the manner of disclosure to Holders, if the
Exchange Offer would otherwise expire during such five to 10 business day
period.
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
Interest on the Exchange Notes is payable semi-annually on May 1 and
November 1 of each year at the rate of 8 1/2% per annum. The Exchange Notes will
bear interest from April 24, 1998, the date of issuance of the Series A Notes,
or the most recent interest payment date to which interest on such Series A
Notes has been paid, whichever is later. Accordingly, Holders of Series A Notes
that are accepted for exchange will not receive interest that is accrued but
unpaid on the Series A Notes at the time of tender, but such interest will be
payable in respect of the Exchange Notes delivered in exchange for such Series A
Notes on the first interest payment date after the Expiration Date.
PROCEDURES FOR TENDERING
Only a Holder of Series A Notes may tender such Series A Notes pursuant to
the Exchange Offer. To tender pursuant to the Exchange Offer, a Holder must
complete, sign and date the Letter of Transmittal, or a facsimile thereof, have
the signatures thereon guaranteed if required by instruction 4 of the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile, together with the Series A Notes and any other required documents, to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. Delivery of the Series A Notes may be made by book-entry transfer in
accordance with the procedures described below. Confirmation of such book-entry
transfer must be received by the Exchange Agent prior to the Expiration Date.
The tender by a Holder of Series A Notes and the acceptance thereof by the
Company will constitute an agreement between such Holder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal.
THE METHOD OF DELIVERY OF SERIES A NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR SERIES A NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT SUCH TENDER FOR SUCH HOLDERS.
Any beneficial holder whose Series A Notes are registered in the name of
such holder's broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact such registered holder promptly and
instruct such registered holder to tender on behalf of such beneficial holder.
If such beneficial holder wishes to tender on such beneficial holder's behalf,
such beneficial holder must, prior to completing and executing the Letter of
Transmittal and delivering the Series A Notes, either make appropriate
arrangements to register ownership of the Series A Notes in such holder's name
or
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obtain a properly completed bond power from the registered holder. The transfer
of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the United
States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Exchange Act (an "Eligible Institution") unless the Series A Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box entitled "Special Registration Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution. In the event that signatures on a Letter of Transmittal
or a notice of withdrawal, as the case may be, are required to be guaranteed,
such guarantee must be by an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Series A Notes listed therein, such Series A Notes must be
endorsed or accompanied by appropriate bond powers and a proxy which authorizes
such person to tender the Series A Notes on behalf of the registered holder, in
each case signed as the name of the registered holder or holders appears on the
Series A Notes with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Series A Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Series A Notes at the DTC for the purpose of facilitating the Exchange Offer,
and subject to the establishment thereof, any financial institution that is a
participant in the DTC may make book-entry delivery of the Series A Notes by
causing the DTC to transfer such Series A Notes into the Exchange Agent's
account with respect to the Series A Notes in accordance with the DTC's
procedures for such transfer. Although delivery of the Series A Notes may be
effected through book entry transfer into the Exchange Agent's account at the
DTC, a Letter of Transmittal properly completed and duly executed with any
required signature guarantee and all other required documents must in each case
be transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures. Delivery of documents to the DTC does not
constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Series A Notes and withdrawal of the tendered
Series A Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Series A Notes not properly tendered or any Series A Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any
irregularities or conditions of tender as to particular Series A Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including, the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Series A Notes must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Series A Notes, nor shall any of them incur any
liability for failure to give such notification. Tenders of Series A Notes will
not be deemed to have been made until such irregularities have been cured or
waived. Any Series A Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned without cost to such Holder by the Exchange Agent to the
tendering
26
<PAGE>
Holders of Series A Notes, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Series A Notes and (i) whose Series A Notes
are not immediately available, or (ii) who cannot deliver their Series A Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
(or comply with the procedures for book-entry transfer) prior to the Expiration
Date, may effect a tender if:
(i) the tender is made through an Eligible Institution;
(ii) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Series A Notes, the
certificate or registration number or numbers of such Series A Notes and the
principal amount of Series A Notes tendered, stating that the tender is
being made thereby, and guaranteeing that, within five business days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Series A Notes to be
tendered in proper form for transfer (or a confirmation of book-entry
transfer of such Series A Notes into the Exchange Agent's account at the
Depository) and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(iii) such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered Series A Notes in proper form for transfer (or a confirmation of
book-entry transfer of such Series A Notes into the Exchange Agent's account
at the Depository) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five business days
after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Series A Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Series A Notes pursuant to the Exchange Offer, a
written or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at the address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Series A Notes to be withdrawn (the
"Depositor"), (ii) identify the Series A Notes to be withdrawn (including the
certificate or registration number(s) and principal amount of such Series A
Notes, or, in the case of notes transferred by book-entry transfer, the name and
number of the account at the DTC to be credited), (iii) be signed by the
Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Series A Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Trustee (as defined herein) register the transfer of such Series A
Notes into the name of the Depositor withdrawing the tender, (iv) specify the
name in which any such Series A Notes are to be registered, if different from
that of the Depositor and (v) include a statement that such Holder is
withdrawing such Holder's election to have such Series A Notes exchanged. All
questions as to the validity, form and eligibility (including time of receipt)
of such withdrawal notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Series A Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Series A Notes so withdrawn are validly retendered. Any Series A Notes which
have been tendered but which are not accepted for payment will be returned to
the Holder thereof without cost to such Holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Series A Notes may be retendered by following
27
<PAGE>
one of the procedures described under "--Procedures for Tendering" at any time
prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to exchange Exchange Notes for, any
Series A Notes, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Series A Notes, if:
(i) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(ii) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable judgment, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable judgment that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Series A
Notes and return all tendered Series A Notes to the tendering Holders, (ii)
extend the Exchange Offer and retain all Series A Notes tendered prior to the
expiration of the Exchange Offer subject, however, to the rights of Holders to
withdraw such Series A Notes (see "--Withdrawals of Tenders") or (iii) waive
such unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Series A Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered Holders, and, depending upon the significance of
the waiver and the manner of disclosure to the registered Holders, the Company
will extend the Exchange Offer for a period of five to 10 business days if the
Exchange Offer would otherwise expire during such five to 10 business-day
period.
EXCHANGE AGENT
U.S. Bank Trust National Association has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C> <C>
By Mail By Facsimile By Hand or Overnight
(registered or certified Transmission: Courier:
mail recommended): (612) 244-1537 180 East 5th Street
180 East 5th Street Saint Paul, MN 55101
Saint Paul, MN 55101 Attention:Specialized
Attention:Specialized Finance
Finance Fourth Floor Fourth Floor
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone or in person by officers and regular employees of
the Company, and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or other
persons soliciting acceptances of the Exchange Offer. The Company, however, will
pay the Exchange Agent reasonable and customary fees for its services and
28
<PAGE>
will reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith and pay other registration expenses, including fees and
expenses of the Trustee, filing fees, blue sky fees and printing and
distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Series A Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Series A Notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered holder of the Series
A Notes tendered, or if tendered Series A Notes are registered in the name of
any person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Series A Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Series
A Notes, which is the aggregate principal amount of the Series A Notes, as
reflected in the Company's accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized in
connection with the Exchange Offer. The cost of the Exchange Offer will be
deferred and amortized over the term of the Exchange Notes.
RESALE OF THE EXCHANGE NOTES
Under existing Commission interpretations, the Exchange Notes would, in
general, be freely transferable after the Exchange Offer by any holder of such
Exchange Notes (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 of the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes acquired pursuant to the Exchange Offer are
obtained in the ordinary course of such holder's business, and such holder does
not intend to participate, and has no arrangement or understanding to
participate in the distribution of such Exchange Notes. Any holder who tenders
pursuant to the Exchange Offer with the intention to participate, or for the
purpose of participating, in a distribution of the Exchange Notes may not rely
on the position of the staff of the Commission enunciated in Exxon Capital
Holdings Corporation (available May 13, 1988) or Morgan Stanley & Co.,
Incorporated (available June 5, 1991) or similar interpretive letters, but
rather must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction. In
addition, any such resale transaction should be covered by an effective
registration statement containing the selling security holders information
required by Item 507 of Regulation S-K of the Securities Act.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Series A Notes, where such Series A Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, may be a statutory underwriter and must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Company has agreed to make available a prospectus meeting the requirements of
the Securities Act to any such broker-dealer for use in connection with any
resale of any Exchange Notes acquired in the Exchange Offer. A broker-dealer
which delivers such a prospectus to purchasers in connection with such resales
will be subject to certain of the civil liability provisions under the
Securities Act and will be bound by the provisions of the Registration Rights
Agreement (including certain indemnification rights and obligations).
By tendering pursuant to the Exchange Offer, each Holder will represent to
the Company, among other things, (i) the Exchange Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of its business, (ii)
neither the holder nor any such other person has an arrangement or
29
<PAGE>
understanding with any person to participate in the distribution of the Exchange
Notes and (iii) the holder and any such other person acknowledge that if they
participate in the Exchange Offer for the purpose of distributing the Exchange
Notes (a) they must, in the absence of an exemption therefrom, comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the Exchange Notes and cannot rely on the
no-action letters referenced above and (b) failure to comply with such
requirements in such instance could result in such holder incurring liability
under the Securities Act for which such holder is not indemnified by the
Company. Further, by tendering in the Exchange Offer, each holder that may be
deemed an "affiliate" (as defined in Rule 405 of the Securities Act), of the
Company will represent to the Company that such holder understands and
acknowledges that the Exchange Notes may not be offered for resale, resold, or
otherwise transferred by that Holder without registration under the Securities
Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the foregoing interpretations of the staff of the Commission with respect to
resales of the Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled one of its obligations under the Registration Rights Agreement, and
Holders of Series A Notes who do not tender their Series A Notes generally will
not have any further registration rights under the Registration Rights Agreement
or otherwise. Accordingly, any Holder that does not exchange such Holder's
Series A Notes for Exchange Notes will continue to hold the untendered Series A
Notes and will be entitled to all the rights and limitations applicable thereto
under the Indenture, except to the extent that such rights or limitations, by
their terms, terminate or cease to have further effectiveness as a result of the
Exchange Offer.
The Series A Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Series A
Notes may be resold only (i) to the Company (upon redemption thereof or
otherwise), (ii) pursuant to an effective registration statement under the
Securities Act, (iii) so long as the Series A Notes are eligible for resale
pursuant to Rule 144A under the Securities Act, to a Qualified Institutional
Buyer (as defined in Rule 144A) in a transaction meeting the requirements of
Rule 144A, (iv) outside the United States to a foreign person pursuant to the
exemption from the registration requirements of the Securities Act provided by
Regulation S thereunder, (v) pursuant to an exemption from registration under
the Securities Act provided by Rule 144 thereunder (if available) or (vi) to an
Accredited Investor in a transaction exempt from the registration requirements
of the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States or other applicable jurisdiction. See
"Risk Factors--Restrictions on Transfer."
OTHER
Participation in the Exchange Offer is voluntary and Holders should
carefully consider whether to accept. Holders are urged to consult their
financial and tax advisors in making their own decision on what action to take.
The Company may in the future seek to acquire untendered Series A Notes, to
the extent permitted by applicable law, in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plans to acquire any Series A Notes that are not tendered in the
Exchange Offer or to file a registration statement to permit resales of any
untendered Series A Notes.
In any state where the Exchange Offer does not fall under a statutory
exemption to the blue sky rules, the Company has filed the appropriate
registrations and notices, and has made the appropriate requests, to permit the
Exchange Offer to be made in such state.
30
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
Department regulations (the "Regulations") and existing administrative
interpretations and court decisions. There can be no assurance that the Internal
Revenue Service (the "IRS") will not take a contrary view, and no ruling from
the IRS has been or will be sought. Legislative, judicial or administrative
changes or interpretations may be forthcoming that could alter or modify the
statements and conditions set forth herein. Any such changes or interpretations
may or may not be retroactive and could affect the tax consequences to Holders.
Certain Holders of the Series A Notes (including insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States) may be subject
to special rules not discussed below. Each Holder of a Series A Note should
consult his, her or its own tax advisor as to the particular tax consequences of
exchanging such Holder's Series A Notes for Exchange Notes, including the
applicability and effect of any state, local or foreign tax laws.
The issuance of the Exchange Notes to Holders of the Series A Notes pursuant
to the terms set forth in this Prospectus will not constitute an exchange for
United States federal income tax purposes because such exchange does not
represent a significant modification of the debt instruments. Consequently, no
gain or loss would be recognized by Holders of the Series A Notes upon receipt
of the Exchange Notes, and ownership of the Exchange Notes will be considered a
continuation of ownership of the Series A Notes. For purposes of determining
gain or loss upon the subsequent sale or exchange of the Exchange Notes, a
Holder's basis in the Exchange Notes should be the same as such Holder's basis
in the Series A Notes exchanged therefor. A Holder's holding period for the
Exchange Notes should include the Holder's holding period for the Series A Notes
exchanged therefor. The issue price, original issue discount inclusion and other
tax characteristics of the Exchange Notes should be identical to the issue
price, original issue discount inclusion and other tax characteristics of the
Series A Notes exchanged therefor.
See also "Description of Certain Federal Income Tax Consequences of an
Investment in the Exchange Notes."
USE OF PROCEEDS
There will be no net proceeds to the Company from the exchange of Notes
pursuant to the Exchange Offer. The net proceeds to the Company from the
offering of the Series A Notes were approximately $159.7 million. The Company
used the net proceeds from the offering of the Series A Notes to repay
outstanding borrowings under the Revolving Credit Facility, which may be
reborrowed for general corporate purposes. Since January 3, 1998, the Company
has increased the amount outstanding under the Revolving Credit Facility to
repay (i) approximately $106.3 million in principal amount of senior unsecured
indebtedness, including $30.0 million in principal amount of 8.38% senior notes
that were due 2006, $25.0 million in principal amount of 9.20% senior notes that
were due 2000, $15.0 million in principal amount of 10.00% senior notes that
were due 2001, $5.3 million in principal amount of 10.90% senior notes that were
due 2004, $23.0 million in principal amount of 8.54% senior notes that were due
2008 and $8.0 million in principal amount of 9.98% senior notes that were due
2002 (collectively, the "Senior Notes"), and (ii) approximately $9.4 million of
related prepayment premiums (together with the Senior Notes, the "Prepayments").
See "Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Description of Certain Other
Indebtedness."
31
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
28, 1998 (i) on an actual basis and (ii) as adjusted to give effect to the
offering of the Series A Notes and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and the Company's Consolidated Financial
Statements and the related notes thereto included elsewhere in this Offering
Memorandum.
<TABLE>
<CAPTION>
AS OF MARCH 28, 1998
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term notes payable to banks........................................................ $16,155 $16,155
---------- -----------
---------- -----------
Long-term liabilities, including current portion (a):
Brinson Trust Company Master Note (b).................................................. $65,000 $65,000
Revolving Credit Facility (b).......................................................... 249,000 89,300
8.38% Senior Notes..................................................................... -- --
8.54% Senior Notes..................................................................... -- --
9.20% Senior Notes..................................................................... -- --
9.55% Senior Notes..................................................................... 1,250 1,250
9.98% Senior Notes..................................................................... -- --
10.00% Senior Notes.................................................................... -- --
10.90% Senior Notes.................................................................... -- --
Industrial development bonds........................................................... 4,220 4,220
Mortgage loans......................................................................... 5,833 5,833
Capitalized lease obligations.......................................................... 39,726 39,726
Series A Notes......................................................................... -- 165,000
---------- -----------
Total long-term liabilities.......................................................... 365,029 370,329
Total stockholders' equity (c)........................................................... 220,970 220,970
---------- -----------
Total capitalization................................................................. $585,999 $591,299
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(a) For information regarding the Company's long-term liabilities, see Note 5 of
Notes to Consolidated Financial Statements.
(b) The Company has an aggregate of $510.0 million of borrowing availability,
subject to the satisfaction of certain conditions, under the $350.0 million
Revolving Credit Facility and under the $160.0 million of Other Bank Credit
Facilities (which include facilities with Brinson Trust Company and Norwest
Bank Minnesota, N.A.).
(c) Reflects approximately $9.5 million of prepayment premiums incurred on March
28, 1998 in connection with the Prepayments and the write-off of deferred
financing costs related thereto, net of tax benefits.
32
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of the
Company. The annual historical data have been derived from the Company's
Consolidated Financial Statements. The summary consolidated financial data for
the fiscal quarters ended March 28, 1998 and March 22, 1997 are derived from the
Unaudited Consolidated Financial Statements of the Company included elsewhere in
this Prospectus. Such Unaudited Consolidated Financial Statements, in the
opinion of the Company's management, include all adjustments necessary
(consisting of normal recurring accruals) for a fair presentation of the
financial condition and results of operations of the Company for such periods
and as of such dates. The selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the Consolidated Financial Statements of the
Company and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED YEAR ENDED (A)
------------------------ ------------------------------------------------------------------
MARCH 28, MARCH 22, JANUARY 3, DECEMBER 28, DECEMBER 30, DECEMBER 31, JANUARY 1,
1998 1997 1998 1996 1995 1994 1994
----------- ----------- ----------- ------------ ------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues................... $ 937,101 $ 947,832 $4,391,602 $3,375,485 $2,888,836 $2,832,000 $2,723,535
Cost of sales.................... 820,360 825,189 3,826,377 2,932,709 2,469,841 2,410,292 2,325,249
----------- ----------- ----------- ------------ ------------ ------------ -----------
Gross profit..................... 116,741 122,643 565,225 442,776 418,995 421,708 398,286
Selling, general and
administrative, and other
operating expenses (b)......... 94,310 99,158 453,645 359,456 350,201 352,683 332,349
Special charges (c).............. -- -- 31,272 -- -- -- --
Depreciation and amortization.... 11,078 10,905 47,697 34,759 29,406 31,831 29,145
Interest expense................. 6,860 7,321 32,845 14,894 10,793 11,384 10,114
----------- ----------- ----------- ------------ ------------ ------------ -----------
Income before income taxes and
extraordinary charge........... 4,493 5,259 (234) 33,667 28,595 25,810 26,678
Income taxes..................... 1,865 2,203 994 13,635 11,181 10,330 10,804
Extraordinary charge (d)......... (5,569) -- -- -- -- -- --
----------- ----------- ----------- ------------ ------------ ------------ -----------
Net income (loss)................ $(2,941) $3,056 $(1,228 ) $20,032 $17,414 $15,480 $15,874
----------- ----------- ----------- ------------ ------------ ------------ -----------
----------- ----------- ----------- ------------ ------------ ------------ -----------
Net income (loss) per share:
Basic.......................... (.26 ) .27 (.11 ) 1.83 1.60 1.42 1.46
----------- ----------- ----------- ------------ ------------ ------------ -----------
----------- ----------- ----------- ------------ ------------ ------------ -----------
Diluted........................ (.26 ) .27 (.11 ) 1.81 1.60 1.42 1.46
----------- ----------- ----------- ------------ ------------ ------------ -----------
----------- ----------- ----------- ------------ ------------ ------------ -----------
BALANCE SHEET DATA:
Working capital.................. $186,114 $247,394 $199,931 $228,508 $104,002 $89,457 $79,904
Total assets..................... 912,423 935,806 904,883 945,477 514,260 531,604 521,654
Total debt, including capitalized
leases......................... 381,185 433,527 383,270 427,617 95,889 143,045 140,167
Stockholders' equity............. 220,970 234,566 225,618 232,861 215,313 206,269 199,264
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges (e).................... 1.46 x 1.53 x 1.00 x 2.34 x 2.49 x 2.28 x 2.35 x
Capital expenditures (f)......... $13,474 $7,939 $67,725 $51,333 $33,264 $34,965 $36,382
</TABLE>
- ------------------------------
(a) Fiscal year operating results include 52 weeks for each year except fiscal
1997, which includes 53 weeks.
(b) Includes expenses incurred in connection with HORIZONS estimated to be $1.8
million in the first quarter of fiscal 1998, $5.5 million for fiscal 1997
and $1.6 million for fiscal 1996. See "Business--Information Systems."
(c) Includes $14.5 million for the consolidation of selected warehouses, $2.5
million of integration costs associated with the acquisition of the business
and assets of United-A.G. Cooperative, Inc. in Omaha, Nebraska, $5.2 million
from closing or consolidating underperforming retail stores, a $5.4 million
asset impairment charge relating to seven retail stores, a $1.0 million
asset impairment charge relating to the Company's produce marketing
operations, a $0.9 million write-off of current systems software being
replaced by HORIZONS and a $0.6 million loss relating to the sale of the
Company's investment in a Hungarian food wholesaler.
(d) Reflects prepayment premiums from early extinguishment of debt, net of
income tax benefits. See "Use of Proceeds."
(e) For purposes of computing the ratios, earnings represent income before
income taxes, the cumulative effect of accounting changes plus fixed
charges. Fixed charges represent interest expense and that portion of rent
expense under all lease commitments deemed to represent an appropriate
interest factor.
(f) Includes approximately $5.8 million, $2.1 million, $20.0 million and $8.1
million of capital expenditures incurred in connection with HORIZONS in the
first quarter of fiscal 1998, the first quarter of fiscal 1997, fiscal 1997
and fiscal 1996, respectively.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE COMPANY'S RESULTS OF OPERATIONS AND
FINANCIAL CONDITION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY, INCLUDING THE NOTES THERETO, INCLUDED
ELSEWHERE IN THIS REGISTRATION STATEMENT.
GENERAL
Nash Finch Company, organized in 1921 as the successor to a business founded
in 1885, is engaged in the wholesale and retail distribution of groceries and
related products primarily in the Midwestern and Southeastern regions of the
United States.
In January 1996, the Company acquired substantially all of the business and
assets of Military Distributors of Virginia, Inc. ("MDV"), a Virginia
corporation based in Norfolk, Virginia. MDV was engaged in the business of
distributing groceries and related products to military commissaries in the
eastern United States and Europe. The operations of MDV have been consolidated
with the Company's existing military distribution operations in Baltimore,
Maryland, and Chesapeake, Virginia, into a single military division with
distribution centers in Norfolk and Baltimore.
In July 1996, the Company acquired T. J. Morris Company ("T. J. Morris"), a
Georgia-based grocery wholesaler. Following the acquisition of T. J. Morris, the
Company closed its distribution center in Macon, Georgia and consolidated its
operations with the T. J. Morris warehouse in Statesboro, Georgia.
In November 1996, the Company completed the acquisition of all of the
outstanding shares of capital stock of Super Food based in Dayton, Ohio. Super
Food was incorporated in 1957 and, prior to the acquisition by the Company, was
ranked as the 14th largest grocery wholesaler in the United States, with sales
for its fiscal year ended August 31, 1996 of approximately $1.2 billion. Super
Food services independent stores, including IGA stores, across six states,
including primarily Ohio, Michigan and Kentucky. Super Food had four
distribution centers located in Bellefontaine, Ohio, Cincinnati, Ohio,
Bridgeport, Michigan, and Lexington, Kentucky, each providing a full line of
groceries and related products, other than produce. The Company closed the
Lexington distribution center and consolidated its operations with Super Food's
Cincinnati, Ohio and the Company's Bluefield, Virginia distribution centers in
March 1998. The distribution center in Bellefontaine, Ohio also has a portion of
its space dedicated to distributing general merchandise to Super Food's other
distribution centers, the Company's distribution centers in the Southeast and to
outside customers. Since the completion of the acquisition, the Company has
been, and continues to be, engaged in the process of coordinating the
distribution operations of Super Food with existing distribution operations of
the Company, addressing accounting system and control issues raised by the
integration of Super Food's financial reporting systems with those of the
Company and consolidating the general and administrative functions of Super Food
with the general and administrative functions of the Company in Edina,
Minnesota.
In June 1997, the Company acquired the assets of United-A.G. Cooperative,
Inc. ("United-A.G"), a cooperative based in Omaha, Nebraska. The Company
subsequently consolidated the operations of the Company's Lincoln, Nebraska
distribution center with the United-A.G. distribution center in Omaha and has
closed the Lincoln distribution center and intends to sell the property.
34
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RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Q1 Q1
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total revenues..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin....................................... 12.5 12.9 12.9 13.1 14.5
Selling, general and administrative, and other
operating expenses............................... 10.1 10.5 10.3 10.7 12.1
Special charges.................................... -- -- 0.7 -- --
Depreciation and amortization...................... 1.2 1.2 1.1 1.0 1.0
Interest expense................................... 0.7 0.8 0.7 0.4 0.4
Earnings before income taxes and extraordinary
charge........................................... 0.5 0.6 -- 1.0 1.0
Income taxes....................................... 0.2 0.2 -- 0.4 0.4
Net earnings (loss)................................ (0.3) 0.3 -- 0.6 0.6
</TABLE>
REVENUES
Total revenues for the first quarter 1998 were $937.1 million compared to
$947.8 million last year, a decrease of 1.1%. The decline related to both the
wholesale and retail segments of the Company.
Although wholesale revenues for the quarter were positively impacted by
sales resulting from the acquisition of the business and assets of United-A.G.
in June 1997, overall wholesale segment revenues declined. Lower revenues were
attributed to the planned consolidation of a distribution center in Lexington,
Kentucky, and soft market conditions in certain areas of the Midwest. Also, the
military division reported lower revenues compared to last year, when such
revenues were exceptionally high. This reflected reduced sales to European
commissaries as well as somewhat lower sales by military commissaries along the
East Coast.
Retail segment revenues were impacted by the closing or sale of 12
under-performing stores since the first quarter of fiscal 1997. Same store sales
declined 1.2% as a result of continuing competitive market conditions in several
market areas in the upper Midwest.
Total revenues increased 30.1% during fiscal 1997 to $4.392 billion compared
to $3.375 billion in 1996 and $2.889 billion in 1995. The increase in 1997 is
largely attributed to the acquisition of Super Food, which took place during
fiscal 1996 (see Note 2 of Notes to Consolidated Financial Statements), the
addition of new independent retail accounts and an additional week of operations
in 1997.
Wholesale segment revenues increased 41.9% to $3.503 billion from $2.469
billion in 1996, primarily due to the acquisitions of Super Food and T. J.
Morris in 1996 and the business and certain assets of United-A.G. in fiscal
1997. Wholesale revenues include an additional week of business and reflect a
full year's volume from Sunshine Food Markets, a seven-store chain which the
Company began servicing in November 1996, following its acquisition by a joint
venture, 50% of which is owned by the Company. Fiscal 1996 revenues increased
25.4% over 1995 because of the expansion of business from acquisitions, in
particular MDV which occurred in January 1996.
Retail segment revenues declined 3.3% from $850.4 million in fiscal 1996 to
$822.2 million in 1997. The decline is attributed to a net reduction of nine
stores. During the year, the Company closed eight under-performing stores, sold
four other units to non-affiliated retailers and opened three stores to
strengthen existing market areas in South Dakota and North Carolina. Same store
sales, expressed on an equivalent 52-week basis, declined 0.9% compared to last
year. This decline is indicative of competitive market conditions in certain
market areas and little or no food price inflation. Retail revenues during 1996
decreased 1.1% from 1995, again due to the closing or selling of stores not
meeting performance expectations.
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<PAGE>
GROSS MARGINS
Gross margins for the first quarter of 1998 were 12.5% compared to 12.9%
last year. The decline is partially attributed to the growing proportion of
lower margin wholesale business. During the quarter, wholesale segment business
represented 81.3% of the Company's consolidated revenues compared to 79.9% for
the same period last year. Food price deflation during the period resulted in a
LIFO credit of $.5 million compared to $.25 million last year. Retail margins
were flat compared to last year. Gains in dry grocery were offset by greater
promotional activities in the perishables departments, primarily produce and
dairy products. Margins compared to last year were also negatively affected by
the timing of religious holidays which occurred later in the second quarter this
year.
Gross margins were 12.9% in 1997, compared to 13.1% in 1996 and 14.5% in
1995. The decline over the three-year period results from the growth of
wholesale revenues which achieve lower margins than retail. Wholesale operations
represented 80.0% of combined segment revenues in 1997, compared to 73.3% and
68.4% in 1996 and 1995, respectively. During 1997, wholesale margins increased
as a result of three initiatives: (i) regionalizing procurement functions for
the Company's Midwest and Southeast distribution centers, (ii) implementing more
efficient logistical systems for handling of variety or specialty food products
through the Company's distribution centers, and (iii) improving coordination
with suppliers to optimize ordering and delivery of product. These initiatives
have contributed to improved operating efficiencies and lower product costs.
Retail margins for the year were flat. Improvements which resulted from a
continued trend of sales of higher margin prepared foods, specialty products and
services were offset by competitive pricing pressures which continued to
intensify in certain market areas.
Margins for fiscal 1995 reflect a greater proportion of retail segment
business which achieves higher margins.
OPERATING EXPENSES
Operating expenses for the quarter as a percent of revenues were 10.1%
compared to 10.5% last year. Expense levels continue to be positively affected
by the increased wholesale business, which operates at lower expense levels than
retail. The Company changed accounting procedures when it adopted Statement of
Position (SOP) 98-1 which resulted in $1.5 million of internal development costs
related to the HORIZONS project (described below) being capitalized during the
quarter. Previously these costs had been expensed as incurred.
During the quarter, the Company continued to execute its strategic plan to
consolidate selected warehouses by closing its distribution center in Lexington,
Kentucky, and transferring a substantial portion of that facility's volume to
the Company's Cincinnati, Ohio and Bluefield, Virginia distribution centers.
Although costs associated with the closing had been provided for through the
special charges recorded in 1997, certain expenses totaling approximately $.7
million associated with transferring the business were incurred during the
quarter. Some unaccrued expenses may continue until shutdown is complete, but
these are not expected to have a material impact on the second quarter.
Selling, general and administrative expenses as a percent of total revenues
were 10.3% in 1997 compared to 10.7% in 1996 and 12.1% in 1995. The decline in
expense levels as a percent of revenues is due to the increasing proportion of
wholesale business which operates at lower expense levels than retail.
For fiscal 1997, operating expenses includes costs associated with a project
involving new business information systems technology, which the Company has
named HORIZONS. Although the project began in fiscal 1996, incremental expenses
associated with HORIZONS were of greater significance throughout 1997 as costs
associated with system design, software configuration and installation of
hardware across the Company were incurred. Operating expenses related to the
Company's management information systems were $3.2 million higher in 1997
compared to 1996, substantially all of which related to HORIZONS. This
36
<PAGE>
incremental expenditure is expected to continue through 1998 and into 1999 as
the Company implements HORIZONS in substantially all operating units and trains
associates in the optimal use of the system. Because HORIZONS is anticipated to
become an integral part of the future of the Company's business, incremental
technology-related spending is anticipated to continue beyond 1999 although at a
lesser rate.
The Company expects benefits from the project to begin to accrue as the
system becomes operational unit by unit, and to reach more significant levels
beyond 1999 when the system is in place in substantially all operating units.
The project represents a major strategic investment for the Company's future and
is expected to provide greater flexibility to ultimately change business
processes, thereby improving efficiency and effectiveness.
Bad debt expense in 1997 was $5.1 million compared to $1.9 million in 1996.
The increase is attributed to maintaining adequate reserve levels consistent
with the growth, through acquisition, of customer receivables. Fiscal 1995
expense of $4.0 million included additional provisions primarily for grower
accounts and notes at the Company's produce marketing subsidiary.
SPECIAL CHARGES
During 1997, the Company accelerated its strategic plan relative to
strengthening its competitive position for the future. Coincident with the
implementation of the plan, the Company recorded special charges, totaling $31.3
million, during the third quarter relating to all three operating segments of
its business.
The aggregate special charges include $14.5 million for the consolidation of
selected warehouses. This charge contains provisions for non-cancelable lease
obligations, expected losses on disposals of tangible assets, and other
continuing occupancy costs. Also included are employee severance costs
consistent with existing practices and the unamortized portion of goodwill for
one of the locations.
Also, related to wholesale operations, the special charges include $2.5
million of integration costs, incurred in the third quarter, associated with the
acquisition of the business and certain assets of United-A.G. early in the third
quarter. These expenses resulted from incremental labor costs due to a
substantial turnover in workforce, training and other start-up activities.
Stabilization of the workforce improved substantially during the fourth quarter,
lowering expenses from levels experienced just after the acquisition.
In retail operations, the strategic plan involves the closing or
consolidation of fourteen, primarily leased stores. The special charges include
a $5.2 million provision for the continuing non-cancelable lease obligations,
anticipated losses on disposals of tangible assets, abandonment of certain
leaseholds and the write-off of intangibles. The time frame for individual store
closings will vary but should be completed by the first quarter of fiscal 1999.
In some instances, closed stores are expected to be consolidated with other
retail locations in the same relative market area, thereby minimizing the loss
of wholesale volume.
Continued operating losses through the dates of closing are unpredictable
and were not included in the special charges. For 1997, the retail units
included in the provision had aggregate sales and pretax losses of $82.9 million
and $2.7 million, respectively, compared with $88.3 million and $1.8 million for
1996.
The aggregate special charges contain a provision of $5.4 million for asset
impairment of seven retail stores. Declining market share due to increasing
competition, deterioration of operating performance in the third quarter, and
forecasted future results that were less than previously planned, were the
factors leading to the impairment determination. The impaired assets covered by
the charge primarily include real estate, leasehold improvements and, to a
lesser extent, goodwill related to two of the stores.
37
<PAGE>
An asset impairment charge of $1.0 million relating to agricultural assets
was also recorded against several farming operations of the Company's produce
marketing subsidiary. The impairment determination was based on recent downturns
in the market for certain varieties of fruit. The impairment resulted from
anticipated future operating losses and inadequate projected cash flows from
agricultural production of these products.
Other special charges aggregating $2.8 million consist primarily of $0.9
million related to the abandonment of current system software which is being
replaced by the Company's HORIZONS project, and a loss of $0.6 million realized
on the sale of the Company's 22.4% equity investment in Alfa Trading Company, a
Hungarian food wholesaler. Negotiations for the sale were substantially
completed during the third quarter, and the transaction was completed in the
fourth quarter. The remaining special charges relate principally to writing down
idle real estate held for resale to current market values.
The consolidations of wholesale and retail operations, as well as the
impairment adjustment to the assets identified, will favorably impact earnings
in the future due to reduced depreciation and amortization expenses and the
elimination of losses from certain affected operations. However, such amounts
are expected to be substantially offset by continuing costs related to HORIZONS.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased 1.6% in the first quarter of
1998 compared to last year. The increase reflects capital additions placed in
service since last year, offset by the reduction in depreciable assets resulting
from the sale of retail stores, and lower depreciation resulting from the write
down of impaired assets recorded as part of the special charges in 1997.
Amortization of goodwill and other intangibles for the current and prior year
quarter was $1.5 million. Depreciation expense is expected to increase during
1998 as implementation of HORIZONS continues, and greater portions of the
developed software are ready for use.
Depreciation and amortization expense increased 37.2% from 1996 to $47.7
million in 1997. The increase was primarily due to a full year of amortization
of goodwill and depreciation of property, plant and equipment associated with
acquisition of Super Food which occurred in 1996.
In addition, capital expenditures related to the HORIZONS project resulted
in increased depreciation expense of $2.0 million compared to last year. The
increase in 1996 compared to 1995 is the result of acquisitions occurring in
1996, partially offset by lower depreciation expenses resulting from sale or
closing of several retail stores.
INTEREST EXPENSE
Interest expense decreased from $7.3 million in the prior year quarter, to
$6.9 million this year, a decline of 6.3%. The reduction is attributable to
lower debt levels brought about by the sale of receivables at the end of 1997
and improved asset management. While the Company reduced its long-term borrowing
rates through refinancing, interest expense is expected to increase because a
greater portion of total debt is now based on a fixed interest rate which is
higher than the revolving debt rate it replaced.
Interest expense increased from $14.9 million in 1996 to $32.8 million in
1997 largely due to the full year debt costs related to financing the Super Food
acquisition in November 1996. The acquisition of the business and certain assets
of United-A.G. also contributed to higher interest expense in 1997. Interest
expense as a percent of revenues was 0.75%, 0.44% and 0.37% for 1997, 1996 and
1995, respectively.
The increase in interest expense in 1996 compared to 1995 was primarily due
to financing the acquisition of MDV early in 1996.
38
<PAGE>
EARNINGS (LOSS) BEFORE INCOME TAXES
Earnings before extraordinary charge were $2.6 million or $.23 per share for
the first quarter of 1998, compared to $3.1 million or $.27 per share last year.
The change in accounting for direct software development costs resulted in an
after tax benefit of $.8 million, or $.08 per share. Conversely, costs
associated with the transfer of business from Lexington, Kentucky to other
facilities adversely affected after tax earnings by $.4 million, or $.04 per
share.
In conjunction with the offering of the Series A Notes, the Company prepaid
$106.3 million of senior notes, and paid prepayment premiums and wrote off
related deferred financing costs totaling $9.5 million, all with drawings under
the Company's revolving credit facility. This transaction resulted in an
extraordinary charge of $5.6 million or $.49 per share after income tax benefits
of $4.0 million in the first quarter of 1998.
Including the special charges, the Company reported a pretax loss of
$234,000 for 1997 compared to pretax earnings of $33.7 million in 1996 and $28.6
million in 1995. Each segment of the Company's business was negatively affected
by these charges (see Note 14 of Notes to Consolidated Financial Statements).
Operating profit of $26.2 million in 1997 declined 44.1% from $46.9 million in
1996, while 1996 improved 28.2% compared to $36.6 million in 1995.
Excluding special charges, wholesale segment operating profit would have
been $50.8 million, or 1.45% of segment sales and other operating revenues,
compared to $37.1 million, or 1.50% of such revenues a year ago. The lower
margin reflects a decline in earnings as a percent of revenues for the existing
and newly acquired wholesale operations, where independent retail customers were
affected by a weak sales environment, somewhat offset by increases in earnings
contributions of the military division.
Retail segment operating profit before special charges would have been $5.8
million compared to $7.7 million last year. The decline resulted from
competitive pricing pressures in certain markets throughout the year, and the
loss of sales volume due to the sale or closure of certain underperforming
stores.
Nash-DeCamp Company, the Company's produce marketing subsidiary, would have
reported operating profit of $934,000 before special charges in 1997, compared
to $2.1 million and $2.4 million in 1996 and 1995, respectively. The weak
performance resulted from poor market prices caused by a surplus of available
product, particularly tree fruit.
INCOME TAXES
The effective tax rate for 1998 is estimated at 41.5%, compared to 41.9% in
1997. The effective income tax rate for 1997 is influenced by a number of
factors that do not allow for a meaningful comparison to prior years. The tax
provision substantially results from the nondeductibility of goodwill relating
to the acquisitions of Super Food and T. J. Morris, partially offset by other
items as shown in tax rate tables in Note 6 of Notes to Consolidated Financial
Statements.
YEAR 2000 COMPLIANCE
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the Year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company uses a significant number of computer software programs and
embedded operating systems that are essential to its business. The Company's
resolution to the Year 2000 issue is substantially incorporated in the system
design of the HORIZONS project. In addition, since all segments of the Company
39
<PAGE>
will not be initially impacted by HORIZONS, the Company has been actively
engaged in a process designed to mitigate any detrimental effects from the Year
2000 to any of these segments.
The Company has also initiated communications with its significant suppliers
and large customers with whom the Company's systems interface, exchange data or
are dependent upon, for the purpose of coordinating efforts to minimize its
vulnerability resulting from third parties' failure to resolve their own Year
2000 issues. However, there can be no guarantee that the systems of such third
parties will be timely corrected and would not have an adverse effect on the
Company's system. The Company expects to be completed with Year 2000 compliance
in mid-1999 and believes that with the HORIZONS project and modifications of its
existing software and systems, Year 2000 compliance will not pose significant
operating problems. However, the Company's business, results of operations or
financial condition could be adversely affected by the failure of its system, or
others' systems, to operate properly beyond 1999. Wherever possible, the Company
will be developing and executing contingency plans designed to allow continued
operation in the event of failure of the Company's or other third party systems.
Costs associated with a substantial portion of Year 2000 compliance coincide
with the new software and system design of the HORIZONS project. The cost of
Year 2000 compliance for business operations not affected by HORIZONS is not
expected to have a material effect on results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its capital needs through a
combination of internal and external sources. These sources include cash flow
from operations, short-term bank borrowings, various types of long-term debt,
lease and equity financing.
Operating activities generated positive net cash flows of $27.1 million
during the first quarter of 1998 compared to $5.0 million a year ago. The
increase is primarily due to higher accounts payable and accrued expenses and
lower accounts receivable. Working capital was $186.1 million at the end of the
quarter, a reduction of $13.8 million during the quarter. The current ratio
decreased from 1.68 at the end of fiscal 1997 to 1.59 at the end of the first
quarter.
At March 28, 1998, the Company had $16.2 million in short-term debt compared
to $11.3 million at the end of 1997.
As part of a plan to extend the maturity of the Company's outstanding
indebtedness and to provide the Company with greater financial and operating
flexibility, on March 27, 1998, the Company prepaid approximately $106.3 million
of Senior Notes. The Prepayments (including related prepayment premiums of $9.4
million) were financed with borrowings under the Revolving Credit Facility. The
net proceeds from the issuance of the Series A Notes were used to reduce such
borrowings, effectively extending the maturity of the Company's outstanding
indebtedness.
Other transactions affecting liquidity during the quarter include capital
expenditures of $13.4 million, of which approximately $4.0 million related to
HORIZONS, and payment of a cash dividend of $.18 per share on March 13, 1998 to
shareholders of record on February 27, 1998.
Cash provided from operating activities was $87.7 million in 1997 compared
to $32.9 million in 1996. The increase is attributed to the improvements in
operating profit before special charges and depreciation and amortization
expenses.
Working capital at January 3, 1998 declined to $199.9 million compared to
$228.5 million at the end of 1996, reflecting the reduction in current assets.
The current ratio was 1.68 in 1997 compared to 1.77 in 1996.
At January 3, 1998, the Company had $11.3 million in short-term debt
compared to $16.2 million at fiscal year-end 1996. As of January 3, 1998, the
Company had uncommitted lines of credit totaling $25.0 million with two banks,
under which a total of $13.7 million was unused. The Revolving Credit
40
<PAGE>
Facility provides for borrowings of up to $360.0 million, under which a total of
$204.0 million was outstanding at year-end. An agreement with a trust company
provides for borrowings of up to $150.0 million, under which $10.0 million was
borrowed at year-end. During the year, the Company utilized the existing
revolving agreements to finance the acquisition of United-A.G. and capital
outlays related to HORIZONS.
During fiscal 1997, the Company provided financial assistance in the form of
secured loans totaling $18.8 million to new or existing independent retailers.
These loans are generally used to maintain and expand their businesses. In
addition, the Company sold $37.0 million of trade accounts receivable and used
proceeds from the sale to reduce long-term debt.
Of the $31.3 million pretax special charges, approximately $13.6 million
involve cash outflows, while the balance are non-cash. On an after tax basis,
the cash impact is estimated to be $8.5 million, to be funded primarily from
internally generated funds.
Capital projects designed to maintain operating capacity, expand operations
or improve efficiency totaled $67.7 million in 1997 compared to $51.3 million in
1996. Included in 1997 and 1996 expenditures are approximately $20.0 million and
$8.1 million, respectively, related to the HORIZONS project. Total cash outlay
for the design, installation of, and training for HORIZONS is projected to be
about $76 million over the period of 1996 through 2004. Approximately half of
such amount had been expended as of January 3, 1998. Of the $76 million, $58.7
million is expected to be capitalized. A majority of the remaining projected
capital expenditures relating to HORIZONS are expected to be made in 1998.
Subsequent to the completion of the offering of the Series A Notes and the
application of the net proceeds thereof, the Company will continue to have
available approximately $339.2 million of additional borrowing capacity under
the Bank Credit Facilities. The Company believes that borrowings under the Bank
Credit Facilities, cash flow from operating activities and lease financings will
be adequate to meet the Company's working capital needs, planned capital
expenditures and debt service obligations for the foreseeable future.
41
<PAGE>
BUSINESS
Nash Finch Company, organized in 1921 as the successor to a business founded
in 1885, is the third largest publicly traded wholesale food distributor in the
United States (based on 1997 estimates), serving primarily the Midwestern and
Southeastern regions of the United States. In addition, the Company operates 97
conventional and warehouse supermarkets in 13 states. The Company's wholesale
operations, which include 21 distribution centers serving approximately 2,250
affiliated and independent supermarkets, U.S. military commissaries and other
customers in approximately 30 states, accounted for 79.8% of the Company's total
revenues in fiscal 1997, while its retail operations accounted for 18.7%. In
fiscal 1997, the Company had total revenues of $4.4 billion and EBITDA (as
defined herein) of $113.1 million.
The Company's wholesale operations serve two primary markets: (i)
supermarkets (70.4% of wholesale revenues in fiscal 1997), where the Company
combines a wide offering of national brand and private label products with
comprehensive support services to develop strong relationships with customers;
and (ii) military commissaries (29.6% of wholesale revenues in fiscal 1997),
where the Company believes it is currently the largest distributor of groceries
and related products to such facilities in the United States. The Company's
broad product offering includes dry groceries, fresh fruits and vegetables,
frozen foods, fresh and processed meat products and dairy products, as well as a
wide variety of non-food products, including health and beauty care, tobacco,
paper products, cleaning supplies and small household items. Private label
products are branded primarily under the Our Family trademark, a long-standing
private label of the Company, and Fame, a trademark acquired in the acquisition
of Super Food in November 1996. The Company offers a wide range of support
services to its independent retailers to help them compete more effectively in
their markets and to build customer loyalty, including supermarket merchandising
support, accounting services, price management systems, retail technology
support, advertising and promotional programs, training and human resource
development services, market research and store development services.
The Company's retail stores, as well as many of the retail outlets supplied
by the Company's wholesale operations, are located primarily in small to
midsized markets and rural areas. The Company's retail operations consist of 66
conventional supermarkets, averaging approximately 23,300 square feet in size,
operating principally under the Sun Mart, Easter Foods and Food Folks trade
names; 27 warehouse stores, averaging approximately 42,900 square feet in size,
operating principally under the Econofoods trade name; and four combination
general merchandise/food stores averaging approximately 43,000 square feet in
size, operating under the Family Thrift Center trade name.
COMPANY STRENGTHS
LEADING WHOLESALE FOOD DISTRIBUTOR. Through recent acquisitions, the
Company has become the third largest publicly traded wholesale food distributor
in the United States (based on 1997 estimates) with geographically dispersed
operations serving primarily the Midwestern and Southeastern regions of the
United States. The Company serves a diversified group of approximately 2,250
affiliated and independent supermarkets, U.S. military commissaries and other
customers, none of which accounted for more than 2.5% of the Company's total
revenues in fiscal 1997. The Company believes it is the largest wholesale
distributor of groceries and related products to military commissaries in the
United States. The Company derives increased purchasing power and economies of
scale from its large sales volume and distribution network.
INTEGRATED AND EFFICIENT DISTRIBUTION NETWORK. The Company has and
continues to develop a highly integrated and efficient distribution network by
realizing synergies from acquisitions and implementing innovative logistical
techniques. The Company continues to pursue opportunities to increase volume
through strategic acquisitions and to realize greater efficiencies in its
distribution network through consolidation of distribution centers. The Company
believes it is an industry leader in the development of advanced information
systems and the application of innovative logistics, such as port of entry
purchasing
42
<PAGE>
in full truck load quantities, cross docking and redistribution, which have
resulted in price and freight savings and operating efficiencies.
EXPERTISE IN PRIVATE LABEL PRODUCTS AND PERISHABLES. The Company has
developed extensive expertise in marketing and distributing a wide range of
private label products, including approximately 1,600 SKUs under the Our Family
private label and approximately 1,300 SKUs under the Fame private label. The
Company's private labels enjoy strong brand name recognition in the Company's
markets. Sales and transfers of private label products accounted for 9.8% of the
Company's non-military wholesale revenues in fiscal 1997. The Company has also
developed significant expertise in handling, marketing and distributing
perishables, including produce and dairy products. The Company's commitment to
distributing perishables enables it to provide a full spectrum of quality
products to customers. The Company believes that offering high quality private
label products and perishables provides it with certain competitive advantages
in attracting and retaining independent retailers and consumers. Private label
products and perishables generally result in higher margins than branded
products and other food categories.
STRONG RETAIL STORE BASE. The Company's 97 retail stores serve primarily
small to midsized markets and rural areas. The Company believes that
approximately 70% of the Company's stores are in markets where the Company is
first or second in market share. The Company believes its strong market share
positions result primarily from offering a variety of store formats and retail
concepts targeted to different geographical markets under several store names,
including Sun Mart, Easter Foods, Food Folks, Econofoods and Food Bonanza. In
addition, the Company believes its retail store base enhances the Company's
wholesale operations by enabling it to (i) better understand the needs of
independent retailers, thereby improving customer service; and (ii) test retail
concepts and innovations, including advertising and promotional programs, in the
Company's stores before they are rolled out to independent retailers. The
Company's retail stores are typically located close to distribution centers,
thereby creating certain operating efficiencies and logistical savings.
LEADING DISTRIBUTOR TO DOMESTIC MILITARY COMMISSARIES. The Company believes
that it is the largest wholesale distributor of groceries and related products
to domestic military commissaries. The Company's military distribution centers
also provide products for distribution to U.S. military commissaries in Europe
and to ships afloat. The Company serves as a third party distributor to
commissaries, contracting with a variety of food producers and other
manufacturers to procure and warehouse products for distribution to
commissaries. The Company's military distribution operations generally result in
higher net margins than the Company's civilian distribution operations due
primarily to lower operating expenses.
REPUTATION FOR SUPERIOR CUSTOMER SERVICE. The Company's 113 year operating
history, centered on the theme "CUSTOMER SATISFACTION IS ALWAYS FIRST!", has
resulted in strong relationships with long-standing customers. To further
enhance its reputation and strengthen customer relationships, the Company offers
a wide range of support services to customers to help them compete more
effectively in their markets, including supermarket merchandising support,
accounting services, price management systems, retail technology support,
advertising and promotional programs, training and human resource development
services, market research and store development services.
EXPERIENCED MANAGEMENT TEAM. The Company is led by a strong and experienced
executive management team, the members of which have on average 20 years with
the Company and 24 years of industry expertise across all facets of wholesale
distribution, marketing, merchandising and retail operations.
COMPANY STRATEGY
Management believes that the role of the distributor will continue to change
from the warehousing of goods toward a greater emphasis on the strategic
facilitation of goods and services for customers in a manner that provides
greater efficiencies. In addition the Company believes that food retailers will
be required to offer a wider variety of goods and services at attractive prices
to compete effectively.
43
<PAGE>
Accordingly, the Company's goals are to (i) profitably build the competitive
strength of the Company's wholesale customers by being a reliable cost-effective
provider of superior products and services, and (ii) achieve critical mass of
profitable Company retail stores in target markets. To achieve these goals, the
Company has adopted the following strategic initiatives:
COST SAVINGS AND VALUE ADDED INITIATIVES. The Company has implemented and
will continue to focus on a wide range of cost savings and value added
initiatives, including (i) maximizing the Company's substantial purchasing power
through centralized buying; (ii) consolidating operations and distribution
centers to achieve operating efficiencies and economies of scale; (iii) reducing
the Company's investment in working capital through strategic partnerships with
suppliers and more aggressive management of receivables; (iv) implementing
innovations in logistics and supply chain management to reduce procurement
costs, freight charges, inventory levels and delivery lead times; (v)
emphasizing greater cost consciousness among the Company's workforce; and (vi)
identifying under-performing assets and adopting an aggressive "fix, sell or
close" approach.
IMPLEMENTATION OF HORIZONS INFORMATION SYSTEM. The Company, working in
conjunction with SAP America and a number of other vendors and consultants, has
committed significant resources over the last two years to develop and implement
HORIZONS, a client server based enterprise management and financial information
system. The HORIZONS system will be a fully integrated and scalable system that
management believes will provide the Company with competitive advantages that
can be aggressively marketed to independent retailers. Implementation of the
HORIZONS system is scheduled to be substantially completed in 1999 and is
expected to provide (i) a solution to the Company's Year 2000 software issues,
(ii) greater flexibility for the changing business environment, (iii) greater
connectivity opportunities with customers and suppliers, (iv) the ability to
integrate and standardize information systems throughout the Company, (v) timely
and easy-to-use information, (vi) greater business process and workflow
efficiencies, and (vii) more powerful decision-making and analysis tools. To
parallel the development and implementation of the HORIZONS project, management
has led a cultural change and training initiative designed to prepare the
Company's workforce for changes in the industry and in the use of the HORIZONS
system to address these changes.
GROWTH THROUGH STRATEGIC ACQUISITIONS AND ALLIANCES. The Company has grown
significantly in recent years through strategic acquisitions that have (i)
enhanced the Company's purchasing power, (ii) expanded the Company's geographic
scope and breadth of product offering, (iii) increased the volume and efficiency
of several of the Company's distribution centers, (iv) significantly enhanced
the Company's presence in the military commissary market, and (v) added retail
stores in the Company's target markets. The Company will continue to strive to
achieve additional synergies through further integration of recent acquisitions.
In addition, the Company will continue to seek new opportunities for strategic
acquisitions and alliances that will provide a superior return on investment and
achieve one or more of the criteria described above.
STRENGTHEN RETAIL STORE BASE. The Company will continue to focus on
improving the profitability and contribution of the Company's retail store base
by investing to achieve critical mass and market dominance in the Company's key
retail markets, including seeking acquisition opportunities that provide
synergies, constructing new stores, remodeling and expanding existing stores and
remodeling, selling or closing underperforming stores. In the past two years,
the Company has acquired seven stores, remodeled 16 stores, sold seven stores
and closed 16 stores. In addition, the Company has and will continue to develop
and utilize a number of different retail formats in its retail stores. The
Company believes that multiple retail formats enable the Company to more
effectively respond to competition in the varied markets in which it operates.
Addressing each market individually has resulted in the strong market position
the Company enjoys in the majority of the Company's retail markets. Multiple
formats also allow the Company to test different concepts prior to extending
such concepts to independent retail customers.
44
<PAGE>
WHOLESALE OPERATIONS
The Company distributes and sells a full line of food products, including
dry groceries, fresh fruits and vegetables, frozen foods, fresh and processed
meat products and dairy products, and a variety of non-food products, including
health and beauty care, tobacco, paper products, cleaning supplies and small
household items. The Company primarily distributes and sells nationally
advertised brand products and a number of unbranded products (principally meats
and produce) purchased directly from various manufacturers, processors and
suppliers or through manufacturers' representatives and brokers. The Company
also distributes and sells private label products using the Company's own
trademarks, including principally the Our Family private label that the Company
has owned and developed over many years, and the Fame private label that the
Company acquired in the acquisition of Super Food. A wide variety of grocery,
dairy, packaged meat, frozen foods, health and beauty care products, paper and
household products, beverages, and other packaged products are manufactured or
processed by others for the Company and sold under the Company's private labels.
As of January 3, 1998, the Company distributed food and non-food products,
on a wholesale basis, to approximately 2,250 affiliated and independent
supermarkets, U.S. military commissaries and other customers. The Company's
wholesale customers are primarily self-service supermarkets that carry a wide
variety of grocery products, health and beauty care products and general
merchandise. Many stores also have one or more specialty departments such as
delicatessens, in-store bakeries, restaurants, pharmacies and flower shops.
Stores served by the Company's wholesale operations range in size from small
stores to large warehouse stores of over 100,000 square feet.
The Company offers to affiliated independent retailers a broad range of
services, including promotional, advertising and merchandising programs, the
installation of computerized ordering, receiving and scanning systems, the
establishment and supervision of computerized retail accounting, budgeting and
payroll systems, personnel management assistance and employee training, consumer
and market research, store development services and insurance programs. The
Company's retail counselors and other Company personnel advise and counsel
affiliated independent retailers, and directly provide many of the above
services. Separate charges are made for some of these services. Other
independent stores are charged for services on a negotiated basis. The Company
also provides retailers with marketing and store upgrade services, many of which
have been developed in connection with Company owned stores. For example, the
Company assists retailers in installing and operating delicatessens and other
specialty food sections. Rather than offering a single program for the services
it provides, the Company has developed multiple, flexible programs to serve the
needs of most affiliated independent retailers, whether rural or urban, large or
small.
The Company's assistance to affiliated independent retailers in store
development provides a means of continued growth for the Company through the
development of new retail store locations and the enlargement or remodeling of
existing retail stores. Services provided include site selection, marketing
studies, building design, store layout and equipment planning and procurement.
The Company assists wholesale customers in securing existing supermarkets that
are for sale from time to time in market areas served by the Company and,
occasionally, acquires existing stores for resale to wholesale customers.
The Company also provides financial assistance to its independent retailers
generally in connection with new store development and the upgrading or
expansion of existing stores. The Company makes secured loans to some of its
independent retailers, generally repayable over a period of five or seven years,
for inventories, store fixtures and equipment, working capital and store
improvements. Loans are secured by liens on inventory or equipment or both, by
personal guarantees and by other types of security. As of January 3, 1998, the
Company had approximately $39.0 million outstanding of such secured loans to 147
independent retailers. In addition, the Company may provide such assistance to
independent retailers by guarantying loans from financial institutions and
leases entered into directly with lessors. The Company
45
<PAGE>
also uses its credit strength to lease supermarket locations for sublease to
independent retailers, at rates that are at least as high as the rent paid by
the Company.
The Company currently distributes products from 21 distribution centers
located in Colorado, Georgia, Iowa, Kansas, Maryland, Michigan, Minnesota,
Nebraska (2), North Carolina (2), North Dakota (2), Ohio (3), South Dakota (2),
Virginia (2), and Wisconsin. The Company's distribution centers are located at
strategic points to efficiently serve Company owned stores, independent
customers and military commissaries. The distribution centers are equipped with
modern materials handling equipment for receiving, storing and shipping goods
and merchandise and are designed for high-volume operations at low unit costs.
Distribution centers serve as central sources of supply for Company owned
and independent stores, military commissaries and other institutional customers
within their operating areas. Generally, the distribution centers maintain
complete inventories containing most national brand grocery products sold in
supermarkets and a wide variety of high-volume private label items. In addition,
distribution centers provide full lines of perishables, including fresh meats
and poultry, fresh fruits and vegetables (except Super Food distribution
centers), dairy and delicatessen products and frozen foods. Health and beauty
care products, general merchandise and specialty grocery products are
distributed from a dedicated area of a distribution center located in
Bellefontaine, Ohio, and from the distribution center located in Sioux Falls,
South Dakota. Retailers order their inventory requirements at regular intervals
through direct linkage with the Company's computers. Deliveries are made
primarily by the Company's transportation fleet. The frequency of deliveries
varies, depending upon customer needs. The Company currently has a modern fleet
of approximately 500 tractors and 1,200 semi-trailers, most of which are owned
by the Company. In addition, many types of meats, dairy products, bakery and
other products are sold by the Company but are delivered by the suppliers
directly to retail food stores.
Virtually all of the Company's wholesale sales to independent retailers are
made on a market price-plus-fee and freight basis, with the fee based on the
type of commodity and quantity purchased. Selling prices are changed promptly,
based on the latest market information.
The Company distributes groceries and related products directly to military
commissaries in the U.S., and distribution centers also provide products for
distribution to U.S. military commissaries in Europe and to ships afloat. These
distribution services are provided primarily under contractual arrangements with
the manufacturers of those products. The Company provides storage, handling and
transportation services for the manufacturers and, as products ordered from the
Company by the commissaries are delivered to the commissaries, the Company
invoices the manufacturers for the cost of the merchandise delivered plus
negotiated fees.
RETAIL OPERATIONS
As of January 3, 1998, the Company owned and operated 97 retail outlets,
including 66 supermarkets, 27 warehouse stores and four combination general
merchandise/food stores. The Company has devoted considerable resources in
recent years to acquire, construct, enlarge and modernize its stores. By
constructing new stores or expanding existing stores, the Company seeks to add
either larger conventional supermarkets (at least 30,000 square feet) or
warehouse stores (at least 45,000 square feet), as appropriate. The Company's
stores use a number of automated systems to provide inventory control at
delivery and checkout points, reduce shrinkage and increase labor efficiency.
The Company operates 66 conventional supermarkets principally under the
names Sun Mart, Easter Foods and Food Folks. These stores, 12 of which the
Company owns (the remainder are leased), range in size up to approximately
46,000 square feet. These stores are primarily self-service supermarkets that
carry a wide variety of grocery products, health and beauty care products and
general merchandise. Many stores also have one or more specialty departments
such as delicatessens, in-store bakeries, restaurants, pharmacies and floral
departments.
46
<PAGE>
The Company operates 27 warehouse stores, principally under the name
Econofoods. These stores, six of which the Company owns (the remainder are
leased), range in size up to approximately 106,000 square feet. The Company's
warehouse stores offer a wide variety of high quality groceries, fresh fruits
and vegetables, dairy products, frozen foods, fresh fish, fresh and processed
meat and health and beauty care products, all at lower prices. Many have
specialty departments such as delicatessens, bakeries, pharmacies, banks and
floral and video departments. These stores appeal to quality and price-conscious
customers who want broad selection and availability of convenience foods, but
are willing, in some cases, to forgo standard supermarket services. The stores
offer lower prices due to increased business volume as well as the limited
services available.
The Company also operates four combination general merchandise/food stores
under the name Family Thrift Center. These stores, two of which are owned, range
in size up to approximately 60,000 square feet. In addition to traditional
supermarket food departments, these stores have expanded general merchandise and
health and beauty care products departments and pharmacies, and some also have
sit-down restaurants, full-service floral departments and book departments.
PRODUCE MARKETING OPERATIONS
Through a wholly owned subsidiary, Nash-DeCamp Company ("Nash-DeCamp"), the
Company grows, packs, ships and markets fresh fruits and vegetables from
locations in California and the countries of Chile and Mexico to customers in
the United States, Canada and overseas. For regulatory reasons, the amount of
business between Nash-DeCamp and the Company is limited. The Company owns and
operates three modern packing, shipping and/or cold storage facilities that ship
fresh grapes, plums, peaches, nectarines, apricots, pears, persimmons, kiwi
fruit and other products. The Company also acts as marketing agent for other
packers of fresh produce in California and in the countries of Chile and Mexico.
For the above services, the Company receives, in addition to a selling
commission, a fee for packing, handling and shipping produce. The Company also
owns vineyards and orchards for the production of table grapes, tree fruit, kiwi
and citrus.
INFORMATION SYSTEMS
The Company, working in conjunction with SAP America and a number of other
vendors and consultants, has committed substantial resources over the last two
years to the development and implementation of HORIZONS, a client server based
enterprise management and financial information system. The Company currently
expects to spend approximately $76 million between 1996 and 2004 on the design
and installation of, and training for, the HORIZONS project, approximately half
of which has been spent through the end of fiscal 1997. The HORIZONS system will
be a fully integrated and scalable system that management believes will provide
the Company with competitive advantages that can be aggressively marketed to
retail customers. Implementation of the HORIZONS system is scheduled to be
substantially completed in 1999, and is expected to provide (i) a solution to
the Company's Year 2000 software issues, (ii) greater flexibility for the
changing business environment, (iii) greater connectivity opportunities with
customers and suppliers; (iv) the ability to integrate and standardize
information systems throughout the Company, (v) timely and easy-to-use
information, (vi) greater business process and workflow efficiencies, and (vii)
more powerful decision-making and analysis tools. To parallel the development
and implementation of the HORIZONS project, management has led a cultural change
and training initiative designed to prepare the Company's workforce for changes
in the industry and in the use of the HORIZONS system to address these changes.
PROPERTIES
The principal executive offices of the Company are located in Edina,
Minnesota, and consist of approximately 68,000 square feet of office space in a
building owned by the Company. In addition to the executive offices, the Company
leases an additional 15,275 square feet of office space in Edina, Minnesota. The
locations and sizes of the Company's distribution centers, as of January 3,
1998, are listed below (all of
47
<PAGE>
which are owned, except as indicated). The distribution center facilities which
are leased have varying terms, all with remaining terms of less than 20 years.
<TABLE>
<CAPTION>
APPROX. SIZE
LOCATION (SQUARE FEET)
- ------------------------------------------------------------------ -------------
<S> <C>
Midwest/West:
Denver, Colorado (a)............................................ 335,800
Cedar Rapids, Iowa.............................................. 351,900
Liberal, Kansas................................................. 177,000
St. Cloud, Minnesota............................................ 329,000
Grand Island, Nebraska.......................................... 177,700
Omaha, Nebraska (a)............................................. 530,000
Lincoln, Nebraska (b)........................................... 226,300
Fargo, North Dakota............................................. 288,800
Minot, North Dakota............................................. 185,200
Rapid City, South Dakota........................................ 187,100
Sioux Falls, South Dakota (c)................................... 271,100
Appleton, Wisconsin............................................. 430,900
Southeast:
Statesboro, Georgia (a)(d)...................................... 287,800
Baltimore, Maryland (a)......................................... 350,500
Lumberton, North Carolina (a)(e)................................ 256,600
Rocky Mount, North Carolina (a)................................. 191,800
Bluefield, Virginia............................................. 186,400
Norfolk, Virginia (a)(f)........................................ 543,600
Super Food Services, Inc.:
Bellefontaine, Ohio (g)......................................... 863,000
Cincinnati, Ohio................................................ 445,600
Bridgeport, Michigan (a)........................................ 581,300
Lexington, Kentucky (a)(h)...................................... 334,700
-------------
Total Square Footage.............................................. 7,532,100
-------------
-------------
</TABLE>
- ------------------------
(a) Leased facility.
(b) The operations of the Lincoln distribution center have been consolidated
with the operations of the Company's distribution center in Omaha, Nebraska,
and the Company has closed the Lincoln distribution center and intends to
sell the property.
(c) Includes 79,300 square feet that are leased by the Company.
(d) Includes 46,400 square feet that are owned by the Company.
(e) Includes 16,100 square feet of produce warehouse space located in
Wilmington, North Carolina which is leased by the Company.
(f) Includes 52,800 square feet that are owned by the Company.
(g) Includes 197,000 square feet that are leased by the Company. General
Merchandise Services, an operating unit of Super Food, utilizes
approximately 487,800 square feet of the total space (owned and leased) for
the distribution of health and beauty care products, general merchandise and
specialty grocery products.
(h) The Company closed the Lexington distribution center in March 1998, having
consolidated its operations with the Cincinnati, Ohio and Bluefield,
Virginia distribution centers.
48
<PAGE>
The following table shows the number and aggregate size of Company operated
conventional supermarkets and warehouse stores at January 3, 1998:
<TABLE>
<S> <C>
Conventional Supermarkets:
Number of stores............................................... 66
Total square feet.............................................. 1,459,532
Warehouse Stores:
Number of stores............................................... 27
Total square feet.............................................. 1,168,875
Combination General Merchandise/Food:
Number of stores............................................... 4
Total square feet.............................................. 180,399
Totals:
Number of stores............................................... 97
Total square feet.............................................. 2,808,806
</TABLE>
Nash-DeCamp has executive offices comprising approximately 11,600 square
feet of leased space in an office building located in Visalia, California.
Nash-DeCamp owns and operates three packing, shipping and/or cold storage
facilities in California in connection with its produce marketing operations,
with total space of approximately 174,000 square feet. In addition to such
storage facilities, Nash-DeCamp also owns approximately 879 acres for the
production of table grapes, 40 acres for the production of kiwi fruit, 796 acres
for the production of peaches, plums, apricots and nectarines, 245 acres for the
production of citrus, and 194 acres of open ground for future development, all
in the San Joaquin Valley of California. Nash-DeCamp also leases 236 acres for
the production of tree fruit located in the San Joaquin Valley and, through a
99% owned Chilean subsidiary, approximately 740 acres in Chile for the
production of table grapes.
COMPETITION
All segments of the Company's business are highly competitive. The Company
competes directly at the wholesale level with a number of wholesalers that
supply independent retailers, including "cooperative" wholesalers that are owned
by their retail customers and "voluntary" wholesalers who, like the Company, are
not owned by their retail customers but sponsor a program under which
single-unit or multi-unit independent retailers may affiliate under a common
name. Certain of these competing wholesalers may also engage in distribution to
military commissaries. The Company also competes indirectly with the warehouse
and distribution operations of the large integrated chains, which consist of
single entities owning both wholesale and retail operations. At the wholesale
level, the principal methods of competition are price, quality, breadth and
availability of products offered, strength of private label brands offered,
schedules and reliability of deliveries and the range and quality of services
offered, such as store financing and use of store names, and the services
offered to manufacturers of products sold to military commissaries. The success
of the Company's wholesale business also depends upon the ability of its retail
store customers to compete successfully with other retail food stores.
The Company competes on the retail level in a fragmented market with many
organizations of various sizes, ranging from national chains and voluntary or
cooperative groups to local chains and privately owned unaffiliated stores.
Depending on the product and location involved, the principal methods of
competition at the retail level include price, quality and assortment, store
location and format, sales promotions, advertising, availability of parking,
hours of operation and store appeal.
The Company competes directly in its produce marketing operations with a
large number of other firms that pack, ship and market produce, and competes
indirectly with larger, integrated firms that grow,
49
<PAGE>
pack, ship and market produce. The principal methods of competition in this
segment are service provided to growers and the ability to sell produce at the
most favorable prices.
EMPLOYEES
As of January 3, 1998, the Company employed approximately 12,200 persons,
approximately 5,400 of which were employed on a part-time basis. All employees
are non-union, except approximately 774 employees in a variety of functions who
are unionized under various collective bargaining agreements. The Company
considers its employee relations to be good.
LEGAL PROCEEDINGS
The Company is a party to various litigation, claims and disputes, some of
which are for substantial amounts, arising in the ordinary course of its
business. While the ultimate effect of such actions cannot be predicted with
certainty, the Company expects that the outcome of these matters will not result
in a material adverse effect on its consolidated financial position or results
of operations.
50
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, their ages and the
offices held as of June 1, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ----------------------------------------
<S> <C> <C>
Ron Marshall........................ 44 Director, President and Chief Executive
Officer
William E. May, Jr.................. 49 Executive Vice President and Chief
Operating Officer
Norman R. Soland.................... 57 Vice President, Secretary and General
Counsel
Charles F. Ramsbacher............... 56 Vice President, Marketing
Clarence T. Walters................. 61 Vice President, Management Information
Systems
Steven L. Lumsden................... 53 Vice President, Warehouse and
Transportation
Gerald D. Maurice................... 65 Vice President, Store Development
Charles M. Seiler................... 50 Vice President, Corporate Retail
Operations
John R. Scherer..................... 47 Vice President and Chief Financial
Officer
Edgar F. Timberlake................. 50 Vice President, Human Resources
John M. McCurry..................... 49 Vice President, Independent Store
Operations
Thomas W. Struck.................... 47 Vice President, Supply Chain Management
Lawrence A. Wojtasiak............... 52 Controller
Suzanne S. Allen.................... 33 Treasurer
Carole F. Bitter.................... 52 Director
Richard A. Fisher................... 68 Director
Jerry L. Ford....................... 57 Director
Allister P. Graham.................. 62 Director
John H. Grunewald................... 61 Director
Richard G. Lareau................... 69 Director
Donald R. Miller.................... 70 Director; Board Chair
Robert F. Nash...................... 65 Director
Jerome O. Rodysill.................. 69 Director
</TABLE>
There are no family relationships between or among any of the executive
officers or directors of the Company. The Company's directors are divided into
three classes of as nearly equal size as possible. The term of each class of
directors is three years, and the term of one class expires each year in
rotation. Executive officers of the Company are elected by the Board of
Directors for one-year terms, commencing with their election at the first
meeting of the Board of Directors immediately following the annual meeting of
stockholders and continuing until the next such meeting of the Board of
Directors.
Mr. Marshall was elected by the Board of Directors to serve as President and
Chief Executive Officer and as a director effective as of June 1, 1998. Prior to
joining the Company, Mr. Marshall served as Executive Vice President and Chief
Financial Officer of Pathmark Stores, Inc., a grocery retailer serving the
mid-Atlantic states, since 1994. From 1991 through 1994, Mr. Marshall served as
Senior Vice President and Chief Financial Officer of Dart Group Corporation, a
retailer of groceries, auto parts and books. Prior to that, he was Vice
President and Chief Financial Officer of Barnes & Noble Bookstores, Inc.
Mr. May's election as Executive Vice President and Chief Operating Officer
was effective in January 1998. He previously served as Vice President, Strategic
Technology Programs and Marketing Services from July 1996 to January 1998, after
joining the Company in June 1996. He was previously employed by Spartan Stores,
Inc., a wholesale food distribution company, serving in various executive and
officer capacities from July 1988 to June 1996.
51
<PAGE>
Mr. Soland has served as Vice President, Secretary and General Counsel since
May 1988, and as Secretary and General Counsel since January 1986.
Mr. Ramsbacher has served as Vice President, Marketing since May 1991.
Mr. Walters has served as Vice President, Management Information Systems
since May 1988.
Mr. Lumsden has served as Vice President, Warehouse and Transportation since
May 1992.
Mr. Maurice was elected Vice President, Store Development in May 1993. He
previously served as operating Vice President, Central Division for more than
five years.
Mr. Seiler was elected as Vice President, Corporate Retail Operations
effective as of October 1994. He previously served as operating Vice President,
Iowa Division from May 1993 to October 1994 and Iowa Division Manager from June
1991 to May 1993.
Mr. Scherer was appointed as Chief Financial Officer in November 1995. His
election as Vice President was effective in December 1994, and he served as Vice
President, Planning and Financial Services from December 1994 to November 1995.
He previously served as Director of Strategic Planning and Financial Services
from April 1994 to December 1994, and Director of Planning and Budgets from
January 1988 through April 1994.
Mr. Timberlake was elected as Vice President, Human Resources in November
1995. He previously served as Director of Human Resources from January 1993 to
November 1995.
Mr. McCurry was elected as Vice President, Independent Store Operations in
May 1996. He previously served as Director of Independent Store Operations from
August 1993 to May 1996 and as Distribution Center Manager, Sioux Falls, South
Dakota, from January 1991 to August 1993.
Mr. Struck was elected as Vice President, Supply Chain Management effective
as of January 1998. He previously served as Director, Future Business Systems in
the Company's HORIZONS project from March 1997 to January 1998, and as
Distribution Center Manager, Cedar Rapids, Iowa from August 1988 to March 1997.
Mr. Wojtasiak has served as Controller since May 1990.
Ms. Allen was elected as Treasurer effective as of January 1996. She
previously served as Assistant Treasurer from May 1995 to January 1996 and
Treasury Manager from January 1993 to May 1995.
Dr. Bitter has been a director of the Company since November 1993. She is
President and Chief Executive Officer of Harold Friedman, Inc., an operator of
retail supermarkets, a position she has held for more than five years.
Mr. Fisher has been a director of the Company since May 1984. He retired in
December 1992 as Vice President--Finance and Treasurer of Network Systems
Corporation, a position he had held for more than five years.
Mr. Ford has been a director of the Company since May 1997. He served as an
executive of Comdisco Network Services, a division of Comdisco, Inc. from June
1994 to April 1998. He previously served as Executive Director and Chief
Operating Officer of Lindquist & Vennum, a law firm, for more than five years.
Mr. Graham has been a director of the Company since May 1992. He is the
Chairman of the Board and Chief Executive Officer of The Oshawa Group Limited, a
food and pharmaceutical distributor in Canada, a position he has held for more
than five years. Mr. Graham also serves as a director of Dylex Limited (Canada).
Mr. Grunewald has been a director of the Company since September 1992. He
retired in January 1997 as Executive Vice President, Finance and Administration
of Polaris Industries, Inc., a position he had held
52
<PAGE>
since September 1993. He previously served as Executive Vice President, Chief
Financial Officer and Secretary of Pentair, Inc. for more than five years. Mr.
Grunewald also serves as a director of Advantage Learning Systems, Inc. and
Kinnard Investments Inc.
Mr. Lareau has been a director of the Company since May 1984. He has been a
partner in the law firm of Oppenheimer Wolff & Donnelly LLP for over 30 years.
Oppenheimer Wolff & Donnelly has provided and is expected to continue to provide
legal services to the Company. Mr. Lareau also serves as a director of Merrill
Corporation, Mesabi Trust, Northern Technologies International Corporation and
Ceridian Corporation.
Mr. Marsh has been a director of the Company since June 1995. He is the
Chairman of the Board, President and Chief Executive Officer of Marsh
Supermarkets, Inc., a supermarket and convenience store chain, positions he has
held for more than five years. Mr. Marsh also serves as a director of Indiana
Energy Incorporated and National City Bank, Indiana.
Mr. Miller has been a director of the Company since February 1978, and has
served as Board Chair since May 1995. He has been an independent management
consultant for more than five years. Mr. Miller also serves as a director of
Michael Anthony Jewelers, Inc.
Mr. Nash has been a director of the Company since May 1968. He retired in
January 1996 as Vice President and Treasurer of the Company, a position he had
held for more than five years.
Mr. Rodysill has been a director of the Company since May 1974. He retired
in January 1994 as Senior Vice President, Store Development and Construction of
the Company, a position he had held for more than five years.
EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation earned
during the fiscal years ending January 3, 1998, December 28, 1996 and December
30, 1995, by the Chief Executive Officer and the four other most highly
compensated executive officers of the Company whose salary and bonus exceeded
$100,000 in fiscal 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------------------------------
AWARDS
ANNUAL COMPENSATION -------------------------- PAYOUTS
RESTRICTED SECURITIES -----------
---------------------- STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS(A) AWARDS(B) OPTIONS(C) PAYOUTS(D) COMPENSATION(E)
- ------------------------------- ----------- --------- ----------- ----------- ------------- ----------- -------------------
($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
Alfred N. Flaten (f) .......... 1997 470,091 127,187 -- -- 73,024 3,331
PRESIDENT, CHIEF EXECUTIVE 1996 368,985 114,700 69,996 48,693 165,956 5,318
OFFICER AND DIRECTOR 1995 279,232 130,000 -- -- -- 5,081
William T. Bishop (g) ......... 1997 215,408 47,216 -- -- 24,437 3,331
SENIOR VICE PRESIDENT, SALES 1996 179,506 43,200 29,998 20,868 50,478 --
AND LOGISTICS 1995 149,588 50,000 -- -- -- --
William E. May, Jr. (h) ....... 1997 1996 208,370 57,400 -- -- -- --
EXECUTIVE VICE PRESIDENT AND 1995 101,288 30,000 -- -- -- --
CHIEF OPERATING OFFICER -- -- -- -- -- --
David J. Richards (i) ......... 1997 207,353 53,040 -- -- 20,364 3,331
VICE PRESIDENT, CORPORATE 1996 153,425 55,000 -- -- 37,836 --
RETAIL STORES 1995 124,657 25,000 -- -- -- --
Norman R. Soland .............. 1997 177,876 36,000 -- -- 17,612 3,331
VICE PRESIDENT, SECRETARY AND 1996 139,616 34,720 21,597 15,024 39,247 5,318
GENERAL COUNSEL 1995 107,704 47,000 -- -- -- 4,398
</TABLE>
- ------------------------------
(a) Cash bonuses for services rendered have been included as compensation for
the year earned, even though bonuses were actually paid in the following
year.
53
<PAGE>
(b) These amounts reflect the value of the 25% discount related to the purchase
by certain executive officers of shares of the Company's Common Stock (the
"Common Stock") that are restricted and subject to a risk of forfeiture for
an aggregate purchase price equal to 75% of the fair market value of the
Common Stock on January 31, 1996. Pursuant to this program (the "Management
Restricted Stock Purchase Program"), which was implemented under the Nash
Finch 1994 Stock Incentive Plan (the "1994 Stock Incentive Plan"), 10% of
the aggregate purchase price was paid by such executive officer in cash and
the remainder was paid by delivery of a promissory note secured by a pledge
of the shares. Interest on the promissory note, at a rate of 5.61% per annum
(120% of the then applicable federal rate), is payable quarterly, with
principal amounts payable commencing two years from issuance of the
promissory note and due in full on February 28, 2001. The forfeiture
restrictions on the shares generally will lapse on February 28, 2001,
although the shares will remain pledged as collateral for the promissory
note until repayment of the promissory note or the Company otherwise
releases such shares. If, however, the executive officer's employment is
terminated by reason of death, disability, retirement, or a change in
control of the Company occurs, as defined in the 1994 Stock Incentive Plan,
the forfeiture restrictions will lapse. If the executive officer's
employment is terminated prior to the lapsing of forfeiture restrictions for
any other reason, such restricted shares will be repurchased by the Company
at the lesser of the purchase price paid or an amount equal to the then fair
market value of the shares divided by 0.75. Although ordinary cash dividends
on such restricted shares will be paid to such executive officers, any other
dividends or distributions on such restricted shares will be subject to the
same security interest and forfeiture restrictions as the shares to which
they relate. As of January 3, 1998, the number and fair market value of
restricted shares held by each of the named executive officers participating
in the Management Restricted Stock Purchase Program was as follows: (i) Mr.
Flaten's shares (16,231) had a fair market value of $312,447; and (ii) Mr.
Soland's shares (5,008) had a fair market value of $96,404.
(c) These amounts reflect the grant of options under the 1994 Stock Incentive
Plan.
(d) For fiscal 1996, these amounts reflect (i) the fair market value ($20.125
per share) of shares of Common Stock issued for performance units earned for
fiscal 1996 pursuant to awards granted under the 1994 Stock Incentive Plan,
and (ii) cash payments representing dividends declared on an equivalent
number of shares ("dividend equivalents") from January 1, 1996 through March
1, 1997, the date the shares were issued. For fiscal 1997, the amounts
reflect (i) the fair market value ($19.625 per share) of shares of Common
Stock issued for performance units earned for fiscal 1995-1997 pursuant to
awards granted under the 1994 Stock Incentive Plan and (ii) cash payments
representing dividend equivalents from January 1, 1995 through March 1,
1998, the date the shares were issued. Fair market value of the shares was
determined as of the dates that the issuance of the shares was approved by
the Compensation Committee of the Board of Directors, which were February
10, 1997 and February 16, 1998, respectively. These shares have been
included as payouts for the year in which they were earned, even though the
shares were not issued, and dividend equivalents paid, until the following
year (e.g., shares earned in fiscal 1997 were actually paid in fiscal 1998).
(e) "All Other Compensation" consists of contributions by the Company in fiscal
1995, fiscal 1996 and fiscal 1997 to the Nash Finch Profit Sharing Plan.
(f) Mr. Flaten retired from the Company effective as of June 1, 1998.
(g) Mr. Bishop resigned from the Company effective as of January 4, 1998.
(h) Mr. May joined the Company in June 1996.
(i) Mr. Richards resigned from the Company effective as of May 15, 1998.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS
Set forth in the following table is information, as of March 1, 1998 unless
otherwise indicated, pertaining to (a) the individual ownership of the Company's
Common Stock (the "Common Stock") by directors and executive officers named in
the Summary Compensation Table, and (b) the ownership of Common Stock by
directors and executive officers as a group.
<TABLE>
<CAPTION>
TOTAL SHARES OF COMMON
STOCK BENEFICIALLY
OWNED(A)(B)(C)
------------------------
NUMBER OF NUMBER OF NUMBER OF PERCENT
NAME OF BENEFICIAL OWNER SHARES(A) OPTIONS(B) SHARE UNITS(C) AMOUNT OF CLASS
- ------------------------------------------------------ ----------- ------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Carole F. Bitter...................................... 1,000 1,000 926 2,926 *
Richard A. Fisher..................................... 2,000(d) 1,000 966 3,966(d) *
Alfred N. Flaten...................................... 33,030(e) 5,600 N/A 38,630(e) *
Jerry L. Ford......................................... 1,000 500 197 1,697 *
Allister P. Graham.................................... 1,000 1,500 1,114 3,614 *
John H. Grunewald..................................... 2,500(f) 1,500 613 4,613(f) *
Richard G. Lareau..................................... 3,948(g) 1,500 -0- 5,448(g) *
Don E. Marsh (h)...................................... 640 500 627 1,767 *
Donald R. Miller...................................... 2,015 1,500 -0- 3,515 *
Robert F. Nash........................................ 99,800(i) 1,000 511 101,311(i) *
Jerome O. Rodysill.................................... 21,015(j) 1,500 151 22,666(j) *
William T. Bishop (k)................................. 1,110 -0- N/A 1,110 *
William E. May, Jr.................................... -0- 1,280 N/A 1,280 *
David J. Richards (l)................................. 4,322 -0- N/A 4,322 *
Norman R. Soland...................................... 11,043(m) 2,400 N/A 13,443(m) *
All Directors and Executive Officers as a Group (26
persons)............................................ 215,210(n) 36,540 5,105 256,855(n) 2.27%
</TABLE>
- ------------------------------
* Less than 1%.
(a) Unless otherwise noted, all of the shares shown are held by individuals or
entities possessing sole voting and investment power with respect to such
shares.
(b) Includes shares of Common Stock that may be acquired upon exercise of
options within 60 days of March 1, 1998 by the persons and group identified
in this table under the 1994 Stock Incentive Plan and the Nash Finch 1995
Director Stock Option Plan.
(c) Share Units represent shares of Common Stock payable to non-employee
directors upon termination of service on the Board under the Nash Finch 1997
Non-Employee Director Stock Compensation Plan.
(d) Includes 500 shares owned beneficially by Mr. Fisher's wife as to which he
may be deemed to share voting and investment power, but as to which he
disclaims any beneficial interest.
(e) Includes 1,000 shares owned beneficially by Mr. Flaten's wife as to which he
may be deemed to share voting and investment power, but as to which he
disclaims any beneficial interest.
(f) Includes 500 shares owned beneficially by a trust for which Mr. Grunewald's
wife serves as a trustee. As a result, Mr. Grunewald may be deemed to share
voting and investment power for such shares, but he disclaims any beneficial
interest in such shares.
(g) Includes 1,800 shares owned beneficially by Mr. Lareau's wife as to which he
may be deemed to share voting and investment power, but as to which he
disclaims any beneficial interest.
(h) Mr. Marsh resigned from the Board of Directors of the Company effective as
of May 22, 1998.
(i) Includes 28,082 shares owned beneficially by Mr. Nash's wife as to which he
may be deemed to share voting and investment power, but as to which he
disclaims any beneficial interest.
(j) Includes 12,860 shares held by a trust for the benefit of Mr. Rodysill's
wife, of which Mr. Rodysill is a co-trustee with his son and as to which he
shares voting and investment power.
(k) Mr. Bishop resigned from the Company effective as of January 4, 1998.
(l) Mr. Richards resigned from the Company effective as of May 15, 1998.
(m) Includes 3,371 shares that are owned beneficially by Mr. Soland and his wife
jointly and as to which he shares voting and investment power.
(n) Includes 48,413 shares as to which voting and investment power are shared or
may be deemed to be shared.
55
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth in the following table is information pertaining to persons known
to the Company, as of March 1, 1998, to be the beneficial owners of more than
five percent of the outstanding Common Stock.
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT OF CLASS
- ----------------------------------------------------------------------- --------- -----------
<S> <C> <C>
Sanford C. Bernstein & Co., Inc........................................ 620,138(a) 5.5%
767 Fifth Avenue
New York, NY 10153
Franklin Resources, Inc................................................ 785,000(b) 6.9%
777 Mariners Island Blvd.
San Mateo, CA 94404
</TABLE>
- ------------------------
(a) Sanford C. Bernstein & Co., Inc. has reported in a Schedule 13G dated
February 4, 1998 that, as of December 31, 1997, it was the beneficial owner
of all of such shares, possessing sole investment power with respect to all
such shares, sole voting power with respect to 523,100 shares and shared
voting power with respect to 15,863 shares. Sanford C. Bernstein & Co., Inc.
has also reported that the filing was made in its capacities as an
investment adviser and broker/dealer, and that its beneficial ownership of
such shares is on behalf of certain accounts of its discretionary clients.
These clients have the right to receive dividends from and the proceeds of
the sale of such securities.
(b) Franklin Resources, Inc. has reported in a Schedule 13G dated January 30,
1998 that, as of December 31, 1997, it was the beneficial owner of all of
such shares, possessing sole investment power and sole voting power with
respect to all such shares. Franklin Resources, Inc. has also reported that
the filing was made in its capacities as a holding company of direct and
indirect investment advisory subsidiaries. Such subsidiaries advise various
open or closed-end investment companies or other managed accounts pursuant
to advisory contracts. The advisory contracts grant to such subsidiaries all
voting and investment power over the securities owned by the advisory
clients, and as a result, such subsidiaries may be deemed as the beneficial
owners of such shares. These clients have the right to receive dividends
from and the proceeds of the sale of such securities.
56
<PAGE>
DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
The following summary of the instruments and agreements governing certain
other indebtedness of the Company does not purport to be complete and is
qualified in its entirety by reference to the agreements governing such
indebtedness, certain of which have been filed by the Company with the
Commission. Capitalized terms used herein are defined as specified in the
agreement to which each of the following sections relate, unless the context
requires otherwise.
THE REVOLVING CREDIT FACILITY
The Company entered into the Revolving Credit Facility as of October 8,
1996, with Harris Trust and Savings Bank, as Administrative Agent, and various
other lending institutions, which originally provided for a $500.0 million
revolving line of credit, the proceeds of which were available to finance and
pay various transaction costs relating to the Company's acquisition of the
shares of Super Food and are available to pay various other indebtedness of the
Company and Super Food, and provide working capital to the Company and its
subsidiaries. On March 2, 1998, the credit available under the Revolving Credit
Facility was reduced to $360.0 million, and was reduced to $350.0 million upon
consummation of the offering of the Series A Notes. The Revolving Credit
Facility also includes a letter of credit facility of up to $25.0 million, and a
$25.0 million swing line facility, each of which reduces to the extent used, the
amount otherwise available under the revolving line of credit. The Revolving
Credit Facility is guaranteed by all the significant operating subsidiaries of
the Company. Interest on amounts outstanding under the Revolving Credit Facility
may be calculated, at the Company's option, at either a base rate (i.e., the
greater of the prime commercial rate or the Fed Funds rate plus 0.50%) or an
Adjusted LIBOR rate plus a margin which may be adjusted depending on the rating
assigned to the Company's outstanding senior unsecured non-credit enhanced
long-term indebtedness by Standard & Poor's Ratings Services Group and/or
Moody's Investors Services, Inc. (the "Company's Debt Rating"). The Revolving
Credit Facility also provides the Company with the right to request interest on
loans outstanding thereunder to be set pursuant to a bid procedure which may be
responded to by the lenders thereunder, at their sole discretion. The Company is
obligated to pay a facility fee ranging from 0.10% to 0.30 % of the total
commitments depending on the Company's Debt Rating, certain agents' fees and
other administrative fees.
The Revolving Credit Facility, as amended in connection with the offering of
the Series A Notes, contains numerous covenants, including: (i) the Company must
maintain a Current Ratio of at least 1.25 to 1.00; (ii) the Company's Tangible
Net Worth must be at least $125.0 million plus 50% of its consolidated Net
Income (if positive) for the fiscal quarter ending March 23, 1997, and for each
fiscal quarter thereafter; (iii) the Company's ratio of Total Funded Debt to
EBITDA (excluding the effect of the Company's extraordinary charge to earnings
in the third quarter of fiscal 1997) for any four quarter period on the last day
of each fiscal quarter may not be more than 4.75 to 1.00 as of the end of second
quarter of fiscal 1998, declining to 4.50 to 1.00 by the end of the fourth
quarter of fiscal 1998, declining to 4.25 to 1.00 as of the end of the second
quarter of fiscal 1999 and declining to 4.00 to 1.00 as of the end of the second
quarter of fiscal 2000 and thereafter; (iv) the Company may not allow its ratio
of EBITDA (excluding the effect of the Company's extraordinary charge to
earnings in the third quarter of fiscal 1997) to Interest Expense for any four
quarter period to be less than 2.50 to 1.00 from the first fiscal quarter of
1998 through the first quarter of fiscal 2000, increasing to 2.75 to 1.00 for
each fiscal quarter thereafter; (v) the Company's ratio of Senior Funded Debt to
EBITDA (excluding the effect of the Company's extraordinary charge to earnings
in the third quarter of fiscal 1997) for any four quarter period may not be more
than 3.50 to 1.00 as of the end of the second quarter of fiscal 1998 and
decreasing to 3.25 to 1.00 as of the end of the second quarter of fiscal 1999
and further decreasing to 3.00 to 1.00 at the end of the second quarter of
fiscal 2000 and thereafter; (vi) none of the Long-Term Debt of the Company or
its Subsidiaries may have a Weighted Average Life to Maturity of less than seven
years; (vii) the Company and each Subsidiary may not permit to exist any liens
on any of their property other than certain specified permitted liens; (viii)
the Company's Subsidiaries may not incur Indebtedness (other than certain
intercompany Indebtedness,
57
<PAGE>
guarantees by the Subsidiaries of the Company's obligations under the Revolving
Credit Facility and the Notes, and liabilities incurred in connection with
permitted securitization transactions) in excess of 5% of the Total Assets of
the Company and its Subsidiaries; (ix) the Company and each Subsidiary may not
make any investments or loans or advances, or acquire as an entirety the assets
or business of any other Person or become liable on any Guaranty, other than
with respect to investments in certain commercial paper, certificates of
deposit, investments in Subsidiaries (up to $25.0 million in Foreign
Subsidiaries), U.S. obligations, travel advances to employees and sales
representatives, loans and advances to customers up to $135.0 million (as of
January 4, 1998) in aggregate amount (such amount to increase by $10.0 million
as of the first day of each fiscal year thereafter) investments in stock,
obligations or securities received in settlement of ordinary course debts owing
to the Company and acquisitions in lines of business the same as or similar to
the Company's business, certain other minor exceptions and up to $100.0 million
in other such transactions not specifically otherwise excepted; (x) the Company
and each Subsidiary may not consolidate or merge into another Person or sell
substantially all of its assets except for certain permitted intercompany and
financing transactions, and transactions which do not exceed a certain size or
are otherwise not material; (xi) the Company and the Company's subsidiaries may
not make any payments of principal, interest or premium, if any, on the Notes
prior to the scheduled maturity thereof or other times required for payment
thereof, except that the Company may use up to 50% of the proceeds of an
underwritten public offering to redeem not more than 35% of the Notes then
outstanding (if at the time of such payment no default or event of default shall
occur or be continuing under the Revolving Credit Facility) and the Company may
redeem Notes to the extent permitted by the Indenture from the proceeds of Asset
Sales (as defined herein); and (xii) the Company may not change the general
nature of its business in any material respect. In addition, the definition of
"change of control" will be revised to include each similar event as defined in
the Indenture that will entitle holders of the Notes to accelerate the Notes.
The Company is required to prepay amounts outstanding under the Revolving Credit
Facility with 100% of the proceeds of (a) indebtedness for borrowed money
incurred by the Company or any Subsidiary (other than such indebtedness which
does not exceed $5.0 million in any calendar year or $10.0 million in the
aggregate and, subject to the effectiveness of the amendment to the Revolving
Credit Facility described below, other than the Notes), and (b) the sale in any
securitization of accounts receivable of the Company.
The Company is also required to prepay amounts outstanding under the
Revolving Credit Facility, if the Required Banks so notify the Borrower within
30 days after they receive notice of a change of control (which includes the
acquisition by a person or group of 25% of the Common Stock) in which case the
Commitments and Swing Line Commitment under the Revolving Credit Facility
terminate.
The Revolving Credit Facility includes a number of events of default,
including events related to payment defaults, covenant defaults, pension
shortfalls, cross defaults on $10.0 million of other indebtedness, inaccurate
representations and warranties, judgments in excess of $15.0 million, and
certain bankruptcy events.
THE OTHER BANK CREDIT FACILITIES
BRINSON TRUST COMPANY NOTE AGREEMENT. The Company has entered into a Master
Note Agreement (the "Brinson Agreement") dated as of May 16, 1997 pursuant to
which Brinson Trust Company ("Brinson") may, in its sole discretion, offer to
make demand loans to the Company of up to $150.0 million. Both principal and
accrued interest on such loans are payable within five days of demand by
Brinson. Interest accrues on amounts outstanding under the Brinson Agreement at
weekly LIBOR plus 0.25%. The Brinson Agreement does not impose any restrictive
covenants on the Company. The Brinson Agreement may be terminated at any time by
either party. As of March 28, 1998, $65.0 million was outstanding under the
Brinson Agreement.
NORWEST BANK MINNESOTA LINE OF CREDIT. The Company has a conditional line
of credit from Norwest Bank Minnesota, N.A. ("Norwest") dated as of June 24,
1997. Under this arrangement Norwest may, in its sole discretion, advance up to
$10.0 million. Such borrowings are payable on demand, but in no event later
58
<PAGE>
than 30 days after any loan is made. Interest accrues at the rate designated at
the time of borrowing and is generally based on the Fed Funds rate, plus a
margin. This line of credit expires May 31, 1999. As of March 28, 1998, $10.0
million was outstanding under the Norwest line of credit.
WACHOVIA BANK OF GEORGIA. The Company has a $15.0 million line of credit
from Wachovia Bank of Georgia, N.A. ("Wachovia") dated as of December 17, 1996.
Under this line of credit Wachovia may, in its sole discretion, advance up to
$15.0 million upon a request by the Company. Although the Company and Wachovia
may set a payment schedule on any loan under the line of credit, all borrowings
are payable on demand. Interest accrues at the rate designated at the time of
borrowing and is generally based on the Fed Funds rate, plus a margin. This line
of credit expired on June 9, 1998. As of March 28, 1998, $6.2 million was
outstanding under the Wachovia line of credit.
59
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes offered hereby will be issued, and the Series A Notes
were issued, under an Indenture dated April 24, 1998 (the "Indenture"), by and
among the Issuers and U.S. Bank Trust National Association, as trustee (the
"Trustee"). For purposes of this section, references to the "Company" mean only
Nash Finch Company and not any of its subsidiaries. Upon the issuance of the
Exchange Notes, the Indenture will be subject to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The following summary of the
material provisions of the Exchange Notes and the Indenture does not purport to
be complete and is subject to, and qualified by, reference to the provisions of
the Indenture, including the definitions of certain terms contained therein and
those terms made part of the Indenture by reference to the Trust Indenture Act,
as in effect on the date of the Indenture. Copies of the Indenture are available
to prospective participants in the Exchange Offer upon request to the Company.
The term "Notes" as used in the following summary refers to all of the
outstanding Series A Notes and the Exchange Notes. The definition of certain
other terms used in the following summary are set forth below under "--Certain
Definitions."
GENERAL
The Exchange Notes will be general unsecured senior subordinated obligations
of the Company limited to $165,000,000 aggregate principal amount. The Exchange
Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and integral multiples thereof. Principal of, premium,
if any, and interest on the Exchange Notes are payable, and the Exchange Notes
are exchangeable and transferable, at the office or agency of the Company in The
City of New York maintained for such purposes (which initially will be the
corporate trust office of the Trustee); PROVIDED, HOWEVER, that payment of
interest may be made at the option of the Company by check mailed to the Person
entitled thereto as shown on the security register. No service charge will be
made for any registration of transfer, exchange or redemption of the Exchange
Notes, except in certain circumstances for any tax or other governmental charge
that may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The Exchange Notes will mature on May 1, 2008. Interest on the Exchange
Notes will accrue at the rate of 8 1/2% per annum and will be payable
semi-annually on each May 1 and November 1, commencing November 1, 1998, to the
holders of record of Exchange Notes at the close of business on the April 15 and
October 15, respectively, immediately preceding such interest payment date.
Interest on the Exchange Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the Issue Date.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
Pursuant to the Registration Rights Agreement, the Company has filed with
the Commission the Exchange Offer Registration Statement and has agreed to offer
to the holders of Series A Notes who make certain representations the
opportunity to exchange their Series A Notes for Exchange Notes. In the event
that the Company is not permitted to file the Exchange Offer Registration
Statement or to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy or, in certain other
circumstances, including if for any other reason the Exchange Offer is not
consummated within 120 days after the Issue Date, the Company will file with the
Commission the Shelf Registration Statement with respect to resales of the
Series A Notes by the holders thereof. The interest rate on the Notes is subject
to increase under certain circumstances if the Company is not in compliance with
its obligations under the Registration Rights Agreement. See "Exchange Offer;
Registration Rights."
OPTIONAL REDEMPTION
OPTIONAL REDEMPTION. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after May 1, 2003, at the
redemption prices (expressed as percentages of principal
60
<PAGE>
amount) set forth below, plus accrued and unpaid interest thereon, if any, to
the date of redemption, if redeemed during the 12-month period beginning on May
1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ----------------------------------------------------------- ----------------
<S> <C>
2003....................................................... 104.250%
2004....................................................... 102.833
2005....................................................... 101.417
2006 and thereafter........................................ 100.000%
</TABLE>
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERING. On or prior to May 1,
2001, the Company may, at its option, use the net proceeds of a Public Equity
Offering to redeem up to 35% of the originally issued aggregate principal amount
of the Notes, at a redemption price in cash equal to 108.5% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the date of
redemption; PROVIDED, HOWEVER, that at least $107.25 million in aggregate
principal amount of Notes is outstanding following such redemption. Notice of
any such redemption must be given not later than 60 days after the consummation
of the Public Equity Offering.
As used in the preceding paragraph, a "Public Equity Offering" means any
underwritten public offering of Capital Stock (other than Redeemable Capital
Stock) of the Company made on a primary basis by the Company pursuant to a
registration statement filed with and declared effective by the Commission in
accordance with the Securities Act.
SELECTION AND NOTICE. In the event that less than all of the Notes are to
be redeemed at any time, selection of Notes for redemption shall be made by the
Trustee in compliance with the requirements of the principal national securities
exchange, if any, on which the Notes are listed or, if the Notes are not listed
on a national securities exchange, on a PRO RATA basis, by lot or by such method
as the Trustee will deem fair and appropriate; PROVIDED, HOWEVER,that no Notes
of a principal amount of $1,000 or less shall be redeemed in part; PROVIDED,
FURTHER, HOWEVER, that any such redemption made with the net proceeds of a
Public Equity Offering shall be made on a PRO RATA basis or on as nearly a PRO
RATA basis as practicable (subject to the procedures of The Depository Trust
Company or any other depositary). Notice of redemption will be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each holder of Notes to be redeemed at its registered address. If any Note is to
be redeemed in part only, the notice of redemption that relates to such Note
will state the portion of the principal amount thereof to be redeemed. A new
Note in a principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon cancellation of the original Note.
On and after the redemption date, interest will cease to accrue on Notes or
portions thereof called for redemption so long as the Company has deposited with
the paying agent for the Notes funds in satisfaction of the applicable
redemption price pursuant to the Indenture.
CHANGE OF CONTROL
The Indenture provides that, following the occurrence of a Change of Control
(the date of such occurrence being the "Change of Control Date"), the Company
will be obligated, within 20 business days after the Change of Control Date, to
make an offer to purchase (a "Change of Control Offer") all of the then
outstanding Notes at a purchase price (the "Change of Control Purchase Price")
in cash equal to 101% of the principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the purchase date. The Company will be required to
purchase all Notes properly tendered into the Change of Control Offer and not
withdrawn.
In order to effect such Change of Control Offer, the Company will, not later
than the 20th business day after the Change of Control Date, be obligated to
mail to each holder of Notes notice of the Change of Control Offer, which notice
will govern the terms of the Change of Control Offer and will state, among other
things, the procedures that holders must follow to accept the Change of Control
Offer. The Change of Control Offer will be required to be kept open for a period
of at least 20 business days.
61
<PAGE>
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes that might be tendered by holders of Notes seeking to accept the
Change of Control Offer. If the Company fails to repurchase all of the Notes
tendered for purchase, such failure will constitute an Event of Default under
the Indenture. See "--Events of Default" below.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act, and any other applicable securities laws or
regulations and any applicable requirements of any securities exchange on which
the Notes are listed, in connection with the repurchase of Notes pursuant to a
Change of Control Offer, and any violation of the provisions of the Indenture
relating to such Change of Control Offer occurring as a result of such
compliance shall not be deemed a Default.
SUBORDINATION
The payment of the principal of, premium, if any, and interest on the Notes
will be subordinated in right of payment, as set forth in the Indenture, to the
prior payment in full of all Senior Indebtedness of the Company, whether
outstanding at the Issue Date or incurred thereafter. The Indenture permits the
Company and its Restricted Subsidiaries to incur additional Indebtedness,
including Senior Indebtedness. See "--Certain Covenants--Limitation on
Indebtedness."
The Indenture provides that in the event of any insolvency or bankruptcy
case or proceeding, or any receivership, liquidation, reorganization or other
similar case or proceeding in connection therewith, relating to the Company, or
any liquidation, dissolution or other winding-up of the Company, whether
voluntary or involuntary, or any assignment for the benefit of creditors or
other marshalling of assets or liabilities of the Company, all Senior
Indebtedness of the Company must be paid in full before any payment,
distribution, repurchase or redemption (excluding any payment or distribution
of, or repurchase or redemption in exchange for, certain permitted equity or
subordinated securities) is made on account of the principal of, premium, if
any, or interest on the Notes.
During the continuance of any default in the payment of any Designated
Senior Indebtedness pursuant to which the maturity thereof may immediately be
accelerated beyond any applicable grace period and after receipt by the Trustee
from representatives of holders of such Designated Senior Indebtedness of
written notice of such default, no payment or distribution of any assets of the
Company of any kind or character (excluding any payment or distribution of
certain permitted equity or subordinated securities) shall be made on account of
the principal of, premium, if any, or interest on, or the purchase, redemption
or other acquisition of, the Notes unless and until such default has been cured
or waived or has ceased to exist or such Designated Senior Indebtedness shall
have been discharged or paid in full.
During the continuance of any non-payment default with respect to any
Designated Senior Indebtedness pursuant to which the maturity thereof may
immediately be accelerated (a "Non-payment Default") and (x) after the receipt
by the Trustee from the representatives of holders of such Designated Senior
Indebtedness of a written notice of such Non-payment Default or (y) if the
Non-payment Default results from the acceleration of the Notes, from the date of
such acceleration, no payment or distribution of any assets of the Company of
any kind or character (excluding any payment or distribution of certain permit-
ted equity or subordinated securities) shall be made by the Company on account
of the principal of, premium, if any, or interest on, or the purchase,
redemption or other acquisition of, the Notes for the period specified below
(the "Payment Blockage Period").
The Payment Blockage Period will commence upon (x) the receipt of notice of
a Non-payment Default by the Trustee from the representatives of holders of
Designated Senior Indebtedness or (y) if the Non-payment Default results from
the acceleration of the Notes, upon such acceleration, and will end on the
earliest to occur of the following events: (i) 179 days shall have elapsed (A)
since the receipt of such notice of a Non-payment Default or (B) if the
Non-payment Default results from the acceleration of the Notes, since such
acceleration (in each case, provided that such Designated Senior Indebtedness
shall not theretofore have been accelerated and the Company has not defaulted
with respect to the payment of such
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Designated Senior Indebtedness), (ii) such default is cured or waived or ceases
to exist or such Designated Senior Indebtedness is discharged or (iii) such
Payment Blockage Period shall have been terminated by written notice to the
Company or the Trustee from the representatives of holders of Designated Senior
Indebtedness initiating such Payment Blockage Period. After the end of any
Payment Blockage Period the Company shall promptly resume making any and all
required payments in respect of the Notes, including any missed payments.
Notwithstanding anything in the subordination provisions of the Indenture or the
Notes to the contrary, (x) in no event shall a Payment Blockage Period extend
beyond 179 days from the date such Payment Blockage Period was commenced, (y)
there shall be a period of at least 186 consecutive days in each 365-day period
when no Payment Blockage Period is in effect and (z) not more than one Payment
Blockage Period with respect to the Notes may be commenced within any period of
365 consecutive days. A Non-payment Default with respect to Designated Senior
Indebtedness that existed or was continuing on the date of the commencement of
any Payment Blockage Period with respect to the Designated Senior Indebtedness
initiating such Payment Blockage Period cannot be made the basis for the
commencement of a second Payment Blockage Period, whether or not within a period
of 365 consecutive days, unless such default has been cured or waived for a
period of not less than 90 consecutive days and subsequently recurs.
If the Company fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the holders of the Notes to ac-celerate the
maturity thereof. See "--Events of Default."
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the Notes and funds which would be otherwise
payable to the holders of the Notes will be paid to the holders of Senior
Indebtedness to the extent necessary to pay the Senior Indebtedness in full in
cash or Cash Equivalents, and the Company may be unable to meet its obligations
fully with respect to the Notes.
As of March 28, 1998 on a PRO FORMA basis after giving effect to the
Prepayments, the sale of the Notes and the application of the net proceeds
therefrom, the Issuers would have had outstanding an aggregate of $221.5 million
of Senior Indebtedness (without duplication as to any obligation of any such
party which is a guarantor of Senior Indebtedness owed primarily by another such
party). The Indenture limits, but does not prohibit, the incurrence by the
Company of additional Indebtedness which is senior to the Notes, but prohibits
the incurrence of any Indebtedness contractually subordinated in right of
payment to any other Indebtedness of the Company and senior in right of payment
to the Notes. See "Risk Factors-- Subordination of the Notes and the Guarantees;
Asset Encumbrances."
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes will be jointly and
severally guaranteed by the Guarantors. The obligations of each Guarantor under
its Guarantee will be unconditional and absolute, irrespective of any
invalidity, illegality, unenforceability of any Note or the Indenture or any
extension, compromise, waiver or release in respect of any obligation of the
Company or any other Guarantor under any Note or the Indenture, or any
modification or amendment of or supplement to the Indenture.
The obligations of any Guarantor under its Guarantee will be subordinated,
to the same extent as the obligations of the Company in respect of the Notes, to
the prior payment in full in cash or, to the extent permitted under the
agreements governing the Senior Indebtedness being prepaid, Cash Equivalents, of
all Senior Indebtedness of such Guarantor, which will include any guarantee
issued by such Guarantor of any Senior Indebtedness. The obligations of each
Guarantor under its Guarantee will be limited to the extent necessary to provide
that such Guarantee does not constitute a fraudulent conveyance under applicable
law. Each Guarantor that makes a payment or distribution under its Guarantee
shall be entitled to a contribution from each other Guarantor so long as the
exercise of such right does not impair the rights of holders of Notes under any
Guarantee. See "Risk Factors--Dependence on Operations of Subsidiaries;
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Possible Invalidity of Guarantees; Potential Release of Guarantees." A Guarantor
shall be released and discharged from its obligations under its Guarantee under
certain limited circumstances. See "--Certain Covenants--Limitation on Issuances
of Guarantees by Restricted Subsidiaries" and "--Consolidation, Merger, Sale of
Assets, Etc."
CERTAIN COVENANTS
The Indenture provides that the covenants set forth herein will be
applicable to the Company and the Restricted Subsidiaries; PROVIDED, HOWEVER,
that if no Default or Event of Default has occurred and is continuing, after the
ratings assigned to the Notes by both Rating Agencies are equal to or higher
than BBB- and Baa3, or the equivalents thereof, respectively (the "Investment
Grade Ratings"), and notwithstanding that the Notes may later cease to have an
Investment Grade Rating, the Company and the Restricted Subsidiaries will not be
subject to the provisions of the Indenture described under "Limitation on
Indebtedness," "Limitation on Restricted Payments," "Limitation on Sale of
Assets," clauses (ii) and (iii) of the first and fourth paragraphs of
"Limitations on Unrestricted Subsidiaries," "Limitation on Preferred Stock of
Restricted Subsidiaries," "Limitation on Transactions with Affiliates,"
"Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries" and clauses (iii) and (iv) of the first paragraph of
"Consolidation, Merger, Sale of Assets, Etc."
LIMITATION ON INDEBTEDNESS. The Company will not, and will not permit any
of the Restricted Subsidiaries to, directly or indirectly, create, incur,
assume, issue, guarantee or in any manner become liable for or with respect to,
contingently or otherwise (in each case, to "incur"), the payment of any
Indebtedness (including any Acquired Indebtedness), PROVIDED, HOWEVER, that (i)
the Company or a Guarantor may incur Indebtedness (including Acquired
Indebtedness) and (ii) a Restricted Subsidiary (which is not a Guarantor) may
incur Acquired Indebtedness, if, in either case, immediately after giving PRO
FORMA effect thereto, the Consolidated Fixed Charge Coverage Ratio of the
Company is at least equal to 2.00:1.
Notwithstanding the foregoing, the Company and, to the extent specifically
set forth below, the Guarantors and the Restricted Subsidiaries may incur each
and all of the following (collectively, "Permitted Indebtedness"):
(i) Indebtedness of the Company or any Guarantor (without duplication)
under the Revolving Credit Facility or any other Bank Credit Facility in an
aggregate principal amount at any one time outstanding not to exceed $500.0
million, less any permanent reductions made pursuant to the provision
described in the second paragraph under "--Limitation on Sale of Assets";
(ii) Indebtedness of the Company pursuant to the Notes and Indebtedness
of any Guarantor pursuant to a Guarantee of the Notes;
(iii) Indebtedness (other than Indebtedness under the Revolving Credit
Facility, the Notes and the Guarantees) of the Company or any Restricted
Subsidiary outstanding on the date of the Indenture, except Indebtedness to
be repaid as described under "Use of Proceeds";
(iv) Indebtedness of the Company owing to a Restricted Subsidiary;
PROVIDED that any Indebtedness for borrowed money of the Company owing to a
Subsidiary is made pursuant to an intercompany note in the form attached to
the Indenture and is subordinated in accordance with provisions set forth in
the Indenture; PROVIDED, FURTHER, that any disposition, pledge or transfer
of any such Indebtedness to a Person (other than a disposition, pledge or
transfer to a Restricted Subsidiary) shall be deemed to be an incurrence of
such Indebtedness by the Company not permitted by this clause (iv);
(v) Indebtedness of a Guarantor owing to and held by the Company or
another Guarantor; PROVIDED that any such Indebtedness for borrowed money is
made pursuant to an intercompany note in the form attached to the Indenture;
PROVIDED, FURTHER, that (a) any disposition, pledge or transfer of any such
Indebtedness to a Person (other than the Company or a Guarantor) shall be
deemed to be an incurrence of such Indebtedness by the obligor not permitted
by this clause (v), and (b) any
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transaction pursuant to which any Guarantor, which has Indebtedness owing to
the Company or any other Guarantor, ceases to be a Guarantor shall be deemed
to be the incurrence of Indebtedness by such Guarantor that is not permitted
by this clause (v);
(vi) guarantees by any Restricted Subsidiary incurred in compliance with
the provisions of the covenant described under "--Limitation on Issuances of
Guarantees by Restricted Subsidiaries";
(vii) Indebtedness of the Company or any Restricted Subsidiary under
Interest Rate Agreements covering Indebtedness of the Company or such
Restricted Subsidiary (which Indebtedness (a) bears interest at fluctuating
interest rates and (b) is otherwise permitted to be incurred under this
covenant) to the extent the notional principal amount of the obligations
under such Interest Rate Agreements does not exceed the principal amount of
the Indebtedness to which such obligations relate;
(viii) Indebtedness of the Company or any Restricted Subsidiary under
Currency Agreements or Commodity Price Protection Agreements relating to (a)
Indebtedness of the Company or such Restricted Subsidiary and/or (b)
obligations to purchase or sell assets or properties, in each case, incurred
in the ordinary course of business of the Company; PROVIDED, HOWEVER, that
such Currency Agreements or Commodity Price Protection Agreements, as the
case may be, do not increase the Indebtedness or other obligations of the
Company outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(ix) Indebtedness of the Company or any Guarantor represented by
Capitalized Lease Obligations or Purchase Money Obligations or other
Indebtedness incurred or assumed in connection with the acquisition or
development of real or personal movable or immovable property in each case
incurred for the purpose of financing or refinancing all or any part of the
purchase price or cost of construction or improvement of property used in
the business of the Company or such Guarantor, in an aggregate principal
amount pursuant to this clause (ix) not to exceed $10.0 million per year;
PROVIDED that, immediately after any such incurrence pursuant to this clause
(ix), the aggregate amount of Indebtedness outstanding pursuant to this
clause (ix) shall not exceed 2.0% of the Consolidated Net Sales of the
Company in the most recent four full fiscal quarters for which financial
statements of the Company are available; PROVIDED, FURTHER, that the
principal amount of any Indebtedness permitted under this clause (ix) did
not in each case at the time of incurrence exceed the Fair Market Value, as
determined by the Company or such Guarantor in good faith, of the acquired
or constructed asset or improvement so financed;
(x) reimbursement obligations under letters of credit and letters of
credit, in each case, to support (A) workers compensation obligations not to
exceed $10.0 million in the aggregate at any time outstanding and (B)
bankers acceptances, performance bonds, surety bonds, performance guarantees
and supplier obligations not to exceed $10.0 million in the aggregate at any
time outstanding, in the case of each of such clause (A) and (B) of the
Company or any Guarantor, in each case, in the ordinary course of business
consistent with past practice;
(xi) guarantees by the Company of Indebtedness of any Guarantor;
PROVIDED that such Indebtedness of such Guarantor is permitted by the terms
of the Indenture;
(xii) any renewals, extensions, substitutions, refundings, refinancings
or replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (i), (ii) and (iii) of this definition of "Permitted
Indebtedness," including any successive refinancings so long as the
aggregate principal amount of Indebtedness represented thereby is not
increased by such refinancing plus the lesser of (I) the stated amount of
any premium or other payment required to be paid in connection with such a
refinancing pursuant to the terms of the Indebtedness being refinanced or
(II) the amount of premium or other payment actually paid at such time to
refinance the Indebtedness, plus, in either case, the amount of expenses of
the Company or a Restricted Subsidiary incurred in connection with such
refinancing and (A) in the case of any refinancing of Indebtedness that is
Subordinated Indebtedness, such new Indebtedness is subordinated to the
Notes at least to the same extent as the
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Indebtedness being refinanced and (B) such refinancing does not reduce the
Average Life to Stated Maturity or the Stated Maturity of such Indebtedness;
(xiii) guarantees which are permitted under clause (ix) of paragraph (b)
described under the covenant "Limitation on Restricted Payments"; and
(xiv) Indebtedness of the Company or any Guarantor in addition to that
described in clauses (i) through (xiii) above, and any renewals, extensions,
substitutions, refinancings or replacements of such Indebtedness, so long as
the aggregate principal amount of all such Indebtedness shall not exceed
$35.0 million outstanding at any one time.
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly:
(i) declare or pay any dividend or make any other distribution or
payment on or in respect of Capital Stock of the Company or any payment to
the direct or indirect holders (in their capacities as such) of Capital
Stock of the Company (other than dividends or distributions payable solely
in shares of Qualified Capital Stock of the Company or in options, warrants
or other rights to acquire shares of such Qualified Capital Stock); or
(ii) purchase, redeem, defease or otherwise acquire or retire for value,
directly or indirectly, any Capital Stock of the Company (other than any
such Capital Stock owned by the Company or any Wholly-Owned Restricted
Subsidiary) or options, warrants or other rights to acquire such Capital
Stock; or
(iii) make any principal payment on, or purchase, repurchase, redeem,
defease, retire or otherwise acquire for value, prior to any scheduled
maturity, scheduled repayment, scheduled sinking fund payment or other
Stated Maturity, any Subordinated Indebtedness (other than any Subordinated
Indebtedness owed to and held by the Company or a Guarantor); or
(iv) make any Investment (other than any Permitted Investment) in any
Person (other than in the Company, any Restricted Subsidiary or a Person
that becomes a Restricted Subsidiary, or is merged with or into or
consolidated with the Company or a Restricted Subsidiary (provided the
Company or a Restricted Subsidiary is the survivor), as a result of or in
connection with such Investment)
(any of the foregoing actions described in clauses (i) through (iv), other than
any such action that is a Permitted Payment (as defined below), collectively,
"Restricted Payments") (the amount of any such Restricted Payment, if other than
cash, shall be the Fair Market Value of the asset(s) proposed to be transferred
by the Company or such Restricted Subsidiary, as the case may be, in each case,
as determined by the board of directors of the Company, whose determination
shall be conclusive and evidenced by a board resolution), unless (1) immediately
before and immediately after giving effect to such Restricted Payment on a PRO
FORMA basis, no Default or Event of Default shall have occurred and be
continuing; (2) immediately before and immediately after giving effect to such
Restricted Payment on a PRO FORMA basis, the Company could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) under the provisions
described under "--Limitation on Indebtedness," and (3) after giving effect to
the proposed Restricted Payment, the aggregate amount of all such Restricted
Payments declared or made after the Issue Date, does not exceed $5.0 million
plus the sum of:
(A) 50% of the aggregate cumulative Consolidated Net Income of the
Company during the period (treated as one accounting period) beginning on
the first day of the fiscal quarter beginning after the Issue Date and
ending on the last day of the Company's last fiscal quarter ending prior to
the date of the Restricted Payment (or, if such aggregate cumulative
Consolidated Net Income shall be a deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received after the Issue Date by the
Company from the issuance or sale (other than to any of the Restricted
Subsidiaries) of Qualified Capital Stock of the Company or from the exercise
of any options, warrants or rights to purchase such Qualified Capital
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Stock of the Company (except, in each case, to the extent such proceeds are
used to purchase, redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as set forth in clause (ii) or (iii) of paragraph (b) below and
excluding the net cash proceeds from any issuance and sale of Capital Stock
or from any such exercises, in each case, financed, directly or indirectly,
using funds borrowed from the Company or any Restricted Subsidiary until and
to the extent such borrowing is repaid);
(C) the aggregate Net Cash Proceeds received after the Issue Date by the
Company from the conversion or exchange, if any, of debt securities or
Redeemable Capital Stock of the Company or its Subsidiaries into or for
Qualified Capital Stock of the Company plus, without duplication, the
aggregate of Net Cash Proceeds from their original issuance, less any
principal and sinking fund payments made thereon;
(D) in the case of the disposition or repayment of any Investment (other
than an Investment made pursuant to clause (viii) of paragraph (b) below)
constituting a Restricted Payment made after the Issue Date, an amount (to
the extent not included in Consolidated Net Income) equal to the lesser of
the return of capital with respect to such Investment and the initial amount
of such Investment which was treated as a Restricted Payment, in either
case, less the cost of disposition of such Investment and net of taxes; and
(E) so long as the Designation thereof was treated as a Restricted
Payment made after the Issue Date, with respect to any Unrestricted
Subsidiary that has been redesignated as a Restricted Subsidiary after the
Issue Date in accordance with "--Limitations on Unrestricted Subsidiaries"
below, the Fair Market Value of the interest of the Company and the
Restricted Subsidiaries in such Subsidiary, provided that such amount shall
not in any case exceed the Designation Amount with respect to such
Restricted Subsidiary upon its Designation.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) through
(viii) below, so long as no Default or Event of Default shall have occurred and
be continuing or would arise therefrom, the foregoing provisions shall not
prohibit the following actions (each of clauses (i) through (iv) being referred
to as a "Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if (A) at such date of declaration such payment was
permitted by the provisions of the Indenture and (B) such payment shall have
been deemed to have been paid on such date of declaration and shall not have
been deemed a "Permitted Payment" for purposes of the calculation required
by paragraph (a) of this Section;
(ii) the repurchase, redemption, or other acquisition or retirement of
any shares of any class of Capital Stock of the Company in exchange for
(including any such exchange pursuant to the exercise of a conversion right
or privilege in connection with which cash is paid in lieu of the issuance
of fractional shares or scrip), or out of the Net Cash Proceeds of a
substantially concurrent issue and sale for cash to any Person (other than
to a Restricted Subsidiary) of, shares of Qualified Capital Stock of the
Company; PROVIDED that the Net Cash Proceeds from the issuance of such
shares of Qualified Capital Stock are excluded from clause (B) of paragraph
(a) of this Section;
(iii) the repurchase, redemption, defeasance, retirement or acquisition
for value or payment of principal of any Subordinated Indebtedness in
exchange for, or out of the Net Cash Proceeds of a substantially concurrent
issuance and sale for cash to any Person (other than to any Restricted
Subsidiary of the Company) of, any Qualified Capital Stock of the Company;
PROVIDED that the Net Cash Proceeds from the issuance of such shares of
Qualified Capital Stock are excluded from clause (B) of paragraph (a) of
this Section;
(iv) the repurchase, redemption, defeasance, retirement, acquisition for
value or payment of principal of any Subordinated Indebtedness (other than
Redeemable Capital Stock) in exchange for, or out of the Net Cash Proceeds
of a substantially concurrent issuance and sale for cash to any Person
(other than to a Restricted Subsidiary) of, new Subordinated Indebtedness of
such person; PROVIDED
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that any such new Subordinated Indebtedness (1) shall be in a principal
amount that does not exceed the principal amount so repurchased, redeemed,
defeased, retired, acquired or paid (or, if such Subordinated Indebtedness
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration thereof, then such lesser amount
as of the date of determination), plus the lesser of (I) the stated amount
of any premium or other payment required to be paid in connection with such
repurchase, redemption, defeasance, retirement, acquisition or payment
pursuant to the terms of the Indebtedness being repurchased, redeemed,
defeased, retired, acquired or paid or (II) the amount of premium or other
payment actually paid at such time to repurchase, redeem, defease, retire,
acquire or pay the Indebtedness, plus, in either case, the amount of
expenses of the Company incurred in connection with such repurchase,
redemption, defeasance, retirement, acquisition or payment; (2) has an
Average Life to Stated Maturity equal to or greater than the Average Life to
Stated Maturity of the Subordinated Indebtedness being repurchased,
redeemed, defeased, retired, acquired or paid; (3) has no Stated Maturity
earlier than the Stated Maturity for the final scheduled principal payment
of the Notes; and (4) is expressly subordinated in right of payment to the
Notes at least to the same extent as the Subordinated Indebtedness to be
repurchased, redeemed, defeased, retired, acquired or paid;
(v) the repurchase of any Pari Passu Indebtedness (x) at a purchase
price not greater than 101% of the principal amount of such Pari Passu
Indebtedness in the event of a Change of Control (as defined below) pursuant
to a provision similar to the provision described under "--Change of
Control"; PROVIDED that prior to, or contemporaneously with, such repurchase
the Company has made the Change of Control Offer if required by, and as
provided under, "--Change of Control" and has repurchased all Notes validly
tendered for payment in connection with such Change of Control Offer and (y)
at a purchase price not greater than 100% of the principal amount of such
Pari Passu Indebtedness in the event of an Asset Sale (as defined below)
pursuant to a provision similar to the provision described under
"--Limitation on Sale of Assets"; PROVIDED that prior to such repurchase the
Company has made an Asset Sale Offer if required by, and as provided under,
"--Limitation on Sale of Assets" and has repurchased all Notes validly
tendered for payment in connection with such Asset Sale Offer;
(vi) the purchase of restricted stock from employees of the Company upon
the termination of employment of such employees, pursuant to the terms of a
restricted stock plan approved by the Company's board of directors, in an
amount not to exceed $1.0 million in any fiscal year;
(vii) the payment of cash dividends on the Company's Common Stock of up
to $3.0 million in the aggregate in any fiscal quarter;
(viii) Investments by the Company or a Restricted Subsidiary in any Person
established by the Company or a Restricted Subsidiary in conjunction with
customers or suppliers of the Company which Person is engaged in the
distribution and sale of food and related products or the facilitation of
goods and services in the food industry such that, immediately after the
making of any such Investment pursuant to this clause (viii), the aggregate
outstanding amount of all such Investments made pursuant to this clause
(viii) shall not exceed 1.0% of the Consolidated Net Sales of the Company
for the most recent four fiscal quarters for which financial statements are
available; and
(ix) guarantees of obligations of, or loans to, customers in the
ordinary course of business consistent with past practice, such that
immediately after the issuing of any such guarantee or the making of any
such loan pursuant to this clause (ix), the aggregate amount of all such
guarantees or loans made under this clause (ix) that are outstanding would
not exceed 4.0% of the Consolidated Net Sales of the Company for the most
recent four full fiscal quarters for which financial statements of the
Company are available; PROVIDED that renewals of loans made in compliance
with this clause (ix) shall be permitted.
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(c) In computing the amount of Restricted Payments previously made for
purposes of clause (3) of paragraph (a) of this Section, Restricted Payments
under clauses (i) (as described in subclause (B) of such clause), (v), (vi),
(vii), (viii) and (ix) of paragraph (b) of this Section shall be included.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not cause or permit any of the Restricted Subsidiaries to, directly or
indirectly, conduct any business or enter into or suffer to exist any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with, or
for the benefit of, any Affiliate of the Company or of a Restricted Subsidiary
(other than the Company or a Guarantor) unless such transaction or series of
related transactions is entered into in good faith and in writing and (a) such
transaction is on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that would be available in
a comparable transaction in arm's-length dealings with an unrelated third party
and (b) with respect to any transaction or series of related transactions
involving aggregate value in excess of $5.0 million, the Company delivers an
officers' certificate to the Trustee certifying that such transaction or series
of related transactions complies with clause (a) above and such transaction or
series of transactions has been approved by a majority of the Board of Directors
of the Company, including a majority of the Disinterested Directors of the
Company or, in the event there is only one Disinterested Director, by such
Disinterested Director; PROVIDED the Company or any Restricted Subsidiary need
not comply with the preceding clause (b) if the Company delivers to the Trustee
a written opinion of an Independent Financial Advisor stating that the
transaction or series of related transactions is fair to the Company or such
Restricted Subsidiary, from a financial point of view; PROVIDED, HOWEVER, that
this provision shall not apply to (i) any transaction with an officer or
director of the Company entered into in the ordinary course of business
(including compensation and employee benefit arrangements with any officer,
director or employee of the Company, including under any stock option or stock
incentive plans); PROVIDED that such transaction has been approved in the manner
described in clause (b) above, (ii) the payment of dividends otherwise permitted
by the terms of the Indenture, (iii) indemnification agreements for the benefit
of officers, directors and employees and (iv) transactions with any
Securitization Subsidiary made in the ordinary course of business on terms
customary for such transactions.
Under Delaware law, the Disinterested Directors' fiduciary obligations
require that they act in good faith in a manner which they reasonably believe to
be in the best interests of the Company and its stockholders, which may not
necessarily be the same as those of the holders of the Notes.
LIMITATION ON LIENS. The Company will not, and will not cause or permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume, suffer
to exist or affirm any Lien of any kind securing any (a) Pari Passu Indebtedness
or Subordinated Indebtedness (including any assumption, guarantee or other
liability with respect thereto by any Restricted Subsidiary) upon any of its
property or assets (including any intercompany notes), whether owned on the
Issue Date or acquired after the Issue Date, or any proceeds, income or profits
therefrom, or assign or convey any right to receive proceeds, income or profits
therefrom, unless the Notes are directly secured equally and ratably with (or,
in the case of Subordinated Indebtedness, prior or senior thereto, with the same
relative priority as the Notes shall have with respect to such Subordinated
Indebtedness) the obligation or liability secured by such Lien, except for Liens
(A) securing any Indebtedness which became Indebtedness pursuant to a
transaction permitted under "--Consolidation, Merger, Sale of Assets, Etc." or
securing Acquired Indebtedness which, in each case, were created prior to (and
not created in connection with, or in contemplation of) the incurrence of such
Pari Passu Indebtedness or Subordinated Indebtedness (including any assumption,
guarantee or other liability with respect thereto by any Restricted Subsidiary)
and which Indebtedness is permitted under the provisions of the covenant
described under "--Limitation on Indebtedness" or (B) securing any Indebtedness
incurred in connection with any refinancing, renewal, substitution or
replacement of any such Indebtedness described in clause (A), so long as the
aggregate principal amount of Indebtedness represented thereby is not increased
by such refinancing by an amount greater than the lesser of (i) the stated
amount of any premium or other payment required to be paid in connection with
such a refinancing
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pursuant to the terms of the Indebtedness being refinanced or (ii) the amount of
premium or other payment actually paid at such time to refinance the
Indebtedness, plus, in either case, the amount of expenses of the Company
incurred in connection with such refinancing; PROVIDED, HOWEVER, that in the
case of clauses (A) and (B) any such Lien only extends to the assets that were
subject to such Lien securing such Indebtedness prior to the related acquisition
by the Company or the Restricted Subsidiaries or (b) any Senior Indebtedness
which is not incurred in compliance with the terms of the Indenture.
LIMITATION ON INCURRENCE OF SENIOR SUBORDINATED INDEBTEDNESS. The Company
will not, and will not permit any Guarantor to, directly or indirectly, create,
incur, issue, assume, guarantee or otherwise in any manner become directly or
indirectly liable for or with respect to or otherwise permit to exist any
Indebtedness that is subordinate or junior in right of payment to any
Indebtedness of the Company or such Guarantor, as the case may be, unless such
Indebtedness is also PARI PASSU with the Notes or the Guarantee of such
Guarantor or subordinate or junior, in right of payment to the Notes or such
Guarantee at least to the same extent as the Notes or such Guarantee are
subordinate or junior in right of payment to Senior Indebtedness or Senior
Indebtedness of such Guarantor, as the case may be.
LIMITATION ON SALE OF ASSETS. The Company will not, and will not cause or
permit any Restricted Subsidiary to, directly or indirectly, consummate an Asset
Sale unless (i) at least 80% of the consideration from such Asset Sale is
received in cash or Cash Equivalents and (ii) the Company or such Subsidiary
receives consideration at the time of such Asset Sale at least equal to the Fair
Market Value of the shares or assets subject to such Asset Sale. Notwithstanding
the foregoing, the Company need not comply with the preceding clause (i) in
connection with any Asset Sale involving stores (and related fixtures and
inventory) to a customer in exchange for a secured note on a basis consistent
with past practice so long as the aggregate outstanding amount of all such notes
does not exceed 4.0% of Consolidated Tangible Assets immediately after giving
effect to any such Asset Sale.
If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any Senior Indebtedness outstanding
as required by the terms thereof, or the Company determines not to apply such
Net Cash Proceeds to the permanent repayment of the Senior Indebtedness which is
required to be prepaid, or if no such Indebtedness under the Senior Indebtedness
is then outstanding, the Company or such Restricted Subsidiary may within 365
days of such Asset Sale, invest the Net Cash Proceeds in capital expenditures,
properties and other assets or inventories that (as determined by the board of
directors of the Company) replace the properties and assets that were the
subject of the Asset Sale or in properties and assets that will be used in the
businesses of the Company or its Subsidiaries existing on the Issue Date or in
businesses reasonably related thereto; PROVIDED that the Net Cash Proceeds of
any Asset Sale in the case of a sale of a store or stores or warehouse or
warehouses shall be deemed to have been applied to the extent of any capital
expenditures made to acquire or construct a replacement store or acquire,
construct or expand a warehouse, in each case within 180 days preceding the date
of such Asset Sale; PROVIDED FURTHER that with respect to the sale of a store or
stores, the replacement store shall be in the general vicinity of the store or
stores being replaced.
To the extent all or part of the Net Cash Proceeds of any Asset Sale are not
applied, or the Company determines not to so apply such Net Cash Proceeds,
within 365 days of such Asset Sale as described in the immediately preceding
paragraph (such Net Cash Proceeds, the "Unutilized Net Cash Proceeds"), the
Company shall, within 20 days after such 365th day or at any earlier time after
such Asset Sale, make an offer to purchase (the "Asset Sale Offer") all
outstanding Notes and any Pari Passu Indebtedness the terms of which require
such an offer to be made up to a maximum principal amount (expressed as a
multiple of $1,000) of Notes and such Pari Passu Indebtedness equal to such
Unutilized Net Cash Proceeds, at a purchase price in cash equal to 100% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the Purchase Date; PROVIDED, HOWEVER, that the Asset Sale Offer may be deferred
until there are aggregate Unutilized Net Cash Proceeds equal to or in excess of
$10.0 million, at which time the entire amount of such Unutilized Net Cash
Proceeds, and not just the amount in excess of $10.0 million,
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shall be applied as required pursuant to this paragraph. An Asset Sale Offer
will be required to be kept open for a period of at least 20 business days.
With respect to any Asset Sale Offer effected pursuant to this covenant,
among the Notes and such Pari Passu Indebtedness, to the extent the aggregate
principal amount of Notes and such Pari Passu Indebtedness tendered pursuant to
such Asset Sale Offer exceeds the Unutilized Net Cash Proceeds to be applied to
the repurchase thereof, such Notes and such Pari Passu Indebtedness shall be
purchased PRO RATA based on the aggregate principal amount of such Notes and
such Pari Passu Indebtedness tendered. To the extent the Unutilized Net Cash
Proceeds exceed the aggregate amount of Notes and such Pari Passu Indebtedness
tendered pursuant to such Asset Sale Offer, the Company may retain and utilize
any portion of the Unutilized Net Cash Proceeds not applied to repurchase the
Notes and such Pari Passu Indebtedness for any purpose consistent with the other
terms of the Indenture and such excess amount of Unutilized Net Cash Proceeds
shall not be included in any future determination of Unutilized Net Cash
Proceeds.
In the event that the Company makes an Asset Sale Offer, the Company shall
comply, to the extent applicable, with the requirements of Section 14(e) of the
Exchange Act, and any other applicable securities laws or regulations and any
applicable requirements of any securities exchange on which the Notes are
listed, and any violation of the provisions of the Indenture relating to such
Asset Sale Offer occurring as a result of such compliance shall not be deemed a
Default.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES. (a) The
Company will not cause or permit any Restricted Subsidiary, other than the
Guarantors, directly or indirectly, to secure the payment of any Senior
Indebtedness of the Company and the Company will not, and will not permit any
Restricted Subsidiary to, pledge any intercompany notes representing obligations
of any Restricted Subsidiary (other than the Guarantors) to secure the payment
of any Senior Indebtedness unless in each case such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a guarantee of payment of the Notes by such Restricted Subsidiary,
which guarantee shall be on the same terms as the guarantee of the Senior
Indebtedness (if a guarantee of Senior Indebtedness is granted by any such
Restricted Subsidiary) except that the guarantee of the Notes need not be
secured and shall be subordinated to the claims against such Restricted
Subsidiary in respect of Senior Indebtedness to the same extent as the Notes are
subordinated to Senior Indebtedness of the Company under the Indenture.
(b) The Company will not cause or permit any Restricted Subsidiary, directly
or indirectly, to guarantee, assume or in any other manner become liable with
respect to any Indebtedness of the Company unless such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Guarantee of the Notes, on the same terms as the guarantee of
such Indebtedness except that (A) such guarantee need not be secured unless
required pursuant to the covenant described under "--Limitation on Liens," (B)
if such Indebtedness is by its terms Senior Indebtedness, any such assumption,
guarantee or other liability of such Restricted Subsidiary with respect to such
Indebtedness shall be senior to such Restricted Subsidiary's Guarantee of the
Notes to the same extent as such Senior Indebtedness is senior to the Notes, and
(C) if such Indebtedness is by its terms subordinated to the Notes any such
assumption, guarantee or other liability of such Restricted Subsidiary with
respect to such Indebtedness shall be subordinated to such Restricted
Subsidiary's Guarantee of the Notes at least to the same extent as such
Indebtedness is subordinated to the Notes.
(c) Notwithstanding the foregoing, but subject to the requirements described
under "--Consolidation, Merger, Sale of Assets, Etc.," any Guarantee by a
Restricted Subsidiary of the Notes shall provide by its terms that it (and all
Liens securing the same) shall be automatically and unconditionally released and
discharged upon (i) any sale, exchange or transfer, to any Person not an
Affiliate of the Company, of all of the Company's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary, which transaction
is in compliance with the terms of the Indenture (including, but not limited to,
the covenant described under "--Limitation on Sale of Assets" above) and such
Restricted Subsidiary is released from
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all guarantees, if any, by it of other Indebtedness of the Company or any
Restricted Subsidiaries or (ii) (with respect to any Guarantees created after
the date of the Indenture) the release by the holders of the Indebtedness of the
Company described in clauses (a) and (b) above of their security interest or
their guarantee by such Restricted Subsidiary (including any deemed release upon
payment in full of all obligations under such Indebtedness), at a time when (A)
no other Indebtedness of the Company has been secured or guaranteed by such
Restricted Subsidiary, as the case may be, or (B) the holders of all such other
Indebtedness which is secured or guaranteed by such Restricted Subsidiary also
release their security interest in, or guarantee by such Restricted Subsidiary
(including any deemed release upon payment in full of all obligations under such
Indebtedness). The Company may, at any time, cause a Subsidiary to become a
Guarantor by executing and delivering a supplemental indenture providing for the
guarantee of payment of the Notes by such Subsidiary on the basis provided in
the Indenture.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will
not sell and will not cause or permit any Restricted Subsidiary of the Company
to issue, sell or transfer any Preferred Stock of any Restricted Subsidiary
(other than to the Company or to a Wholly-Owned Restricted Subsidiary) except
for (i) Preferred Stock issued or sold to, held by or transferred to the Company
or a Wholly-Owned Restricted Subsidiary and (ii) Preferred Stock issued by a
Person prior to the time (A) such Person becomes a Restricted Subsidiary, (B)
such Person merges with or into a Restricted Subsidiary or (C) a Restricted
Subsidiary merges with or into such Person; PROVIDED that such Preferred Stock
was not issued or incurred by such Person in anticipation of the type of
transaction contemplated by subclause (A), (B) or (C).
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Company will not, and will not cause or permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective or enter into any agreement with any Person that would
cause to become effective, any consensual encumbrance or restriction of any
kind, on the ability of any Restricted Subsidiary to (i) pay dividends, in cash
or otherwise, or make any other distribution on or in respect of its Capital
Stock or any other interest or participation in, or measured by, its profits, to
the Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed
to the Company or any other Restricted Subsidiary, (iii) make any Investment in
the Company or any other Restricted Subsidiary or (iv) transfer any of its
properties or assets to the Company or any other Restricted Subsidiary, except
for: (a) any encumbrance or restriction existing under any agreement in effect
on the Issue Date; (b) any encumbrance or restriction, with respect to a
Subsidiary that is not a Restricted Subsidiary of the Company on the Issue Date,
in existence at the time such Person becomes a Restricted Subsidiary of the
Company and not incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary; PROVIDED, HOWEVER, that such encumbrances and
restrictions are not applicable to the Company or any other Restricted
Subsidiary, or the properties or assets of the Company or any other Restricted
Subsidiary; (c) customary provisions restricting the subletting or assignment of
any lease or the assignment of any other contract to which the Company or any
Restricted Subsidiary is a party, which lease or contract is entered into in the
ordinary course of business consistent with past practice; (d) any encumbrance
or restriction contained in contracts for sales of assets permitted by the
covenant described under "--Limitation on Sale of Assets"; PROVIDED that such
encumbrance or restriction relates only to assets being sold pursuant to the
contract containing such encumbrance or restriction; (e) any encumbrance or
restriction customarily contained in any security agreement or mortgage which
security agreement or mortgage creates a Lien permitted under the Indenture;
PROVIDED that such encumbrance or restriction relates only to assets subject to
such Lien; and (f) any encumbrance or restriction existing under any agreement
that extends, renews, refinances or replaces the agreements containing the
encumbrances or restrictions in the foregoing clauses (a), (b), (c), (d) and
(e), or in this clause (f), PROVIDED that the terms and conditions of any such
encumbrances or restrictions are no more restrictive in any material respect
than those under or pursuant to the agreement evidencing the Indebtedness so
extended, renewed, refinanced or replaced.
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LIMITATIONS ON UNRESTRICTED SUBSIDIARIES. The Company may designate after
the Issue Date any Subsidiary (other than a Guarantor) as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(i) no Default or Event of Default shall have occurred and be continuing
at the time of or after giving effect to such Designation;
(ii) the Company would be permitted to make an Investment (other than a
Permitted Investment) at the time of Designation (assuming the effectiveness
of such Designation) pursuant to the provision described under paragraph (a)
of "--Limitation on Restricted Payments" above in an amount (the
"Designation Amount") equal to the Fair Market Value of the Company's
interest in such Subsidiary on such date; and
(iii) the Company would be permitted under the Indenture to incur $1.00
of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the covenant described under "--Limitation on Indebtedness" at the time of
such Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "--Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount.
The Company shall not, and shall not cause or permit any Restricted
Subsidiary to, at any time (x) provide credit support for or subject any of its
property or assets (other than the Capital Stock of any Unrestricted Subsidiary)
to the satisfaction of, any Indebtedness of any Unrestricted Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness), (y) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary or (z) be directly or indirectly liable for any
Indebtedness which provides that the holder thereof may (upon notice, lapse of
time or both) declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the occurrence
of a default with respect to any Indebtedness of any Unrestricted Subsidiary
(including any right to take enforcement action against such Unrestricted
Subsidiary), except any non-recourse guarantee given solely to support the
pledge by the Company or any Restricted Subsidiary of the Capital Stock of an
Unrestricted Subsidiary. No Unrestricted Subsidiary shall at any time guarantee
or otherwise provide credit support for any obligation of the Company or any
Restricted Subsidiary. All Subsidiaries of Unrestricted Subsidiaries shall
automatically be deemed to be Unrestricted Subsidiaries.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(i) no Default or Event of Default shall have occurred and be continuing
at the time of and after giving effect to such Revocation;
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at such
time, have been permitted to be incurred for all purposes of the Indenture;
and
(iii) any transaction (or series of related transactions) between such
Subsidiary and any of its Affiliates that occurred while such Subsidiary was
an Unrestricted Subsidiary would be permitted by the covenant described
under "--Limitation on Transactions with Affiliates" above as if such
transaction (or series of related transactions) had occurred at the time of
such Revocation.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
PROVISION OF FINANCIAL STATEMENTS. The Indenture provides that for so long
as the Notes are outstanding, whether or not the Company or any Guarantor is
subject to Section 13(a) or 15(d) of the Exchange Act, or any successor
provision thereto, the Company will, to the extent permitted by Commission
practice
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and applicable law and regulations, file with the Commission the annual reports,
quarterly reports and other documents which the Company and such Guarantor would
have been required to file with the Commission pursuant to such Section 13(a) or
15(d), or any successor provision thereto, if the Company and such Guarantor
were so subject, such documents to be filed with the Commission on or prior to
the date (the "Required Filing Dates") by which the Company and such Guarantor
would have been required so to file such documents if the Company and such
Guarantor were so subject. The Company and such Guarantor will also in any event
(x) within 15 days of each Required Filing Date, whether or not permitted or
required to be filed with the Commission, (i) transmit or cause to be
transmitted by mail to all holders of Notes, as their names and addresses appear
in the security register, without cost to such holders and (ii) file with the
Trustee, copies of the annual reports, quarterly reports and other documents
which the Company and such Guarantor would have been required to file with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act, or any
successor provision thereto, if the Company and such Guarantor were subject to
either of such Sections and (y) if filing such documents by the Company and such
Guarantor with the Commission is not permitted under the Exchange Act, promptly
upon written request and payment of the reasonable cost of duplication and
delivery, supply copies of such documents to any prospective holder at the
Company's and such Guarantor's cost. In addition, for so long as any Notes
remain outstanding, the Company will furnish to the holders of Notes and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act, and, to any beneficial holder of Notes, if not obtainable from
the Commission, information of the type that would be filed with the Commission
pursuant to the foregoing provisions, upon the request of any such holder. If
any Guarantor's or other Subsidiaries' financial statements would be required to
be included in the financial statements filed or delivered pursuant hereto if
the Company were subject to Section 13(a) or 15(d) of the Exchange Act, the
Company shall include such Guarantor's or other Subsidiaries' financial
statements in any filing or delivery pursuant hereto.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Company shall not, in any transaction or
series of related transactions, merge or consolidate with or into, or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets as an entirety to, any Person or Persons, and the
Company shall not permit any of the Restricted Subsidiaries to enter into any
such transaction or series of related transactions if such transaction or series
of related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the properties and assets of the Company and the Restricted Subsidiaries
(determined on a consolidated basis for the Company and the Restricted
Subsidiaries), to any Person or Persons, unless at the time and after giving
effect thereto (i) either (A)(1) if the transaction or transactions is a merger
or consolidation involving the Company, the Company shall be the Surviving
Person of such merger or consolidation or (2) if the transaction or transactions
is a merger or consolidation involving a Restricted Subsidiary, such Restricted
Subsidiary shall be the Surviving Person of such merger or consolidation, or
(B)(1) the Surviving Person shall be a corporation organized and existing under
the laws of the United States of America, any State thereof or the District of
Columbia and (2)(x) in the case of a transaction involving the Company, the
Surviving Person shall expressly assume by a supplemental indenture executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Notes and the Indenture and the
Registration Rights Agreement, and in each case, the Indenture, the Notes and
the Registration Rights Agreement shall remain in full force and effect, or (y)
in the case of a transaction involving a Restricted Subsidiary that is a
Guarantor, the Surviving Person shall expressly assume by a supplemental
indenture executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of such Restricted Subsidiary under its Guarantee
and the Indenture and the Registration Rights Agreement, and in each case, such
Indenture, Guarantee and the Registration Rights Agreement shall remain in full
force and effect; (ii) immediately after giving effect to such transaction or
series of
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related transactions on a PRO FORMA basis, no Default or Event of Default shall
have occurred and be continuing; (iii) to the extent the covenant described
under "--Certain Covenants--Limitation on Indebtedness" is still applicable, the
Company, or the Surviving Person, as the case may be, immediately after giving
effect to such transaction or series of related transactions on a PRO FORMA
basis (including, without limitation, any Indebtedness incurred or anticipated
to be incurred in connection with or in respect of such transaction or series of
transactions), could incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the covenant described above under "--Certain
Covenants--Limitation on Indebtedness;" and (iv) at the time of the transaction
if any of the property or assets of the Company or any of its Restricted
Subsidiaries would thereupon become subject to any Lien, the provisions
described under "--Certain Covenants--Limitation on Liens" are complied with.
No Guarantor (other than a Guarantor whose Guarantee is to be released in
accordance with the terms of its Guarantee and the Indenture as provided in
paragraph (c) under "--Certain Covenants--Limitation on Issuances of Guarantees
by Restricted Subsidiaries" above) shall, in any transaction or series of
related transactions, consolidate with or merge with or into another Person,
whether or not such Person is affiliated with such Guarantor and whether or not
such Guarantor is the Surviving Person, unless (i) the Surviving Person (if
other than such Guarantor) is a corporation organized and validly existing under
the laws of the United States, any State thereof or the District of Columbia;
(ii) the Surviving Person (if other than such Guarantor) expressly assumes by a
supplemental indenture all the obligations of such Guarantor under its Guarantee
and the performance and observance of every covenant of the Indenture and the
Registration Rights Agreement to be performed or observed by such Guarantor; and
(iii) immediately after giving effect to such transaction or series of related
transactions on a PRO FORMA basis, no Default or Event of Default shall have
occurred and be continuing.
In connection with any consolidation, merger, transfer, lease or other
disposition contemplated hereby, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an officers' certificate and an opinion of counsel, each stating that
such consolidation, merger, transfer, lease or other disposition and the
supplemental indenture in respect thereof comply with the requirements under the
Indenture. In addition, each Guarantor, in the case of a transaction described
in the first paragraph hereunder, unless it is the other party to the
transaction or unless its Guarantee will be released and discharged in
accordance with its terms as a result of the transaction, will be required to
confirm, by supplemental indenture, that its Guarantee will continue to apply to
the obligations of the Company or the Surviving Person under the Indenture.
Upon any consolidation or merger of the Company or any Guarantor or any
transfer of all or substantially all of the assets of the Company in accordance
with the foregoing, in which the Company or a Guarantor is not the Surviving
Person, the Surviving Person shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture and the Notes
and the Registration Rights Agreement or such Guarantor under the Indenture, the
Guarantee of such Guarantor and the Registration Rights Agreement, as the case
may be, with the same effect as if such successor corporation had been named as
the Company or Guarantor, as the case may be, therein; and thereafter, except in
the case of (a) a lease or (b) any sale, assignment, conveyance, transfer, lease
or other disposition to a Restricted Subsidiary of the Company or such
Guarantor, the Company shall be discharged from all obligations and covenants
under the Indenture, the Notes and the Registration Rights Agreement and such
Guarantor shall be discharged from all obligations and covenants under the
Indenture, the Guarantee of such Guarantor and the Registration Rights
Agreement, as the case may be.
The Indenture provides that for all purposes of the Indenture and the Notes
(including the provision of this covenant and the covenants described under
"--Certain Covenants--Limitation on Indebtedness," "--Certain
Covenants--Limitation on Restricted Payments" and "--Certain
Covenants--Limitation on Liens"), Subsidiaries of any Surviving Person shall,
upon such transaction or series of related transactions, become Restricted
Subsidiaries unless and until designated as Unrestricted Subsidiaries pursuant
to and in accordance with the provisions described under "--Certain
Covenants--Limitations on Unrestricted
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Subsidiaries" and all Indebtedness, and all Liens on property or assets, of the
Company and the Restricted Subsidiaries in existence immediately prior to such
transaction or series of related transactions will be deemed to have been
incurred upon such transaction or series of related transactions.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of the principal of or premium, if any, when
due and payable, on any of the Notes (at its Stated Maturity, upon optional
redemption, acceleration, required purchase, sinking fund, scheduled
principal payment or otherwise); or
(ii) default in the payment of an installment of interest on any of the
Notes, when due and payable, continued for 30 days or more; or
(iii) the Company or any Guarantor fails to comply with any of its
obligations described under "--Consolidation, Merger, Sale of Assets, Etc.,"
"--Change of Control" or "--Certain Covenants-- Limitation on Sale of
Assets"; or
(iv) the Company or any Guarantor fails to perform or observe any other
term, covenant or agreement contained in the Notes, the Guarantees or the
Indenture (other than a default specified in (i), (ii) or (iii) above) for a
period of 30 days after written notice of such failure requiring the Company
to remedy the same shall have been given (x) to the Company by the Trustee
or (y) to the Company and the Trustee by the holders of at least 25% in
aggregate principal amount of the Notes then outstanding; or
(v) default or defaults under one or more agreements, indentures or
instruments under which the Company, any Guarantor or any Restricted
Subsidiary then has outstanding Indebtedness in excess of $17.5 million
individually or in the aggregate and either (a) such Indebtedness is already
due and payable in full or (b) such default or defaults result in the
acceleration of the maturity of such Indebtedness; or
(vi) any Guarantee ceases to be in full force and effect or is declared
null and void or any Guarantor denies that it has any further liability
under any Guarantee, or gives notice to such effect (other than by reason of
the termination of the Indenture or the release of any such Guarantee in
accordance with "--Certain Covenants--Limitation on Issuance of Guarantees
by Restricted Subsidiaries"); or
(vii) one or more judgments, orders or decrees of any court or regulatory
or administrative agency for the payment of money in excess of $17.5 million
(in excess of the coverage under applicable insurance policies (after giving
effect to any deductibles) under which a financially sound and reputable
insurer has admitted liability) either individually or in the aggregate
shall have been rendered against the Company, any Guarantor or any
Restricted Subsidiary or any of their respective properties and shall not
have been discharged and either (a) any creditor shall have commenced an
enforcement proceeding upon such judgment, order or decree or (b) there
shall have been a period of 60 consecutive days during which a stay of
enforcement of such judgment, order or decree, by reason of a pending appeal
or otherwise, shall not be in effect; or
(viii) certain events of bankruptcy, insolvency or reorganization with
respect to the Company, any Guarantor or any Material Subsidiary of the
Company shall have occurred; or
(ix) any holder of at least $17.5 million in aggregate principal amount
of Indebtedness of the Company, any Guarantor or any Restricted Subsidiary
shall commence judicial proceedings to foreclose upon assets of the Company,
any Guarantor or any of its Restricted Subsidiaries having a Fair Market
Value, individually or in the aggregate, in excess of $17.5 million or shall
have exercised
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any right under applicable law or applicable security documents to take
ownership of any such assets in lieu of foreclosure.
If an Event of Default (other than as specified in clause (viii) with
respect to the Company) shall occur and be continuing, the Trustee, by notice to
the Company, or the holders of at least 25% in aggregate principal amount of the
Notes then outstanding, by notice to the Trustee and the Company, may declare
the principal of, premium, if any, and accrued interest on all of the
outstanding Notes due and payable immediately, upon which declaration all such
amounts payable in respect of the Notes will become and be immediately due and
payable. If an Event of Default specified in clause (viii) above with respect to
the Company occurs and is continuing, then the principal of, premium, if any,
and accrued interest on all of the outstanding Notes will IPSO FACTO become and
be immediately due and payable without any declaration or other act on the part
of the Trustee or any holder of Notes.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of the outstanding Notes, by written
notice to the Company and the Trustee, may rescind such declaration if (a) the
Company has paid or deposited with the Trustee a sum sufficient to pay (i) all
sums paid or advanced by the Trustee under the Indenture and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, (ii) all overdue interest on all Notes, (iii) the principal of and
premium, if any, on any Notes which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate borne by the Notes,
and (iv) to the extent that payment of such interest is lawful, interest upon
overdue interest at the rate borne by the Notes, and (b) all Events of Default,
other than the non-payment of principal of, premium, if any, and interest on the
Notes that has become due solely by such declaration of acceleration, have been
cured or waived as provided in the Indenture.
No holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in aggregate principal amount of the outstanding Notes have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as Trustee under the Notes and the Indenture, the Trustee has
failed to institute such proceeding within 15 days after receipt of such notice
and the Trustee, within such 15-day period, has not received directions
inconsistent with such written request by holders of a majority in aggregate
principal amount of the outstanding Notes. Such limitations do not apply,
however, to a suit instituted by a holder of a Note for the enforcement of the
payment of the principal of, premium, if any, or interest on such Note on or
after the respective due dates expressed in such Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
under the Indenture is not under any obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any of the holders
unless such holders shall have offered to the Trustee reasonable security or
indemnity. Subject to certain provisions concerning the rights of the Trustee,
the holders of a majority in aggregate principal amount of the outstanding Notes
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or power
conferred on the Trustee under the Indenture.
The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company and the Guarantors of their
respective obligations under the Indenture and as to any default in such
performance. The Company is also required to notify the Trustee within five
business days of any event which is, or after notice or lapse of time or both
would become, an Event of Default.
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DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations of
the Company and the Guarantors with respect to the outstanding Notes
("defeasance"). Such defeasance means that the Company will be deemed to have
paid and discharged the entire Indebtedness represented by the outstanding
Notes, except for (i) the rights of holders of outstanding Notes to receive
payment in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due, (ii) the Company's obligations to issue
temporary Notes, register the transfer or exchange of any Notes, replace
mutilated, destroyed, lost or stolen Notes and maintain an office or agency for
payments in respect of the Notes, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and (iv) the defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to terminate
the obligations of the Company and any Guarantor with respect to certain
covenants that are set forth in the Indenture, some of which are described under
"--Certain Covenants" above, and any omission to comply with such obligations
will not constitute a Default or an Event of Default with respect to the Notes
("covenant defeasance"). In the event covenant defeasance occurs, certain events
(not including non-payment, bankruptcy and insolvency events) described under
"--Events of Default" will no longer constitute an Event of Default with respect
to the Notes.
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes, cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay and discharge the principal of, premium,
if any, and interest on the outstanding Notes at maturity; (ii) the Company
shall have delivered to the Trustee an opinion of independent counsel in the
United States to the effect that the holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such defeasance or covenant defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have been
the case if such defeasance or covenant defeasance had not occurred (in the case
of defeasance, such opinion must refer to and be based upon a ruling of the
Internal Revenue Service or a change in applicable federal income tax laws);
(iii) no Default shall have occurred and be continuing on the date of such
deposit or insofar as clause (viii) under the first paragraph under "--Events of
Default" is concerned, at any time during the period ending on the 91st day
after the date of deposit; (iv) such defeasance or covenant defeasance shall not
cause the Trustee to have a conflicting interest with respect to any securities
of the Company or any Guarantor; (v) such defeasance or covenant defeasance
shall not result in a breach or violation of, or constitute a default under, any
material agreement or instrument to which the Company or any Guarantor is a
party or by which it is bound; (vi) such defeasance or covenant defeasance shall
not result in the trust arising from such deposit constituting an investment
company within the meaning of the Investment Company Act of 1940, as amended,
unless such trust shall be registered under such Act or exempt from registration
thereunder; (vii) the Company shall have delivered to the Trustee an opinion of
independent counsel in the United States to the effect that after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (viii) the Company shall have delivered to the
Trustee an officers' certificate stating that the deposit was not made by the
Company with the intent of preferring the holders of the Notes or any Guarantee
over the other creditors of the Company or any Guarantor with the intent of
defeating, hindering, delaying or defrauding creditors of the Company, any
Guarantor or others; (ix) no event or condition shall exist that would prevent
the Company from making payments of the principal of, premium, if any, and
interest on the Notes on the date of such deposit or at any time ending on the
91st day after the date of such deposit; and (x) the Company shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent under the Indenture to either
defeasance or covenant defeasance, as the case may be, have been complied with.
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SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company or any Guarantor has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company or any Guarantor has paid all other sums payable under the Indenture
by the Company and the Guarantors; and (iii) the Company and each of the
Guarantors have delivered to the Trustee an officers' certificate and an opinion
of independent counsel each stating that (a) all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have been
complied with and (b) such satisfaction and discharge will not result in a
breach or violation of, or constitute a default under, the Indenture or any
other material agreement or instrument to which the Company, any Guarantor or
any Subsidiary is a party or by which the Company, any Guarantor or any
Subsidiary is bound.
AMENDMENTS AND WAIVERS
Amendments and modifications of the Indenture or the Notes may be made by
the Company, the Guarantors and the Trustee with the consent of the holders of
not less than a majority of the aggregate principal amount of the outstanding
Notes; PROVIDED, HOWEVER, that no such modification or amendment may, without
the consent of the holder of each outstanding Note affected thereby, (i) change
the maturity of the principal of, or any installment of interest on, any such
Note or alter the optional redemption or repurchase provisions of any such Note
or the Indenture in a manner adverse to the Holders of the Notes; (ii) reduce
the principal amount of (or the premium of) any such Note; (iii) reduce the rate
of or extend the time for payment of interest on any such Note; (iv) change the
place or currency of payment of principal of (or premium) or interest on any
such Note; (v) modify any provisions of the Indenture relating to the waiver of
past defaults (other than to add sections of the Indenture or the Notes subject
thereto) or the right of the holders of Notes to institute suit for the
enforcement of any payment on or with respect to any such Note or any Guarantee
or the modification and amendment provisions of the Indenture and the Notes
(other than to add sections of the Indenture or the Notes which may not be
amended, supplemented or waived without the consent of each Holder therein
affected); (vi) reduce the percentage of the principal amount of outstanding
Notes necessary for amendment to or waiver of compliance with any provision of
the Indenture or the Notes or for waiver of any Default in respect thereof;
(vii) waive a default in the payment of principal of, premium, if any, or
interest on, or redemption payment with respect to, the Notes (except a
rescission of acceleration of the Notes by the holders thereof as provided in
the Indenture and a waiver of the payment default that resulted from such
acceleration); (viii) modify the ranking or priority of any Note or the
Guarantee of any Guarantor; (ix) following the occurrence of a Change of Control
or Asset Sale, modify the provisions of any covenant (or the related
definitions) in the Indenture requiring the Company to make and consummate a
Change of Control Offer in respect of such Change of Control or Asset Sale Offer
in respect of an Asset Sale or modify any of the provisions or definitions with
respect thereto in a manner materially adverse to the Holders of Notes affected
thereby; or (x) release any Guarantor from any of its obligations under its
Guarantee or the Indenture otherwise than in accordance with the Indenture.
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Notwithstanding the foregoing, without the consent of any holders of the
Notes, the Company, the Guarantors and the Trustee may modify or amend the
Indenture (a) to evidence the succession of another Person to the Company or any
Guarantor, and the assumption by any such successor of the covenants of the
Company or such Guarantor in the Indenture and in the Notes and in any Guarantee
in accordance with "--Consolidation, Merger, Sale of Assets, Etc."; (b) to add
to the covenants of the Company or any Guarantor for the benefit of the holders
of the Notes, or to surrender any right or power herein conferred upon the
Company or any Guarantor in the Indenture, in the Notes or in any Guarantee; (c)
to cure any ambiguity, to correct or supplement any provision in the Indenture
which may be defective or inconsistent with any other provision in the
Indenture, in the Notes or in any Guarantee; (d) to comply with the requirements
of the Commission in order to maintain the qualification of the Indenture under
the Trust Indenture Act of 1939, as amended; (e) to secure the Notes or add a
Guarantor under the Indenture; (f) to evidence and provide the acceptance of the
appointment of a successor Trustee under the Indenture; or (g) to make any other
provisions with respect to matters or questions arising under the Indenture, the
Notes or any Guarantee; PROVIDED that, in the case of clause (b), (c) or (g),
such provisions shall not adversely affect the interests of any of the holders
of the Notes and the Company has delivered to the Trustee an Opinion of Counsel
(as such term is defined in the Indenture) to such effect.
The holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all holders of Notes, may waive compliance by the Company
and the Guarantors with certain restrictive provisions of the Indenture. Subject
to certain rights of the Trustee, as provided in the Indenture, the holders of a
majority in aggregate principal amount of the Notes, on behalf of all holders of
the Notes, may waive any past default under the Indenture (including any such
waiver obtained in connection with a tender offer or exchange offer for the
Notes), except a default in the payment of principal, premium or interest or a
default arising from failure to purchase any Notes tendered pursuant to an offer
to purchase pursuant thereto, or a default in respect of a provision that under
the Indenture cannot be modified or amended without the consent of the Holder of
each Note that is affected.
GOVERNING LAW
The Indenture and the Notes and the Guarantees are governed by the internal
laws of the State of New York, without regard to the principles of conflicts of
law.
CERTAIN DEFINITIONS
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person (i) assumed in
connection with an Asset Acquisition from such Person or (ii) existing at the
time such Person becomes a Restricted Subsidiary of any other Person (other than
any Indebtedness incurred in connection with, or in contemplation of, such Asset
Acquisition or such Person becoming such a Restricted Subsidiary). Acquired
Indebtedness shall be deemed to be incurred on the date of the related
acquisition of assets from any Person or the date the acquired Person becomes a
Restricted Subsidiary, as the case may be.
"AFFILIATE" means with respect to any specified Person: (i) any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person; (ii) any other Person that owns,
directly or indirectly, 10% or more of such specified Person's Capital Stock or
any officer, director or employee of any such specified Person or other Person
or, with respect to any natural Person, any person having a relationship with
such Person by blood, marriage or adoption no more remote than first cousin; or
(iii) any other Person 10% or more of the Voting Stock of which is beneficially
owned or held directly or indirectly by such specified Person. For the purposes
of this definition, "control" when used with respect to any specified Person
means the power to direct the management and policies of such Person, directly
or indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
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"ASSET ACQUISITION" means (i) an Investment by the Company or any Restricted
Subsidiary in any other Person pursuant to which such Person will become a
Restricted Subsidiary or will be merged or consolidated with or into the Company
or any Restricted Subsidiary or (ii) the acquisition by the Company or any
Restricted Subsidiary of the assets of any Person which constitute substantially
all of the assets of such Person, or any division or line of business of such
Person, or which is otherwise outside of the ordinary course of business.
"ASSET SALE" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of: (i) any Capital
Stock of any Subsidiary; (ii) all or substantially all of the properties and
assets of any division or line of business of the Company or its Subsidiaries;
or (iii) any other properties or assets of the Company or any Subsidiary other
than in the ordinary course of business. For the purposes of this definition,
the term "Asset Sale" shall not include any transfer of properties and assets
(a) that is governed by the provisions described under "--Consolidation, Merger,
Sale of Assets, Etc."; PROVIDED, HOWEVER, that any transaction consummated in
compliance with "--Consolidation, Merger, Sale of Assets, Etc." above involving
a transfer of less than all of the properties or assets of the Company shall be
deemed to be an Asset Sale with respect to the properties or assets of the
Company that are not so transferred in such transaction, (b) that is by the
Company to any Guarantor, or by any Subsidiary to the Company or any Restricted
Subsidiary in accordance with the terms of the Indenture, (c) that is of
obsolete equipment in the ordinary course of business, (d) to any Securitization
Subsidiary (on a "true sale" non-recourse basis) of any accounts receivable or
customer loans receivable of the Company or any Restricted Subsidiary in the
ordinary course of business on terms customary for such transactions, but only
to the extent that the aggregate amount of such accounts receivable or loans
held by all such Securitization Subsidiaries which remain uncollected at any one
time does not exceed $125.0 million, or (e) the Fair Market Value of any such
Asset Sale not otherwise described in clause (a) through (d) above which in the
aggregate does not exceed $10.0 million.
"ASSET SALE OFFER" has the meaning set forth under "--Limitation on Sale of
Assets."
"AVERAGE LIFE TO STATED MATURITY" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (b) the amount
of each such principal payment by (ii) the sum of all such principal payments.
"CAPITAL STOCK" means, with respect to any Person, any and all shares,
interests, participations, rights in or other equivalents (however designated)
of such Person's capital stock, and any rights (other than debt securities
convertible into capital stock), warrants or options exchangeable for or
convertible into such capital stock, whether now outstanding or issued after the
date of the Indenture.
"CAPITALIZED LEASE OBLIGATION" means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation under GAAP, and, for the purpose of the Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
"CASH EQUIVALENTS" means, at any time, (i) any evidence of Indebtedness with
a maturity of not more than one year issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) certificates of deposit or acceptances with a
maturity of not more than one year of any financial institution that is a member
of the Federal Reserve System having combined capital and surplus and undivided
profits of not less than $500,000,000; (iii) commercial paper with a maturity of
not more than one year issued by a corporation that is not an Affiliate of the
Company organized under
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the laws of any state of the United States or the District of Columbia and rated
at least A-1 by Standard & Poor's Corporation or at least P-1 by Moody's
Investors Service, Inc.; and (iv) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clauses (i)
and (ii) above entered into with any financial institution meeting the
qualifications specified in clause (ii) above.
"CHANGE OF CONTROL" means the occurrence of any of the following events
(whether or not approved by the Board of Directors of the Company): (i) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act, except that a Person shall be deemed to have
"beneficial ownership" of all securities that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of 35% or more of the total voting power of
the then outstanding Voting Stock of the Company; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the board of directors of the Company (together with any new directors whose
election to such board or whose nomination for election by the stockholders of
the Company was approved by a vote of 66 2/3% of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved), cease for any
reason to constitute a majority of such board of directors then in office; (iii)
the Company consolidates with or merges with or into any Person or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any corporation consolidates
with or merges into or with the Company, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is changed into
or exchanged for cash, securities or other property, other than any such
transaction where the outstanding Voting Stock of the Company is not changed or
exchanged at all (except to the extent necessary solely to reflect a change in
the jurisdiction of incorporation of the Company) or where (A) the outstanding
Voting Stock of the Company is changed into or exchanged for (x) Voting Stock of
the surviving corporation which is not Redeemable Capital Stock or (y) cash,
securities and other property (other than Capital Stock of the surviving
corporation) in an amount which could be paid by the Company as a Restricted
Payment as described under "--Certain Covenants--Limitation on Restricted
Payments" (and such amount shall be treated as a Restricted Payment subject to
the provisions in the Indenture described under "--Certain Covenants--
Limitation on Restricted Payments"), (B) no "person" or "group" owns immediately
after such transaction, directly or indirectly, 35% or more of the total
outstanding Voting Stock of the surviving corporation and (C) the holders of the
Voting Stock of the Company immediately prior to such transaction own, directly
or indirectly, not less than a majority of the total voting power of the then
outstanding Voting Stock of the surviving or transferee corporation immediately
after such transaction; or (iv) any order, judgment or decree shall be entered
against the Company decreeing the dissolution or split up of the Company and
such order shall remain undischarged or unstayed for a period in excess of sixty
days.
"CHANGE OF CONTROL OFFER" has the meaning set forth under "--Change of
Control."
"COMMODITY PRICE PROTECTION AGREEMENT" means any forward contract, commodity
swap, commodity option or other similar financial agreement or arrangement
relating to, or the value of which is dependent upon, fluctuations in commodity
prices.
"CONSOLIDATED CASH FLOW AVAILABLE FOR FIXED CHARGES" means, for any period,
(i) the sum of, without duplication, the amounts for such period, taken as a
single accounting period, of (a) Consolidated Net Income, (b) to the extent
reducing Consolidated Net Income, Consolidated Non-cash Charges, (c) to the
extent reducing Consolidated Net Income, Consolidated Interest Expense, and (d)
to the extent reducing Consolidated Net Income, Consolidated Income Tax Expense
less (ii) other non-cash items increasing Consolidated Net Income for such
period.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means the ratio of the aggregate
amount of Consolidated Cash Flow Available for Fixed Charges of the Company for
the four full fiscal quarters immediately
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preceding the date of the transaction (the "Transaction Date") giving rise to
the need to calculate the Consolidated Fixed Charge Coverage Ratio for which
consolidated financial information of the Company is available (such four full
fiscal quarter period being referred to herein as the "Four Quarter Period") to
the aggregate amount of Consolidated Fixed Charges of the Company for such Four
Quarter Period. For purposes of this definition, "Consolidated Cash Flow
Available for Fixed Charges" and "Consolidated Fixed Charges" will be
calculated, without duplication, after giving effect on a PRO FORMA basis for
the period of such calculation to (i) the incurrence of any Indebtedness of the
Company or any of the Restricted Subsidiaries during the period commencing on
the first day of the Four Quarter Period to and including the Transaction Date
(the "Reference Period"), including, without limitation, the incurrence of the
Indebtedness giving rise to the need to make such calculation, as if such
incurrence occurred on the first day of the Reference Period, except that with
respect to the calculation of Consolidated Interest Expense in the determination
of Consolidated Fixed Charges, the Consolidated Interest Expense of such Person
attributable to interest on any Indebtedness under a revolving credit facility
computed on a PRO FORMA basis shall be computed based upon the average daily
balance of such Indebtedness during the Reference Period, (ii) an adjustment to
eliminate or include, as applicable, the Consolidated Cash Flow Available for
Fixed Charges and Consolidated Fixed Charges of the Company directly
attributable to assets which are the subject of any Asset Sale or Asset
Acquisition (including, without limitation, any Asset Acquisition giving rise to
the need to make such calculation as a result of the Company or one of the
Restricted Subsidiaries (including any Person who becomes a Restricted
Subsidiary as a result of the Asset Acquisition) incurring Acquired
Indebtedness) occurring during the Reference Period, as if such Asset Sale or
Asset Acquisition occurred on the first day of the Reference Period and (iii)
the retirement of Indebtedness during the Reference Period which cannot
thereafter be reborrowed occurring as if retired on the first day of the
Reference Period. In calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated Fixed
Charge Coverage Ratio," (1) interest on Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so determined
thereafter will be deemed to accrue at a fixed rate per annum equal to the rate
of interest on such Indebtedness in effect on the Transaction Date; (2) if
interest on any Indebtedness actually incurred on the Transaction Date may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate, or other rates, then the
interest rate in effect on the Transaction Date shall be deemed to have been in
effect during the Reference Period; and (3) notwithstanding clause (1) above,
interest on Indebtedness determined on a fluctuating basis, to the extent such
interest is covered by Interest Rate Agreements, will be deemed to accrue at the
rate per annum resulting after giving effect to the operation of such
agreements. If the Company or any Restricted Subsidiaries directly or indirectly
guarantees Indebtedness of a third Person, the above definition will give effect
to the incurrence of such guaranteed Indebtedness as if the Company or any
Restricted Subsidiary had directly incurred or otherwise assumed such guaranteed
Indebtedness.
"CONSOLIDATED FIXED CHARGES" means, for any period, the sum of, without
duplication, the amounts for such period of (i) Consolidated Interest Expense;
and (ii) the aggregate amount of cash dividends and other distributions paid or
accrued during such period in respect of Redeemable Capital Stock and Preferred
Stock of the Company.
"CONSOLIDATED INCOME TAX EXPENSE" means, for any period, the provision for
federal, state, local and foreign income taxes payable by the Company and the
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, without duplication,
the sum of (a) the interest expense of the Company and the Restricted
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP, including, without limitation, (i) any amortization of debt discount
attributable to such period, (ii) the net cost under or otherwise associated
with Interest Rate Agreements, Currency Agreements and Commodity Price
Protection Agreements (in each case, including any amortization of discounts),
(iii) the interest portion of any deferred payment obligation, (iv) all
commissions,
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discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing and (v) all capitalized interest and all accrued
interest, and (b) all but the principal component of Capitalized Lease
Obligations paid, accrued and/or scheduled to be paid or accrued by the Company
and the Restricted Subsidiaries during such period and as determined on a
consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, for any period, the consolidated net income
(or loss) of the Company and the Restricted Subsidiaries for such period on a
consolidated basis as determined in accordance with GAAP, adjusted, to the
extent included in calculating such net income (or loss), by excluding, without
duplication, (i) all extraordinary gains or losses (net of all fees and expenses
relating thereto), (ii) the portion of net income (or loss) of the Company and
its Restricted Subsidiaries on a consolidated basis allocable to minority
interests in unconsolidated Persons, except to the extent that cash dividends or
distributions are actually received by the Company or a Restricted Subsidiary,
(iii) income of the Company and the Restricted Subsidiaries derived from or in
respect of Investments in Unrestricted Subsidiaries, except to the extent that
cash dividends or distributions are actually received by the Company or a
Restricted Subsidiary, (iv) net income (or loss) of any Person combined with the
Company or any of the Restricted Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination, (v) any gain or
loss, net of taxes, realized upon the termination of any employee pension
benefit plan, (vi) net gains (or losses), net of taxes, less all fees and
expenses relating thereto, in respect of any Asset Sales by the Company or a
Restricted Subsidiary, (vii) the net income of any Restricted Subsidiary to the
extent that the declaration of dividends or similar distributions by that
Subsidiary of that income is not at the time permitted, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders, (viii) any restoration to income of
any contingency reserve except to the extent provision for such reserve was made
out of income accrued at any time following the Issue Date, (ix) any gain,
arising from the acquisition of any securities, or the extinguishment, under
GAAP, of any Indebtedness of the Company, (x) the net gain or loss resulting
from the Prepayments (as defined in the Offering Memorandum relating to the sale
of the Notes) and (xi) the net non-cash compensation expense incurred in
connection with the issuance or exercise of any employee stock options the
issuance of which was approved by the board of directors of the Company.
"CONSOLIDATED NET SALES" means, for any period, the consolidated net sales
of the Company and the Restricted Subsidiaries as determined in accordance with
GAAP.
"CONSOLIDATED NON-CASH CHARGES" means, for any period, the aggregate
depreciation, amortization and other non-cash expenses of the Company and the
Restricted Subsidiaries reducing Consolidated Net Income for such period (other
than any non-cash item requiring an accrual or reserve for cash disbursements in
any future period), determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED TANGIBLE ASSETS" means, at any date, the total assets, less
goodwill and other intangibles, of the Company and the Restricted Subsidiaries
determined on a consolidated basis in accordance with GAAP as of the most recent
date for which a consolidated balance sheet of the Company is available.
"COVENANT DEFEASANCE" has the meaning set forth under "--Defeasance or
Covenant Defeasance of Indenture."
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or its Restricted Subsidiaries against fluctuations in currency values.
"DEFAULT" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"DEFEASANCE" has the meaning set forth under "--Defeasance or Covenant
Defeasance of Indenture."
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"DESIGNATED SENIOR INDEBTEDNESS" means (a) all Senior Indebtedness
outstanding under the Revolving Credit Facility and (b) any other Senior
Indebtedness which, at the time of determination, is specifically designated in
the instrument governing such Senior Indebtedness as "Designated Senior
Indebtedness" by the Company.
"DESIGNATION" has the meaning set forth under "--Certain
Covenants--Limitations on Unrestricted Subsidiaries."
"DESIGNATION AMOUNT" has the meaning set forth under "--Certain
Covenants--Limitations on Unrestricted Subsidiaries."
"DISINTERESTED DIRECTOR" means, with respect to any transaction or series of
related transactions, a member of the board of directors of the Company who does
not have any material direct or indirect financial interest in or with respect
to such transaction or series of related transactions.
"EVENT OF DEFAULT" has the meaning set forth under "--Events of Default."
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length transaction, for cash, between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy. Fair Market Value shall be determined
by the Board of Directors of the Company acting in good faith evidenced by a
board resolution thereof delivered to the Trustee.
"FOUR QUARTER PERIOD" has the meaning set forth in the definition of
"Consolidated Fixed Charge Coverage Ratio."
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States which are applicable at the date of
determination and which are consistently applied for all applicable periods.
"GUARANTEE" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit. A guarantee shall include, without
limitation, any agreement to maintain or preserve any other Person's financial
condition or to cause any other Person to achieve certain levels of operating
results.
"GUARANTEE" means the guarantee by any Guarantor of the Company's
obligations under the Indenture and the Notes pursuant to a guarantee given in
accordance with the Indenture.
"GUARANTOR" means the Subsidiaries listed as guarantors in the Indenture and
any other Subsidiary which is a guarantor of the Notes, including any Person
that executes or is required after the date of the Indenture to execute a
guarantee of the Notes pursuant to the covenant described under "--Certain
Covenants--Limitations on Liens" or "--Certain Covenants--Limitation on
Issuances of Guarantees by Restricted Subsidiaries" until a successor replaces
such party pursuant to the applicable provisions of the Indenture and,
thereafter, shall mean such successor; PROVIDED that for purposes hereof the
term "Guarantor" shall not include any Unrestricted Subsidiary unless
specifically provided otherwise.
"INCUR" has the meaning set forth in "--Certain Covenants--Limitation on
Indebtedness." "Incurrence," "incurred" and "incurring" shall have the meanings
correlative to the foregoing.
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"INDEBTEDNESS" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities incurred or arising in the ordinary course of business, but
including, without limitation, all obligations, contingent or otherwise, of such
Person in connection with any letters of credit, bankers acceptance or other
similar credit transaction and in connection with any agreement to purchase,
redeem, exchange, convert or otherwise acquire for value any Capital Stock of
such Person, or any warrants, rights or options to acquire such Capital Stock,
now or hereafter outstanding, (ii) all obligations of such Person evidenced by
bonds, notes, debentures or other similar instruments, (iii) all indebtedness
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such Person (even if the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), but excluding trade
payables arising in the ordinary course of business, (iv) all Capitalized Lease
Obligations of such Person, (v) all Indebtedness referred to in clauses (i)
through (iv) above of other persons and all dividends of other Persons, to the
extent the payment of which is secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien upon or with respect to property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such Indebtedness, (vi) all
guarantees of Indebtedness by such Person, (vii) except for purposes of the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments," all Redeemable Capital Stock issued by such Person valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends, (viii) all obligations under Interest Rate
Agreements, Currency Agreements or Commodity Price Protection Agreements of such
Person (net of any payments owed to such Person thereunder to the extent such
Person's obligations thereunder are subject to offset by the amount of payments
owed to such Person thereunder), and (ix) any amendment, supplement,
modification, deferral, renewal, extension, refunding or refinancing of any
liability of the types referred to in clauses (i) through (viii) above. For
purposes hereof, the "maximum fixed repurchase price" of any Redeemable Capital
Stock which does not have a fixed repurchase price shall be calculated in
accordance with the terms of such Redeemable Capital Stock as if such Redeemable
Capital Stock were purchased on any date on which Indebtedness shall be required
to be determined pursuant to the Indenture, and if such price is based upon, or
measured by, the Fair Market Value of such Redeemable Capital Stock, such Fair
Market Value shall be determined in good faith by the board of directors of the
issuer of such Redeemable Capital Stock.
"INDEPENDENT FINANCIAL ADVISOR" means a nationally recognized accounting,
appraisal or investment banking firm (i) which does not, and whose directors,
officers and employees or Affiliates do not have, a direct or indirect financial
interest in the Company and (ii) which, in the judgment of the Board of
Directors of the Company, is otherwise independent and qualified to perform the
task for which it is to be engaged.
"INTEREST RATE AGREEMENTS" means one or more of the following agreements
which shall be entered into by one or more financial institutions: obligations
of any Person pursuant to any arrangement with any other Person whereby,
directly or indirectly, such Person is entitled to receive from time to time
periodic payments calculated by applying either a floating or a fixed rate of
interest on a stated notional amount in exchange for periodic payments made by
such Person calculated by applying a fixed or a floating rate of interest on the
same notional amount or any other arrangement involving payments by or to such
Person based upon fluctuations in interest rates (including, without limitation,
interest rate swaps, caps, floors, collars and similar agreements) and/or other
types of interest rate hedging agreements from time to time.
"INVESTMENT" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit (including by means of a guarantee)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others or otherwise), or any purchase or acquisition by such Person of any
Capital Stock, bonds, notes, debentures or other securities or evidences of
Indebtedness issued by any other Person and all other items that would
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be classified as investments on a balance sheet prepared in accordance with
GAAP. Investments shall exclude extensions of trade credit on commercially
reasonable terms in accordance with normal trade practices. In addition to the
foregoing, any Currency Agreement, Interest Rate Agreement, Commodity Price
Protection Agreement or similar agreement shall constitute an Investment in the
net amount required to be set forth on such Person's balance sheet in accordance
with GAAP. Upon the sale of any portion of the Capital Stock of any Restricted
Subsidiary by the Company or any other Restricted Subsidiary, the Company or
such other Restricted Subsidiary shall be deemed to have made an Investment in
the amount of its remaining Investment, if any, in such Person.
"ISSUE DATE" means the original issue date of the Notes under the Indenture.
"LIEN" means any mortgage or deed of trust, charge, pledge, lien (statutory
or other), privilege, security interest, hypothecation, cessation and transfer,
lease of real property, assignment for security, claim, deposit arrangement, or
preference or priority or other encumbrance upon or with respect to any property
of any kind (including any conditional sale, capital lease or other title
retention agreement, any leases in the nature thereof, and any agreement to give
any security interest), whether real, personal or mixed, movable or immovable,
now owned or hereafter acquired. A Person shall be deemed to own subject to a
Lien any property which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
"MATERIAL SUBSIDIARY" means each Restricted Subsidiary of the Company that
is a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X under
the Securities Act and the Exchange Act (as such regulation is in effect on the
Issue Date).
"NET CASH PROCEEDS" means (a) with respect to any Asset Sale by any Person,
the proceeds thereof (without duplication in respect of all Asset Sales) in the
form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of, or stock or other assets when
disposed of for, cash or Cash Equivalents (except to the extent that such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary) net of (i) brokerage commissions and other reasonable fees and
expenses (including fees and expenses of legal counsel and investment bankers)
related to such Asset Sale, (ii) provisions for all taxes payable as a result of
such Asset Sale, (iii) payments made to retire Indebtedness where payment of
such Indebtedness is secured by the assets or properties the subject of such
Asset Sale, (iv) amounts required to be paid to any Person (other than the
Company or any Restricted Subsidiary) owning a beneficial interest in or having
a Lien on the assets subject to the Asset Sale and (v) appropriate amounts to be
provided by the Company or any Restricted Subsidiary, as the case may be, as a
reserve, in accordance with GAAP, against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale (provided that the amount of any such reserves shall be deemed
to constitute Net Cash Proceeds at the time such reserves shall have been
released or are not otherwise required to be retained as a reserve), all as
reflected in an officers' certificate delivered to the Trustee and (b) with
respect to any issuance or sale of shares of Capital Stock that have been
converted into or exchanged for shares of Capital Stock as referred to under
"--Certain Covenants--Limitation on Restricted Payments," the proceeds of such
issuance or sale in the form of cash or Cash Equivalents including payments in
respect of deferred payment obligations when received in the form of, or stock
or other assets when disposed of for, cash or Cash Equivalents (except to the
extent that such obligations are financed or sold with recourse to the Company
or any Restricted Subsidiary), net of attorney's fees, accountant's fees and
brokerage, consultation, underwriting and other fees and expenses actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"PARI PASSU INDEBTEDNESS" means (a) any Indebtedness of the Company which
ranks PARI PASSU in right of payment to the Notes and (b) with respect to any
Guarantor, Indebtedness which ranks PARI PASSU in right of payment to the
Guarantee of such Guarantor.
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"PERMITTED INDEBTEDNESS" has the meaning set forth under "--Certain
Covenants--Limitation on Indebtedness."
"PERMITTED INVESTMENTS" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c) loans and
advances to employees and sales representatives made in the ordinary course of
business not to exceed $1.0 million in the aggregate at any one time
outstanding; (d) Interest Rate Agreements, Currency Agreements and Commodity
Price Protection Agreements permitted under clause (vii) or (viii) of the second
paragraph under "--Certain Covenants--Limitation on Indebtedness"; (e)
Investments represented by accounts receivable created or acquired in the
ordinary course of business; (f) loans or advances to vendors in the ordinary
course of business in an amount not to exceed $10.0 million at any time; (g)
Investments existing on the Issue Date and any renewal or replacement thereof on
terms and conditions no less favorable in any respect than that existing on the
Issue Date; (h) any Investment to the extent that the consideration therefor is
Qualified Capital Stock of the Company; (i) bonds, notes, debentures or other
securities or other non-cash proceeds received in connection with an Asset Sale
permitted under "--Certain Covenants--Limitation on Sale of Assets," not to
exceed 20% of the total consideration in such Asset Sale; (j) Investments in the
form of the sale (on a "true sale" non-recourse basis) or the servicing of
receivables transferred from the Company or any Guarantor, or transfer of cash,
to a Securitization Subsidiary as a capital contribution or in exchange for
Indebtedness of such Securitization Subsidiary in the ordinary course of
business consistent with past practice on terms customary for such
transactions); (k) Indebtedness permitted under clauses (iv), (v) and (vi) of
the second paragraph under "--Certain Covenants--Limitation on Indebtedness";
and (l) Investments in any of the Notes or any other debt securities of the
Company not otherwise prohibited by the Indenture.
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"PREFERRED STOCK" means, with respect to any Person, Capital Stock of any
class or, classes (however designated) of such Person which is preferred as to
the payment of dividends or distributions, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such Person,
over Capital Stock of any other class of such Person.
"PUBLIC EQUITY OFFERING" has the meaning set forth under "--Optional
Redemption--Optional Redemption upon Public Equity Offering."
"PURCHASE MONEY OBLIGATION" means any Indebtedness secured by a Lien on
assets related to the business of the Company and the Restricted Subsidiaries
and any additions and accessions thereto, which are purchased by the Company or
any Restricted Subsidiary at any time after the Notes are issued; PROVIDED that
(i) the security agreement or conditional sales or other title retention
contract pursuant to which the Lien on such assets is created (collectively, a
"Purchase Money Security Agreement") shall be entered into within 180 days after
the purchase or substantial completion of the construction of such assets and
shall at all times be confined solely to the assets so purchased or acquired,
any additions and accessions thereto and any proceeds therefrom except that, in
the case of land upon which a supermarket is constructed, such Purchase Money
Security Agreement may be entered into within 180 days after the substantial
completion of such supermarket, (ii) at no time shall the aggregate principal
amount of the outstanding Indebtedness secured thereby be increased, except in
connection with the purchase of additions and accessions thereto and except in
respect of fees and other obligations in respect of such Indebtedness and (iii)
(A) the aggregate outstanding principal amount of Indebtedness secured thereby
(determined on a per asset basis in the case of any additions and accessions)
shall not at the time such Purchase Money Security Agreement is entered into
exceed 90% of the purchase price to the Company and its Restricted Subsidiaries
of the assets subject thereto or (B) the Indebtedness secured thereby shall be
with recourse solely to the assets so purchased or acquired, any additions and
accessions thereto and any proceeds therefrom.
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"QUALIFIED CAPITAL STOCK" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"RATING AGENCIES" means (i) Standard & Poor's Ratings Group and (ii) Moody's
Investors Service, Inc. or (iii) if Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. or both shall not make a rating of the Notes publicly
available, a nationally recognized securities rating agency or agencies, as the
case may be, selected by the Company, which shall be substituted for Standard &
Poor's Ratings Group, Moody's Investors Service, Inc. or both, as the case may
be.
"REDEEMABLE CAPITAL STOCK" means any class or series of Capital Stock to the
extent that, either by its terms, by the terms of any security into which it is
convertible or exchangeable, or by contract or otherwise, is or upon the
happening of an event or passage of time would be, required to be redeemed prior
to any Stated Maturity of the principal of the Notes or is redeemable at the
option of the holder thereof at any time prior to such Stated Maturity, or is
convertible into or exchangeable for debt securities at any time prior to such
Stated Maturity.
"REFERENCE PERIOD" has the meaning set forth under the definition of
"Consolidated Fixed Charge Coverage Ratio."
"RESTRICTED PAYMENT" has the meaning set forth under "--Certain
Covenants--Limitation on Restricted Payments."
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a board resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "--Certain Covenants-- Limitations
on Unrestricted Subsidiaries." Any such designation may be revoked by a board
resolution of the Board of Directors of the Company delivered to the Trustee,
subject to the provisions of such covenant.
"REVOCATION" has the meaning set forth under "--Certain
Covenants--Limitations on Unrestricted Subsidiaries."
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules
and regulations promulgated by the Commission thereunder.
"SECURITIZATION SUBSIDIARY" means any Unrestricted Subsidiary of the Company
which engages in no business, activity or transaction other than (i) acquiring
accounts or customer loans receivable of the Company or any Restricted
Subsidiary, (ii) incurring Indebtedness which is without credit recourse and
which is secured solely by, or selling (on a "true sale" non-recourse basis)
interests in, such accounts or customer loans receivable and (iii) immediately
paying all of the proceeds of such Indebtedness or sale of interests to the
Company or such Restricted Subsidiary as payment for accounts or customer loans
receivable of the Company or such Restricted Subsidiary.
"SENIOR INDEBTEDNESS" means, with respect to the Company or any Guarantor,
as applicable, the principal of, premium, if any, and interest on any
Indebtedness of the Company or such Guarantor, as the case may be, whether
outstanding on the Issue Date or thereafter created, incurred or assumed,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to any
Indebtedness of the Company or such Guarantor, as the case may be. Without
limiting the generality of the foregoing, "Senior Indebtedness" will include the
principal of, premium, if any, and interest (including interest that would
accrue but for the filing of a petition initiating any proceeding under any
state or federal bankruptcy laws, whether or not such claim is allowable in such
proceeding) on all obligations of every nature of the Company or such Guarantor,
as the case may be, from time to time owed to the lenders under the Revolving
Credit Facility, including, without limitation, principal of and interest on,
and all fees and expenses payable under the Revolving Credit Facility.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include, to the
extent constituting Indebtedness, (i) Indebtedness evidenced by the Notes or the
Guarantors, (ii) Indebtedness that is subordinate or junior in right of payment
to any Indebtedness of the Company or any Guarantor, (iii) Indebtedness which,
when incurred and without respect to any election under Section 1111(b) of Title
11, United States Code, is without recourse
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to the Company or any Guarantor, (iv) Indebtedness which is represented by
Redeemable Capital Stock, (v) Indebtedness for goods, materials or services
purchased in the ordinary course of business or Indebtedness consisting of trade
payables or other current liabilities (other than any current liabilities owing
under the Revolving Credit Facility or the current portion of any long-term
Indebtedness which would constitute Senior Indebtedness but for the operation of
this clause (v)), (vi) Indebtedness of or amounts owed by the Company or any
Guarantor for compensation to employees or for services rendered to the Company
or such Guarantor, (vii) any liability for federal, state, local or other taxes
owed or owing by the Company or any Guarantor, (viii) Indebtedness of the
Company or any Guarantor to a Subsidiary of the Company, and (ix) that portion
of any Indebtedness which at the time of issuance is issued in violation of the
Indenture.
"STATED MATURITY" means, with respect to any Note or any installment of
interest thereon, the dates specified in such Note as the fixed date on which
the principal of such Note or such installment of interest is due and payable,
and when used with respect to any other Indebtedness, means the date specified
in the instrument governing such Indebtedness as the fixed date on which the
principal of such Indebtedness or any installment of interest is due and
payable.
"SUBORDINATED INDEBTEDNESS" means, with respect to the Company, Indebtedness
of the Company which is expressly subordinated in right of payment to the Notes
or, with respect to any Guarantor, Indebtedness of such Guarantor which is
expressly subordinated in right of payment to the Guarantee of such Guarantor.
"SUBSIDIARY" means, with respect to any Person, (a) any corporation of which
the outstanding shares of Voting Stock having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, by such Person, or (b) any other Person of which at
least a majority of the shares of Voting Stock are at the time, directly or
indirectly, owned by such first named Person.
"SURVIVING PERSON" means, with respect to any Person involved in any
consolidation or merger, or any sale, assignment, conveyance, transfer, lease or
other disposition of all or substantially all of its properties and assets as an
entirety, the Person formed by or surviving such merger or consolidation or the
Person to which such sale, assignment, conveyance, transfer or lease is made.
"TRANSACTION DATE" has the meaning set forth under the definition of
"Consolidated Fixed Charge Coverage Ratio."
"UNRESTRICTED SUBSIDIARY" means (i) each Securitization Subsidiary and its
Subsidiaries and (ii) each Subsidiary of the Company (other than a Guarantor)
designated as such pursuant to and in compliance with the covenant described
under "--Certain Covenants--Limitations on Unrestricted Subsidiaries," and each
Subsidiary of each such Subsidiary of the Company. Any such designation may be
revoked by a board resolution of the Company delivered to the Trustee, subject
to the provisions of such covenant.
"UNUTILIZED NET CASH PROCEEDS" has the meaning set forth under "--Certain
Covenants--Limitation on Sale of Assets."
"VOTING STOCK" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the Board of Directors, managers or trustees of
any Person (irrespective of whether or not, at the time, stock of any other
class or classes shall have, or might have, voting power by reason of the
happening of any contingency).
"WHOLLY-OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary of
which 100% of the outstanding Capital Stock is owned by the Company and/or
another Wholly-Owned Restricted Subsidiary. For purposes of this definition, any
directors' qualifying shares shall be disregarded in determining the ownership
of a Restricted Subsidiary.
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DESCRIPTION OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN THE NOTES
The following is a summary of the material United States federal income tax
consequences of the acquisition, ownership and disposition of the Series A Notes
or the Exchange Notes by a United States Holder (as defined below). This summary
deals only with United States Holders that will hold the Series A Notes or the
Exchange Notes as capital assets. The discussion does not cover all aspects of
federal taxation that may be relevant to, or the actual tax effect that any of
the matters described herein will have on, the acquisition, ownership or
disposition of the Series A Notes or the Exchange Notes by particular investors,
and does not address state, local, foreign or other tax laws. In particular,
this summary does not discuss all of the tax considerations that may be relevant
to certain types of investors subject to special treatment under the federal
income tax laws (such as banks, insurance companies, investors liable for the
alternative minimum tax, individual retirement accounts and other tax-deferred
accounts, tax-exempt organizations, dealers in securities or currencies,
investors that will hold the Series A Notes or the Exchange Notes as part of
straddles, hedging transactions or conversion transactions for federal tax
purposes or investors whose functional currency is not United States Dollars).
Furthermore, the discussion below is based on provisions of the Code, and
regulations, rulings and judicial decisions thereunder as of the date hereof,
and such authorities may be repealed, revoked or modified so as to result in
U.S. federal income tax consequences different from those discussed below.
ANY PERSON CONSIDERING THE PURCHASE, OWNERSHIP, OR DISPOSITION OF EXCHANGE NOTES
SHOULD CONSULT SUCH PERSON'S OWN TAX ADVISOR CONCERNING THE U.S. FEDERAL INCOME
TAX CONSEQUENCES IN LIGHT OF SUCH PERSON'S PARTICULAR SITUATION AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION.
As used herein, the term "United States Holder" means a beneficial owner of
the Series A Notes or the Exchange Notes that is (i) a citizen or resident of
the United States for U.S. federal income tax purposes, (ii) a corporation
created or organized under the laws of the United States or any State thereof,
(iii) a person or entity that is otherwise subject to U.S. federal income tax on
a net income tax basis in respect of income derived from the Series A Notes or
the Exchange Notes, or (iv) a partnership to the extent the interest therein is
owned by a person who is described in clause (i), (ii) or (iii) of this
paragraph.
INTEREST
Interest (including any additional interest paid because of failure to
satisfy the requirements of the Registration Rights Agreement ("Additional
Interest")) paid on a Series A Note or an Exchange Note will be taxable to a
United States Holder as ordinary income at the time it is received or accrued,
depending on the holder's method of accounting for tax purposes.
PURCHASE, SALE, EXCHANGE, RETIREMENT AND REDEMPTION OF THE EXCHANGE NOTES
In general (with certain exceptions described below), a United States
Holder's tax basis in an Exchange Note will equal the price paid for the Series
A Note for which such Exchange Note was exchanged pursuant to the Exchange
Offer, subject to any tax basis adjustments required under the Code. A United
States Holder generally will recognize gain or loss on the sale, exchange,
retirement, redemption or other disposition of a Series A Note or an Exchange
Note (or portion thereof) equal to the difference between the amount realized on
such disposition and the United States Holder's adjusted tax basis in the Series
A Note or the Exchange Note (or portion thereof). Except to the extent
attributable to accrued but unpaid interest (which will be treated as ordinary
income), gain or loss recognized on such disposition of a Series A Note or an
Exchange Note will be long-term capital gain or loss if such Series A Note or
Exchange Note were held for more than one year. For individual United States
Holders, the most favorable tax rates on long-term capital gains will only apply
if such Series A Note or Exchange Note were
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held for more than 18 months as of the date of any sale or exchange thereof. Any
such gain will generally be U.S. source gain.
ORIGINAL ISSUE DISCOUNT
The Series A Notes were offered and sold on April 24, 1998 at a price of
$992 per $1,000 principal amount of the Series A Notes. Although issued at a
discount, for federal income tax purposes the amount of "original issue
discount" on the Series A Notes is considered to be DE MINIMIS and is treated as
zero. These rules will find a discount on issuance to be DE MINIMIS where the
discount on issuance is less than 1/4 of one percent (.25%) of the Series A
Note's stated redemption price at the maturity thereof, multiplied by the number
of complete years to maturity.
BOND PREMIUM
If a United States Holder acquires an Exchange Note (other than pursuant to
this Exchange Offer) or has acquired a Series A Note, in each case, for an
amount more than its redemption price, the Holder may elect to amortize and
deduct from federal taxable income such "bond premium" on a yield to maturity
basis. Once made, such an election applies to all bonds (other than bonds the
interest on which is excludable from gross income) held by the United States
Holder at the beginning of the first taxable year to which the election applies
or which are thereafter acquired by the United States Holder, unless the IRS
consents to a revocation of the election. The basis of a Series A Note or
Exchange Note must be reduced by any amortizable bond premium taken as a
deduction after the acquisition thereof.
MARKET DISCOUNT
The purchase of an Exchange Note or the purchase of a Series A Note other
than at original issue may be affected by the market discount provisions of the
Code. These rules generally provide that, subject to a statutorily defined DE
MINIMIS exception, if a United States Holder purchases an Exchange Note (or
purchased a Series A Note) at a "market discount," as defined below, and
thereafter recognizes gain upon a disposition of the Exchange Note (including
dispositions by gift or redemption), the lesser of such gain (or appreciation,
in the case of a gift) or the portion of the market discount that has accrued
("accrued market discount") while the Exchange Note (or its predecessor Series A
Note, if any) was held by such United States Holder will be treated as ordinary
interest income at the time of disposition rather than as capital gain.
For an Exchange Note or a Series A Note, "market discount" is the excess of
the stated redemption price at maturity over the tax basis immediately after its
acquisition by a United States Holder. Similar to the DE MINIMIS rule discussed
above with respect to "original issue discount," market discount arising upon an
acquisition of a Series A Note or Exchange Note will be considered to be zero if
the discount upon acquisition is less than 1/4 of one percent (.25%) of the
stated redemption price of the Note multiplied by the number of complete years
to maturity (after the United States Holder acquired the Series A Note or
Exchange Note). Market discount generally will accrue ratably during the period
from the date of acquisition to the maturity date of the Series A Note or
Exchange Note, unless the United States Holder elects to accrue such discount on
the basis of the constant yield method. Such an election applies only to the
Exchange Note (or, where applicable, a predecessor Series A Note) with respect
to which it is made and is irrevocable.
In lieu of including the accrued market discount in income at the time of
disposition, a United States Holder of an Exchange Note acquired at a market
discount (or acquired in exchange for a Series A Note acquired at a market
discount) may elect to include the accrued market discount in income currently
either ratably or using the constant yield method. Once made, such an election
applies to all other obligations that the United States Holder purchases at a
market discount during the taxable year for which the election is made to
include accrued market discount during such taxable year and in all subsequent
taxable
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years of the United States Holder, unless the IRS consents to a revocation of
the election. If an election is made to include accrued market discount in
income currently, the adjusted tax basis of an Exchange Note (or, where
applicable, a predecessor Series A Note) in the hands of the United States
Holder will be increased by the accrued market discount thereon as it is
includible in income. A United States Holder of a market discount Exchange Note
who does not elect to include market discount in income currently will generally
be required to defer deductions for interest on borrowings, if any, allocable to
such Exchange Note in an amount not exceeding the accrued market discount on
such Exchange Note until the maturity or disposition of such Exchange Note.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments of interest (including any Additional Interest or original issue
discount, if any) and principal on, and the proceeds of sale or other
disposition of the Series A Notes or the Exchange Notes payable to a United
States Holder may be subject to United States information reporting
requirements. In addition, backup withholding at a rate of 31% may apply to such
payments where a United States Holder fails (i) to provide an accurate taxpayer
identification number or (ii) to report all interest and dividends required to
be shown on its federal income tax returns. Certain United States Holders
(including, among others, corporations) may not be subject to backup
withholding. United States Holders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
EXCHANGE OFFER; REGISTRATION RIGHTS
The Issuers entered into the Registration Rights Agreement with the Initial
Purchasers, pursuant to which the Issuers agreed to file with the Commission the
Exchange Offer Registration Statement on an appropriate form under the
Securities Act with respect to the Exchange Offer for the Exchange Notes and to
offer to the holders of Series A Notes who are able to make certain
representations the opportunity to exchange their Notes for Exchange Notes. If
(i) the Issuers are not permitted to file the Exchange Offer Registration
Statement or to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy, (ii) the Exchange Offer is not
for any other reason consummated within 120 days after the Issue Date, (iii) any
holder of Series A Notes notifies the Company within a specified time period
that (a) due to a change in law or policy it is not entitled to participate in
the Exchange Offer, (b) due to a change in law or policy it may not resell the
Exchange Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by such
holder or (c) it is a broker-dealer and owns Series A Notes acquired directly
from the Issuers or an affiliate of an Issuer or (iv) the holders of a majority
of the Series A Notes may not resell the Exchange Notes acquired by them in the
Exchange Offer to the public without restriction under the Securities Act and
without restriction under applicable blue sky or state securities laws, the
Issuers will file with the Commission the Shelf Registration Statement to cover
resales of the Transfer Restricted Notes (as defined herein) by the holders
thereof. The Issuers will use their best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
Commission. For purposes of the foregoing, "Transfer Restricted Notes" means
each Note until (i) the date on which such Note has been exchanged by a person
other than a broker-dealer for an Exchange Note in the Exchange Offer, (ii)
following the exchange by a broker-dealer in the Exchange Offer of a Series A
Note for an Exchange Note, the date on which such Exchange Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of the prospectus contained in the Exchange Offer Registration
Statement, (iii) the date on which such Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement, (iv) the date on which such Note is distributed to the
public pursuant to Rule 144(k) under the Securities Act (or any similar
provision then in force, but not Rule 144A under the Securities Act), (v) such
Note shall have been otherwise transferred by the holder thereof and a new Note
not bearing a legend restricting further transfer shall have been delivered by
the Issuers and
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subsequent disposition of such Note shall not require registration or
qualification under the Securities Act or any similar state law then in force or
(vi) such Note ceases to be outstanding.
Under existing Commission interpretations, the Exchange Notes would, in
general, be freely transferable after the Exchange Offer without further
registration under the Securities Act; PROVIDED, HOWEVER, that in the case of
broker-dealers participating in the Exchange Offer, a prospectus meeting the
requirements of the Securities Act must be delivered upon resale by such
broker-dealers in connection with resales of the Exchange Notes. The Issuers
have agreed, for a period of 180 days after consummation of the Exchange Offer,
to make available a prospectus meeting the requirements of the Securities Act to
any such broker-dealer for use in connection with any resale of any Exchange
Notes acquired in the Exchange Offer. A broker-dealer which delivers such a
prospectus to purchasers in connection with such resales will be subject to
certain of the civil liability provisions under the Securities Act and will be
bound by the provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
Each holder of Series A Notes that wishes to exchange such Series A Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations, including representations that (i) any Exchange Notes to be
received by it will be acquired in the ordinary course of its business, (ii) it
has no arrangement with any person to participate in the distribution of the
Exchange Notes, (iii) it is not an "affiliate," as defined in Rule 405 of the
Securities Act, of any Issuer, or if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable and (iv) it is not a broker-dealer tendering Series A Notes
which it acquired directly from the Issuers for its own account.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
Exchange Notes. If the holder is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Notes that were acquired as a result
of market-making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes.
The Issuers have agreed to pay all expenses incident to the Exchange Offer
and will indemnify the Initial Purchasers against certain liabilities, including
liabilities under the Securities Act.
The Registration Rights Agreement provides that: (i) unless the Exchange
Offer would not be permitted by applicable law or Commission policy, the Issuers
will file the Exchange Offer Registration Statement with the Commission on or
prior to 30 days after the Issue Date, (ii) unless the Exchange Offer would not
be permitted by applicable law or Commission policy, the Issuers will use their
best efforts to have the Exchange Offer Registration Statement declared
effective by the Commission on or prior to 90 days after the Issue Date, (iii)
unless the Exchange Offer would not be permitted by applicable law or Commission
policy, the Issuers will commence the Exchange Offer and use their best efforts
to issue, on or prior to 30 days after the date on which the Exchange Offer
Registration Statement was declared effective by the Commission, Exchange Notes
in Exchange for all Notes tendered prior thereto in the Exchange Offer and (iv)
if obligated to file the Shelf Registration Statement, the Issuers will use
their best efforts to file prior to the later of (a) 30 days after the Issue
Date or (b) 30 days after such filing obligation arises and use their best
efforts to cause the Shelf Registration Statement to be declared effective by
the Commission on or prior to 60 days after such obligation arises; PROVIDED,
HOWEVER, that if the Issuers have not consummated the Exchange Offer within 120
days of the Issue Date, then the Issuers will file the Shelf Registration
Statement with the Commission on or prior to the 121st day after the Issue Date.
The Issuers shall use their best efforts to keep such Shelf Registration
Statement continuously effective, supplemented and amended until the second
anniversary of the effective date of the Shelf Registration Statement or such
shorter period that will terminate when all the Transfer Restricted Notes
covered by the Shelf Registration Statement have been sold pursuant thereto.
If (i) the Issuers fail to file any of the registration statements required
by the Registration Rights Agreement on or before the date specified for such
filing, (ii) any of such registration statements are not
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declared effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), subject to certain limited
exceptions, (iii) the Issuers fail to consummate the Exchange Offer within 30
days of the Effectiveness Target Date with respect to the Exchange Offer
Registration Statement, or (iv) the Shelf Registration Statement or the Exchange
Offer Registration Statement is declared effective but thereafter, subject to
certain limited exceptions, ceases to be effective or usable in connection with
the Exchange Offer or resales of Transfer Restricted Notes, as the case may be,
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (i) through (iv) above, a "Registration Default"),
then the Issuers will pay liquidated damages ("Liquidated Damages") in cash to
each holder of Transfer Restricted Notes, with respect to the first 90-day
period (or portion thereof) while a Registration Default is continuing
immediately following the occurrence of such Registration Default in an amount
equal to 0.25% per annum of the principal amount of the Series A Notes. The
amount of Liquidated Damages will increase by an additional 0.25% per annum of
the principal amount of the Series A Notes for each subsequent 90-day period (or
portion thereof) while a Registration Default is continuing until all
Registration Defaults have been cured, up to a maximum amount of 1.00% of the
principal amount of the Series A Notes. Following the cure of a particular
Registration Default, the accrual of Liquidated Damages with respect to such
Registration Default will cease.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which will be made available to prospective participants in
the Exchange Offer upon request to the Company.
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BOOK-ENTRY; DELIVERY AND FORM
The Exchange Notes will be represented by a single, permanent global note in
definitive, fully registered book-entry form (the "Global Security") which will
be registered in the name of a nominee of DTC and deposited on behalf of holders
of the Exchange Notes represented thereby with a custodian for DTC for credit to
the respective accounts of the purchasers (or to such other accounts as they may
direct) at DTC.
Holders of Exchange Notes who elect to take physical delivery of their
certificates instead of holding their interest through the Global Security (and
which are thus ineligible to trade through DTC) (collectively referred to herein
as the "Non-Global Purchasers") will be issued in registered form ("Certificated
Securities"). Upon the transfer of any Certificated Security, such Certificated
Security will, unless the transferee requests otherwise or the Global Security
has previously been exchanged in whole for Certificated Securities, be exchanged
for an interest in the Global Security upon delivery of appropriate
certifications to the Trustee.
THE GLOBAL SECURITY. The Company expects that pursuant to procedures
established by DTC (a) upon deposit of the Global Security, DTC or its custodian
will credit on its internal system portions of the Global Security which shall
be comprised of the corresponding respective amount of the Global Security to
the respective accounts of persons who have accounts with such depositary and
(b) ownership of the Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC or its nominee
(with respect to interests of Participants (as defined below) and the records of
Participants (with respect to interests of persons other than Participants).
Ownership of beneficial interests in the Global Security will be limited to
persons who have accounts with DTC ("Participants") or persons who hold
interests through Participants. Holders of Exchange Notes may hold their
interests in the Global Security directly through DTC if they are Participants
in such system, or indirectly through organizations which are Participants in
such system.
So long as DTC or its nominee is the registered owner or holder of any of
the Exchange Notes, DTC or such nominee will be considered the sole owner or
holder of such Exchange Notes represented by such Global Security for all
purposes under the Indenture and under the Exchange Notes represented thereby.
No beneficial owner of an interest in the Global Security will be able to
transfer such interest except in accordance with the applicable procedures of
DTC in addition to those provided for under the Indenture.
Payments of the principal of or premium and interest (including Liquidated
Damages) on the Exchange Notes represented by the Global Security will be made
to DTC or its nominee, as the case may be, as the registered owner thereof. None
of the Company, the Trustee or any paying agent under the Indenture will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global
Securities or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of or premium and interest (including Liquidated Damages) on the
Exchange Notes represented by the Global Security, will credit Participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the Global Security as shown on the records of DTC or its nominee.
The Company also expects that payments by Participants to owners of beneficial
interests in the Global Security held through such Participants will be governed
by standing instructions and customary practice as is now the case with
securities held for the accounts of customers registered in the names of
nominees for such customers. Such payment will be the responsibility of such
Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of a Certificated Security for any reason, including
to sell Notes to persons in states which require physical delivery of such
securities or
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to pledge such securities, such holder must transfer its interest in the Global
Security in accordance with the normal procedures of DTC and in accordance with
the procedures set forth in the Indenture.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below) only at the direction of one or more
Participants to whose account the DTC interests in the Global Security are
credited and only in respect of the aggregate principal amount as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global
Security for Certificated Securities, which it will distribute to its
Participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Security among Participants of
DTC, DTC is under no obligation to perform such procedures, and such procedures
may be discontinued at any time. None of the Company, the Trustee or the Paying
Agent will have any responsibility for the performance by DTC or its direct or
indirect Participants of their respective obligations under the rules and
procedures governing their operations.
CERTIFICATED SECURITIES. Interests in the Global Security will be exchanged
for Certificated Securities if (i) DTC is at any time unwilling or unable to
continue as depositary for the Global Security, or DTC ceases to be a "Clearing
Agency" registered under the Exchange Act, and a successor depositary is not
appointed by the Company within 90 days or (ii) an Event of Default has occurred
and is continuing with respect to the Exchange Notes. Upon the occurrence of any
of the events described in the preceding sentence, the Company will cause the
appropriate Certificated Securities to be delivered to the record holders
thereof.
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PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for Series A Notes where such Series A Notes were acquired
as a result of market-making activities or other trading activities. The Company
has agreed that it will make this Prospectus, as amended or supplemented,
available to any Participating Broker-Dealer for use in connection with any such
resale and Participating Broker-Dealers shall be authorized to deliver this
Prospectus in connection with the sale or transfer of the Exchange Notes. In
addition, until October 4, 1998 (90 days after the date of this Prospectus), all
dealers effecting transactions in the Exchange Notes may be required to deliver
a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. Exchange Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be sold
from time to time, in one or more transactions in the over-the-counter market,
in negotiated transactions, through the writing of options on the Exchange Notes
or a combination of such methods of resale, at market prices prevailing at the
time of resale, at prices related to such prevailing market prices or at
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such Participating Broker-Dealer that
resells the Exchange Notes that were received by it for its own account pursuant
to the Exchange Offer. Any broker or dealer that participates in a distribution
of such Exchange Notes may be deemed to be an "underwriter" within the meaning
of the Securities Act and any profit on any such resale of Exchange Notes and
any commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
The Company will promptly send additional copies of this Prospectus and any
amendment or supplement of this Prospectus to any Participating Broker-Dealer
that requests such documents in the Letter of Transmittal. See "The Exchange
Offer."
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
Exchange Notes offered hereby will be passed upon for the Company by Oppenheimer
Wolff & Donnelly LLP, Minneapolis, Minnesota. Richard G. Lareau, a partner of
Oppenheimer Wolff & Donnelly LLP, serves on the Board of Directors of the
Company.
EXPERTS
The consolidated financial statements of the Company and subsidiaries for
each of the three years in the period ended January 3, 1998, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
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NASH-FINCH COMPANY
INDEX TO CONSOLIDATED AND UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors............................................ F-2
Consolidated Statements of Earnings/Loss for the Three Years Ended January
3, 1998................................................................. F-3
Consolidated Balance Sheets as of January 3, 1998 and December 28, 1996... F-4
Consolidated Statements of Cash Flows for the Three Years Ended January 3,
1998.................................................................... F-5
Consolidated Statements of Stockholders' Equity for the Three Years Ended
January 3, 1998......................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Statements of Earnings (Loss) for the Twelve Weeks
Ended March 28, 1998 and March 22, 1997................................. F-27
Condensed Consolidated Balance Sheets as of March 28, 1998 and March 22,
1997.................................................................... F-28
Condensed Consolidated Statements of Cash Flows for the Twelve Weeks Ended
March 28, 1998 and March 22, 1997....................................... F-29
Condensed Consolidated Statements of Stockholders' Equity for the Twelve
Weeks Ended March 28, 1998 and March 22, 1997........................... F-30
Notes to Condensed Consolidated Financial Statements...................... F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Nash Finch Company:
We have audited the accompanying consolidated balance sheets of Nash Finch
Company and subsidiaries as of January 3, 1998 and December 28, 1996, and the
related consolidated statements of earnings/loss, stockholders' equity, and cash
flows for each of the three years in the period ended January 3, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Nash Finch
Company and subsidiaries at January 3, 1998 and December 28, 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 3, 1998, in conformity with generally
accepted accounting principles.
[LOGO]
Minneapolis, Minnesota
March 26, 1998
F-2
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS/LOSS
FISCAL YEARS ENDED JANUARY 3, 1998,
DECEMBER 28, 1996 AND DECEMBER 30, 1995.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
53 WEEKS 52 WEEKS 52 WEEKS
------------ ------------ ------------
<S> <C> <C> <C>
INCOME:
Net sales............................................................. $ 4,319,095 3,322,666 2,831,114
Other revenues........................................................ 72,507 52,819 57,722
------------ ------------ ------------
Total revenues...................................................... 4,391,602 3,375,485 2,888,836
COST AND EXPENSES:
Cost of sales......................................................... 3,826,377 2,932,709 2,469,841
Selling, general and administrative, and other operating expenses..... 453,645 359,456 350,201
Special charges....................................................... 31,272 -- --
Depreciation and amortization......................................... 47,697 34,759 29,406
Interest expense...................................................... 32,845 14,894 10,793
------------ ------------ ------------
Total costs and expenses............................................ 4,391,836 3,341,818 2,860,241
Earnings (loss) before income taxes................................. (234) 33,667 28,595
Income taxes............................................................ 994 13,635 11,181
------------ ------------ ------------
Net earnings (loss)..................................................... $ (1,228) 20,032 17,414
------------ ------------ ------------
Basic earnings (loss) per share......................................... $ (0.11) 1.83 1.60
------------ ------------ ------------
Diluted earnings (loss) per share....................................... $ (0.11) 1.81 1.60
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1998 AND DECEMBER 28, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 933 921
Accounts and notes receivable, net........................ 173,962 206,062
Inventories............................................... 287,801 293,458
Prepaid expenses.......................................... 22,582 20,492
Deferred tax assets....................................... 9,072 4,663
--------- --------
Total current assets.................................... 494,350 525,596
Investments in affiliates................................... 7,679 10,300
Notes receivable, noncurrent................................ 23,092 21,652
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 31,229 33,753
Buildings and improvements................................ 137,070 148,227
Furniture, fixtures and equipment......................... 306,762 295,147
Leasehold improvements.................................... 60,578 54,925
Construction in progress.................................. 28,485 7,543
Assets under capitalized leases........................... 25,048 26,105
--------- --------
589,172 565,700
Less accumulated depreciation and amortization............ (312,939) (293,845)
--------- --------
Net property, plant and equipment....................... 276,233 271,855
Intangible assets, net...................................... 70,732 80,312
Investment in direct financing leases....................... 19,094 22,011
Deferred tax asset, net..................................... 2,622 4,076
Other assets................................................ 11,081 9,675
--------- --------
Total assets............................................ $ 904,883 945,477
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Outstanding checks........................................ $ 36,271 32,492
Short-term debt payable to banks.......................... 11,300 16,171
Current maturities of long-term debt and capitalized lease
obligations............................................. 7,964 7,795
Accounts payable.......................................... 177,548 183,501
Accrued expenses.......................................... 60,599 54,130
Income taxes.............................................. 737 2,999
--------- --------
Total current liabilities............................... 294,419 297,088
Long-term debt.............................................. 325,489 361,819
Capitalized lease obligations............................... 38,517 41,832
Deferred compensation....................................... 6,768 7,476
Other....................................................... 14,072 4,401
STOCKHOLDERS' EQUITY:
Preferred stock--no par value
Authorized 500 shares; none issued...................... -- --
Common stock of $1.66 2/3 par value
Authorized 25,000 shares; issued shares (1997--11,575;
1996--11,574).......................................... 19,292 19,290
Additional paid-in capital................................ 17,648 16,816
Foreign currency translation adjustment--net of a $633
deferred tax benefit.................................... -- (950)
Restricted stock.......................................... (391) (500)
Retained earnings......................................... 190,984 200,322
--------- --------
227,533 234,978
Less cost of 252 shares and 307 shares of common stock in
treasury, respectively.................................... (1,915) (2,117)
--------- --------
Total stockholders' equity.............................. 225,618 232,861
--------- --------
Total liabilities and stockholders' equity.............. $ 904,883 945,477
--------- --------
--------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 3, 1998,
DECEMBER 28, 1996 AND DECEMBER 30, 1995.
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss)............................... $ (1,228) 20,032 17,414
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Special charges................................. 28,749 -- --
Depreciation and amortization................... 47,697 34,759 29,406
Provision for bad debts......................... 5,055 1,893 3,997
Provision for (recovery from) losses on closed
lease locations................................ 1,722 (458) 1,361
Deferred income taxes........................... (2,955) (2,278) (4,187)
Deferred compensation........................... (708) (149) (901)
Loss of equity investments...................... 469 616 (501)
Other........................................... 2,003 326 (157)
Changes in operating assets and liabilities:
Accounts and notes receivable................... (3,744) (12,544) 8,115
Inventories..................................... 19,821 14,021 14,680
Prepaid expenses................................ (1,201) (349) (3,441)
Accounts payable and outstanding checks......... (3,174) (24,245) 15,339
Accrued expenses................................ (2,512) 2,219 2,160
Income taxes.................................... (2,262) (967) 2,508
-------- -------- -------
Net cash provided by operating activities..... 87,732 32,876 85,793
-------- -------- -------
INVESTING ACTIVITIES:
Dividends received.............................. 1,600 -- 890
Disposals of property, plant and equipment,
net............................................ 16,721 9,169 14,858
Additions to property, plant and equipment,
excluding capital leases....................... (67,725) (51,333) (33,264)
Businesses acquired, net of cash acquired....... (17,863) (257,868) --
Investment in an affiliate...................... -- (2,500) (1,379)
Loans to customers.............................. (18,816) (4,997) (9,199)
Payments from customers on loans................ 14,080 4,713 8,788
Sale of receivables............................. 37,000 3,402 13,744
Other........................................... (739) (2,896) (137)
-------- -------- -------
Net cash used in investing activities......... (35,742) (302,310) (5,699)
-------- -------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt.................... -- 30,000 352
(Payments) proceeds from revolving debt......... (30,000) 244,000 --
Dividends paid.................................. (8,110) (8,288) (8,048)
Payments of short-term debt..................... (4,871) 1,171 (41,400)
Payments of long-term debt...................... (6,009) (21,946) (5,568)
Payments of capitalized lease obligations....... (3,467) (717) (540)
Other........................................... 479 111 56
-------- -------- -------
Net cash (used in) provided by financing
activities................................... (51,978) 244,331 (55,148)
-------- -------- -------
Net increase (decrease) cash.................. $ 12 (25,103) 24,946
-------- -------- -------
-------- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED JANUARY 3, 1998,
DECEMBER 28, 1996 AND DECEMBER 30, 1995.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY TREASURY STOCK TOTAL
--------------- PAID-IN RETAINED TRANSLATION RESTRICTED ---------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT STOCK SHARES AMOUNT EQUITY
------ ------- ---------- -------- ---------- ---------- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994... 11,224 $18,706 11,977 179,212 (572) -- (349) $(3,054) 206,269
Net earnings................... -- -- -- 17,414 -- -- -- -- 17,414
Dividend declared of $.74 per
share........................ -- -- -- (8,048) -- -- -- -- (8,048)
Treasury stock issued upon
exercise of options.......... -- -- 36 -- -- -- 3 20 56
Foreign currency translation
adjustment--net of a $252
deferred tax benefit......... -- -- -- -- (378) -- -- -- (378)
------ ------- ---------- -------- --- --- ------ ------- -------------
BALANCE AT DECEMBER 30, 1995... 11,224 18,706 12,013 188,578 (950) -- (346) (3,034 ) 215,313
Net earnings................... -- -- -- 20,032 -- -- -- -- 20,032
Dividend declared of $.75 per
share........................ -- -- -- (8,288) -- -- -- -- (8,288)
Shares issued in connection
with acquisition of a
business..................... 350 584 5,064 -- -- -- -- 5,648
Treasury stock issued upon
exercise of options.......... -- -- 47 -- -- 6 42 89
Issuance of restricted stock... -- -- (308) -- -- (524) 40 995 163
Amortized compensation under
restricted stock plan........ -- -- -- -- -- 24 -- -- 24
Treasury stock purchased....... -- -- -- -- -- -- (7) (120 ) (120)
------ ------- ---------- -------- --- --- ------ ------- -------------
BALANCE AT DECEMBER 28, 1996... 11,574 19,290 16,816 200,322 (950) (500) (307) (2,117 ) 232,861
Net earnings (loss)............ -- -- -- (1,228) -- -- -- -- (1,228)
Dividend declared of $.72 per
share........................ -- -- -- (8,110) -- -- -- -- (8,110)
Treasury stock issued upon
exercise of options.......... -- -- 354 -- -- -- 29 143 497
Amortized compensation under
restricted stock plan........ -- -- -- -- -- 29 -- -- 29
Repayment of notes receivable
from holders of restricted
stock........................ -- -- -- -- -- 80 -- -- 80
Distribution of stock pursuant
to performance awards........ -- -- 460 -- -- -- 30 148 608
Treasury stock purchased....... -- -- -- -- -- -- (4) (89 ) (89)
Foreign currency translation
adjustment................... -- -- -- -- 950 -- -- -- 950
Other.......................... 1 2 18 -- -- -- -- -- 20
------ ------- ---------- -------- --- --- ------ ------- -------------
BALANCE AT JANUARY 3, 1998..... 11,575 $19,292 17,648 190,984 -- (391) (252) $(1,915) 225,618
------ ------- ---------- -------- --- --- ------ ------- -------------
------ ------- ---------- -------- --- --- ------ ------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ACCOUNTING POLICIES
FISCAL YEAR
Nash Finch Company's fiscal year ends on the Saturday nearest to December
31. Fiscal year 1997 consisted of 53 weeks, while 1996 and 1995 consisted of 52
weeks.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of Nash Finch
Company (the Company), its majority-owned subsidiaries and the Company's share
of net earnings or losses of 50% or less owned companies. All material
intercompany accounts and transactions have been eliminated in the consolidated
financial statements. Certain reclassifications were made to prior year amounts
to conform with 1997 presentation.
CASH AND CASH EQUIVALENTS
In the accompanying financial statements, and for purposes of the statements
of cash flows, cash and cash equivalents include cash on hand and short-term
investments with original maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. At both January 3,
1998 and December 28, 1996, approximately 85% of the Company's inventories are
valued on the last-in, first-out (LIFO) method. During fiscal 1997, the Company
recorded a LIFO charge of $1.5 million compared to $1.6 million in 1996. The
remaining inventories are valued on the first-in, first-out (FIFO) method. If
the FIFO method of accounting for inventories had been used, inventories would
have been $43.1 million and $41.6 million higher at January 3, 1998 and December
28, 1996, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Assets under capitalized
leases are recorded at the present value of future lease payments or fair market
value, whichever is lower. Expenditures which improve or extend the life of the
respective assets are capitalized while maintenance and repairs are expensed as
incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
An impairment loss is recognized whenever events or changes in circumstances
indicate that the carrying amount of an asset is not recoverable. In applying
Statement of Financial Accounting Standards ("SFAS") No. 121, assets are grouped
and evaluated at the lowest level for which there are identifiable cash flows
that are largely independent of the cash flows of other groups of assets. The
Company has generally identified this lowest level to be individual stores;
however, there are limited circumstances where, for evaluation purposes, stores
are considered with the distribution center they support. The Company considers
historical performance and future estimated results in its evaluation of
potential impairment. If the carrying amount of the asset exceeds estimated
expected undiscounted future cash flows, the Company measures the amount of the
impairment by comparing the carrying amount of the asset to its fair value,
generally measured by discounting expected future cash flows at the rate the
Company utilizes to evaluate potential investments.
F-7
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist primarily of covenants not to compete and
goodwill, and are carried at cost less accumulated amortization. Costs are
amortized over the estimated useful lives of the related assets ranging from
2-25 years. Amortization expense charged to operations for fiscal years ended
January 3, 1998, December 28, 1996, and December 30, 1995 was $5.9 million, $5.2
million and $1.8 million, respectively. The accumulated amortization of
intangible assets was $13.5 million and $10.1 million at January 3, 1998 and
December 28, 1996, respectively. The carrying value of intangible assets is
reviewed for impairment annually and/or when factors indicating impairment are
present using an undiscounted cash flow assumption.
DEPRECIATION AND AMORTIZATION
Property, plant and equipment are depreciated on a straight-line basis over
the estimated useful lives of the assets which generally range from 10-40 years
for buildings and improvements and 3 to 10 years for furniture, fixtures and
equipment. Leasehold improvements and capitalized leases are amortized to
expense on a straight-line basis over the term of the lease.
ADVERTISING
Advertising costs included in selling, general and administrative, and other
operating expenses, are expensed as incurred and were $5.0 million, $5.9 million
and $8.5 million in 1997, 1996 and 1995, respectively.
INCOME TAXES
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, EARNINGS PER SHARE. SFAS No. 128 replaced the previously reported primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, contingent, and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods have
been presented, and where necessary, restated to conform to the SFAS No. 128
requirements.
STOCK OPTION PLANS
In accordance with the provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the Company has chosen to continue to apply Accounting
Principles Board Opinion No. 25, (APB 25) ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES and related interpretations in accounting for its stock option plans,
and, accordingly, does not recognize compensation costs, if the option price
equals or exceeds market price at date of grant. Note (7) of Notes to
Consolidated Financial Statements contains a summary
F-8
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ACCOUNTING POLICIES (CONTINUED)
of the pro forma effects to reported net income and earnings per share had the
Company elected to recognize compensation costs as encouraged by SFAS No. 123.
FOREIGN CURRENCY TRANSLATION
Adjustments resulting from the translation of assets and liabilities of a
foreign investment are included in stockholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME
and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. SFAS No. 130 establishes standards for the reporting and
presentation of comprehensive income and its components. SFAS No. 131
establishes standards for defining operating segments and the reporting of
certain information regarding operating segments. Because these statements only
impact how financial information is disclosed in interim and annual reports, the
adoption will have no impact to the Company's financial condition or results of
operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED FOR OR OBTAINED FOR INTERNAL USE. The SOP is effective for
the Company beginning on January 1, 1999, however, early adoption is permitted.
The SOP will require the capitalization of certain costs incurred after the date
of adoption in connection with developing or obtaining software for internal
use. Some, but not all, of the costs that are required to be capitalized by the
SOP are currently being expensed by the Company. The Company has not yet
assessed what the impact of the SOP will be on the Company's future earnings or
financial position.
(2) ACQUISITIONS
The following acquisitions have been accounted for by the purchase method of
accounting and accordingly, the operating results of the newly acquired
businesses have been included in the consolidated operating results of the
Company since their respective dates of acquisition.
On June 9, 1997, the Company acquired the business and certain assets from
United-A.G., a cooperative wholesale grocery distributor located in Omaha, for
approximately $17.9 million in cash. Real estate which was not included in the
purchase price, is being leased under a five-year agreement from a third party.
This operating lease contains an option to purchase the property at fair market
value, or a renewal option for an additional five years at the end of the
initial lease term. In addition, the Company has guaranteed a residual value for
the leased real estate. United-A.G., with pre-acquisition annual revenues of
approximately $200 million, served stores in Nebraska, Kansas, Iowa, Colorado
and South Dakota.
F-9
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS (CONTINUED)
On November 7, 1996, the Company completed a tender offer to purchase the
outstanding shares of common stock of Super Food for $15.50 per share in cash,
with 10.6 million shares tendered at that date, representing approximately 96
percent of the outstanding common stock of Super Food. Super Food is a wholesale
grocery distributor based in Dayton, Ohio with annual revenues of approximately
$1.2 billion. The fair value of the assets acquired, including goodwill, was
$321.9 million, and liabilities assumed totaled $150.0 million. Goodwill of
$29.8 million and other intangibles of $7.1 million are being amortized over 25
years on a straight line basis.
On August 5, 1996, the Company acquired all of the outstanding stock of T.
J. Morris, a full line food wholesaler located in Statesboro, Georgia, with
annual revenues of $110.0 million. In exchange for the T. J. Morris stock, the
Company issued 350,764 shares of its common stock, valued at approximately $5.7
million, of which 25,002 shares are held in escrow at January 3, 1998. Such
shares were issued January 8, 1998. The excess of purchase price over fair value
of the assets acquired resulted in goodwill of approximately $3.1 million which
is being amortized on a straight line basis over a 15-year period.
On January 2, 1996, the Company acquired substantially all of the business
and assets of MDV located in Norfolk, Virginia for approximately $56.0 million
in cash and the assumption of certain liabilities totaling approximately $54.0
million. MDV, with revenues of approximately $350.0 million, is a major
distributor of grocery products to military commissaries in the eastern United
States and Europe. The purchase price exceeded the fair value of the net assets
acquired by approximately $43 million. The resulting goodwill is being amortized
on a straight line basis over 15 years.
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations as if the above operations had been acquired
as of the beginning of the periods presented, after including the impact of
certain adjustments such as amortization of intangibles, increased interest
expense on acquisition debt and related income tax effects:
PRO FORMA INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net revenues................................. $4,499,543 4,713,664 4,589,362
Earnings (loss) before income taxes.......... (36) 23,790 32,291
Net income (loss)............................ (247) 14,120 19,060
Basic earnings (loss) per share.............. $ (.02) 1.28 1.70
---------- --------- ---------
---------- --------- ---------
</TABLE>
The pro forma information is provided for informational purposes only. It is
based on historical information and does not necessarily reflect results that
would have occurred had the acquisitions been made as of those dates or results
which may occur in the future.
(3) SPECIAL CHARGES
During the third quarter of 1997, the Company recorded special charges
totaling $31.3 million consisting of $12.6 million in asset writedowns and $6.5
million and $9.7 million classified as accrued expenses and other noncurrent
liabilities, respectively.
F-10
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SPECIAL CHARGES (CONTINUED)
The aggregate special charges include $14.5 million for the consolidation of
selected warehouses. This charge contains provisions for non-cancelable lease
obligations, expected losses on disposals of tangible assets, and other
continuing occupancy costs. Also included are employee severance costs
consistent with existing practices and the unamortized portion of goodwill for
one of the locations.
Also, related to wholesale operations, the special charges include $2.5
million of integration costs, incurred in the third quarter, associated with the
acquisition of the business and certain assets from United-A.G.
In retail operations, the special charges relate to the closing or
consolidation of fourteen, primarily leased stores. The special charges include
a $5.2 million provision for continuing non-cancelable lease obligations,
anticipated losses on disposals of tangible assets, abandonment of certain
leaseholds and the write-off of intangibles. The time frame for individual store
closings will vary but should be completed by the first quarter of fiscal 1999.
For 1997, the retail units included in the provision had aggregate sales and
pretax losses of $82.9 million and $2.7 million, respectively, compared with
$88.3 million and $1.8 million for 1996.
The aggregate special charges contain a provision of $5.4 million for asset
impairment of seven retail stores. Declining market share due to increasing
competition, deterioration of operating performance in the third quarter, and
forecasted future results that were less than previously planned were the
factors leading to the impairment determination. The impaired assets covered by
the charge primarily include real estate, leasehold improvements and, to a
lesser extent, goodwill related to two of the stores.
An asset impairment charge of $1.0 million relating to agricultural assets
was also recorded against several farming operations of Nash DeCamp, the
Company's produce marketing subsidiary. The impairment determination was based
on recent downturns in the market for certain varieties of fruit. The impairment
resulted from anticipated future operating losses and insufficient projected
cash flows from agricultural production of these products.
Other special charges aggregating $2.8 million consist primarily of $.9
million related to the abandonment of current system software which is being
replaced by the Company's HORIZONS project, and a loss of $.6 million realized
on the sale of the Company's 22.4% equity investment in Alfa Trading Company, a
Hungarian food wholesaler. The remaining special charges relate principally to
the write down of idle real estate held for sale to current market values.
During the fourth quarter of 1997, rents totaling $198,000 were charged to
reserves established as a result of the special charges recorded in the third
quarter. Reserves related to the closing or consolidation of wholesale and
retail operations in the amount of $6.3 million and $9.7 million are included in
accrued expense and other liabilities, respectively, on the balance sheet at
January 3, 1998.
F-11
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable at the end of fiscal years 1997 and 1996 are
comprised of the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Customer notes receivable--current portion.................... $ 9,256 8,090
Customer accounts receivable.................................. 157,737 197,336
Other receivables............................................. 26,970 21,158
Allowance for doubtful accounts............................... (20,001) (20,522)
-------- -------
Net current accounts and notes receivable..................... $173,962 206,062
-------- -------
-------- -------
Noncurrent customer notes receivable.......................... 29,759 29,223
Allowance for doubtful accounts............................... (6,667) (7,571)
-------- -------
Net noncurrent notes receivable............................... $ 23,092 21,652
-------- -------
-------- -------
</TABLE>
Operating results include bad debt expense totaling $5.1 million, $1.9
million and $4.0 million during fiscal years 1997, 1996 and 1995, respectively.
On January 1, 1997, the Company adopted the requirements of SFAS No. 125,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCED ASSETS AND EXTINGUISHMENTS OF
LIABILITIES. SFAS No. 125 establishes accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on the application of a financial components approach which focuses on
control of the assets and extinguishments of liabilities that exist after the
transfer. The implementation of SFAS No. 125 did not have a material effect on
the Company's 1997 consolidated financial statements.
On December 29, 1997, a Receivables Purchase Agreement (the "Agreement") was
executed by the Company, Nash Finch Funding Corporation (NFFC), a wholly-owned
subsidiary of the Company, and a certain third party purchaser (the "Purchaser")
pursuant to a securitization transaction. On this date the Company sold $44.6
million of accounts receivable on a non-recourse basis to NFFC. NFFC sold $37.0
million of its undivided interest in such receivables to the Purchaser, subject
to specified collateral requirements. NFFC maintains a variable undivided
interest in these receivables and is subject to losses on its share of the
receivables and, accordingly, maintains an allowance for doubtful accounts. In
applying the provisions of SFAS No. 125, no gain or loss resulted on the
transaction. The Agreement is a five-year $50 million revolving receivable
purchase facility allowing the Company to sell additional receivables to NFFC,
and NFFC to sell, from time to time, variable undivided interests in these
receivables to the Purchaser.
In 1995, the Company entered into an agreement with a financial institution
which allowed the Company to sell on a revolving basis customer notes
receivable. Although the agreement lapsed on December 28, 1996, the notes, which
have maturities through the year 2002, were sold at face value with recourse. As
a result, the Company continues to be responsible for collection of the notes
and remits the principal plus a floating rate of interest to the purchaser on a
monthly basis. Proceeds from the sale of the notes receivable were used to fund
working capital requirements.
The remaining balances of such sold notes receivable totaled $9.1 million
and $14.0 million at January 3, 1998 and December 28, 1996, respectively. The
Company is contingently liable should these notes become uncollectible.
F-12
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) ACCOUNTS AND NOTES RECEIVABLE (CONTINUED)
Substantially all notes receivable are based on floating interest rates
which adjust to changes in market rates. As a result, the carrying value of
notes receivable approximates market value.
(5) LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt at the end of the fiscal years 1997 and 1996 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Variable rate--revolving credit agreement.................... $214,000 244,000
Industrial development bonds, 5.4% to 7.8% due in various
installments through 2009.................................. 4,370 4,885
Term loans, 7.5% to 9.9% due in various installments through
2008....................................................... 107,528 112,250
Notes payable and mortgage notes, 9.3% to 12.0% due in
various installments through 2003.......................... 5,975 6,747
-------- --------
$331,873 367,882
Less current maturities...................................... 6,384 6,063
-------- --------
$325,489 361,819
-------- --------
-------- --------
</TABLE>
During 1997, the Company entered into four swap agreements, with separate
financial institutions. The agreements which are based on a notional amount of
$30.0 million each, call for an exchange of interest payments with the Company
receiving payments based on a London Interbank Offered Rate (LIBOR) floating
rate and making payments based on a fixed rate, ranging from 6.21% to 6.54%,
without an exchange of the notional amount upon which the payments are based.
The differential to be paid or received from counter-parties as interest rates
change is included in other liabilities or assets, with the corresponding amount
accrued and recognized as an adjustment of interest expense related to the debt.
The Company is exposed to credit loss in the event of non-performance by
counter-parties to these financial instruments, but it does not expect any
counter-party to fail to meet its obligations. The amount of such credit
exposure is generally the unrealized gains in such contracts. To manage credit
risks, the Company selects counter-parties based on credit ratings, limits
exposure to a single counter-party and monitors the market position with each
counter-party.
The fair values of the swap agreements are not material and have not been
recognized in the financial statements at January 3, 1998. Gains and losses on
terminations of interest rate swap agreements are deferred as an adjustment to
the carrying amount of the outstanding debt and amortized as an adjustment to
the interest expense related to the debt over the remaining term of the original
contract life of the terminated swap agreement. In the event of the early
extinguishment of a designated debt obligation, any realized or unrealized gain
or loss from the swap would be recognized in income coincident with the
extinguishment. Any swap agreements that are not designated with outstanding
debt are recorded as an asset or liability at fair value, with changes in fair
value recorded in other income or expense.
On October 8, 1996, the Company entered into a $500 million senior unsecured
revolving credit facility (the "Revolving Credit Facility") with two lead banks.
The agreement calls for a scheduled reduction of the facility within two years,
to $400 million, with the remaining balance maturing five years from closing.
During 1997, the Company exercised its right to reduce the Revolving Credit
Facility to
F-13
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED)
$360 million. Borrowings under this agreement bear interest at variable rates
equal to LIBOR plus .30%. In addition, the Company pays commitment fees of .175%
on the entire facility both used and unused. The average borrowing rate during
the period was 6.0%.
The Revolving Credit Facility contains covenants which, among other matters,
limits the Company's ability to incur indebtedness, buy and sell assets, and
requires compliance to predetermined ratios related to net worth, debt to equity
and interest coverage.
At January 3, 1998, land, buildings and other assets pledged to secure
outstanding mortgage notes and obligations under industrial development bond
issues have a depreciated cost of approximately $4.8 million and $4.3 million,
respectively.
Aggregate annual maturities of long-term debt for the five fiscal years
after January 3, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................... $ 6,384
1999................................................................... 1,844
2000................................................................... 33,576
2001................................................................... 240,394
2002 and thereafter.................................................... $ 49,675
</TABLE>
Interest paid was $31.6 million, $14.3 million and $11.4 million, for the
fiscal years 1997, 1996 and 1995, respectively.
In addition, the Company maintains informal lines of credit at various
banks. At January 3, 1998, unused uncommitted lines of credit amounted to $13.7
million.
Based on borrowing rates currently available to the Company for long-term
financing with similar terms and average maturities, the fair value of long-term
debt, including current maturities, utilizing discounted cash flows is $340.3
million.
(6) INCOME TAXES
Income tax expense for fiscal years 1997, 1996 and 1995 is made up of the
following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Current:
Federal............................................... $ 3,293 12,125 12,244
State................................................. 692 2,354 2,872
Deferred:
Federal............................................... (2,644) (576) (3,145)
State................................................. (347) (268) (790)
------- ------ ------
Total............................................... $ 994 13,635 11,181
------- ------ ------
------- ------ ------
</TABLE>
F-14
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
Total income tax expense represents effective tax rates of 425.4%, 40.5% and
39.1% for the fiscal years 1997, 1996 and 1995, respectively. The reasons for
differences compared with the U.S. federal statutory tax rate (expressed as a
percentage of pretax income) are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate.................................. (35.0)% 35.0% 35.0%
Items affecting federal income tax rate:
State taxes, net of federal income tax benefit.............. 96.0 4.3 4.9
Foreign equity earnings..................................... (27.6) -- --
Dividends received deduction on domestic stock of under 80%
owned companies........................................... (191.7) -- --
Non-deductible goodwill..................................... 700.1 .2 --
Non-deductible meals and entertainment...................... 94.6 .6 .8
Adjustment to valuation allowance and other income tax
accruals.................................................. (198.0) .4 (.6)
Other net................................................... (13.0) -- (1.0)
------- ---- ----
Effective tax rate........................................ 425.4% 40.5% 39.1%
------- ---- ----
------- ---- ----
</TABLE>
Income taxes paid were $8.9 million, $12.4 million and $10.8 million during
fiscal years 1997, 1996 and 1995, respectively.
F-15
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at January 3,
1998, December 28, 1996, and December 30, 1995, are presented below (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Deferred tax assets:
Accounts and notes receivable, principally due to
allowance for doubtful accounts....................... $ 5,891 7,625 1,964
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the Tax
Reform Act of 1986.................................... 3,405 2,956 1,654
Health care claims, principally due to accrual for
financial reporting purposes.......................... 2,668 2,991 1,073
Deferred compensation, principally due to accrual for
financial reporting purposes.......................... 2,546 2,376 3,173
Compensated absences, principally due to accrual for
financial reporting purposes.......................... 3,086 2,286 1,379
Compensation and casualty loss, principally due to
accrual for financial reporting purposes.............. 1,780 1,959 2,135
Purchased intangibles................................... -- -- 1,958
Closed locations........................................ 10,612 3,126 1,110
Other................................................... 731 2,236 1,193
------- ------ ------
Total gross deferred tax assets......................... 30,719 25,555 15,639
Less valuation allowance................................ -- -- --
------- ------ ------
Net deferred tax assets............................... 30,719 25,555 15,639
------- ------ ------
Deferred tax liabilities:
Purchased intangibles................................... 231 1,055 --
Plant and equipment, principally due to differences in
depreciation.......................................... 9,704 6,511 5,978
Inventories, principally due to differences in LIFO
basis................................................. 7,686 7,230 2,070
Other................................................... 1,404 2,020 1,082
------- ------ ------
Total gross deferred tax liabilities.................... 19,025 16,816 9,130
------- ------ ------
Net deferred tax asset................................ $11,694 8,739 6,509
------- ------ ------
------- ------ ------
</TABLE>
Since it is more likely than not that the deferred tax asset of $30,719,
$25,555 and $15,639 at January 3, 1998, December 28, 1996 and December 30, 1995,
respectively, will be realized through carry back to taxable income in prior
years, future reversals of existing taxable temporary differences, future
taxable income and tax planning strategies, the Company has determined that
there is no need to establish a valuation allowance for the deferred tax asset
at January 3, 1998 and December 28, 1996 as required by SFAS No. 109, ACCOUNTING
FOR INCOME TAXES.
F-16
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCK RIGHTS AND OPTIONS
Under the Company's 1996 Stockholder Rights Plan, one right is attached to
each outstanding share of common stock. Each right entitles the holder to
purchase, under certain conditions, one-half share of common stock at a price of
$30.00 ($60.00 per full share). The rights are not yet exercisable and no
separate rights certificates have been distributed. All rights expire on March
31, 2006.
The rights become exercisable 20 days after a "flip-in event" has occurred
or 10 business days (subject to extension) after a person or group makes a
tender offer for 15% or more of the Company's outstanding common stock. A
flip-in event would occur if a person or group acquires (1) 15% of the Company's
outstanding common stock, or (2) an ownership level set by the Board of
Directors at less than 15% if the person or group is deemed by the Board of
Directors to have interests adverse to those of the Company and its
stockholders. The rights may be redeemed by the Company at any time prior to the
occurrence of a flip-in event at $.01 per right. The power to redeem may be
reinstated within 20 days after a flip-in event occurs if the cause of the
occurrence is removed.
Upon the rights becoming exercisable, subject to certain adjustments or
alternatives, each right would entitle the holder (other than the acquiring
person or group, whose rights become void) to purchase a number of shares of the
Company's common stock having a market value of twice the exercise price of the
right. If the Company is involved in a merger or other business combination, or
certain other events occur, each right would entitle the holder to purchase
common shares of the acquiring company having a market value of twice the
exercise price of the right. Within 30 days after the rights become exercisable
following a flip-in event, the Board of Directors may exchange shares of Company
common stock or cash or other property for exercisable rights.
The Company follows APB 25 and related interpretations in accounting for its
employee stock options. Under APB 25, when the exercise price of employee stock
options equals the market price of the underlying stock on the date of the
grant, no compensation expense is recognized.
Under the Company's 1994 Stock Incentive Plan, as amended (the "1994 Plan"),
a total of 845,296 shares were reserved for the granting of stock options,
restricted stock awards and performance unit awards. Stock options are granted
at not less than 100% of fair market value at date of grant and are exercisable
over a term which may not exceed 10 years from date of grant. Restricted stock
awards are subject to restrictions on transferability and such conditions for
vesting, including continuous employment for specified periods of time, as may
be determined at the date of grant. Performance unit awards are grants of rights
to receive shares of stock if certain performance goals or criteria, determined
at the time of grant, are achieved in accordance with the terms of the grants.
Under the 1995 Director Stock Option Plan (the "Director Plan"), for which a
total of 40,000 shares were reserved, annual grants of options to purchase 500
shares are made automatically to each eligible non-employee director following
each annual meeting of stockholders. The stock options are granted at 100% of
fair market value at date of grant, become exercisable six months following the
date of grant and may be exercised over a term of five years from the date of
grant.
At January 3, 1998, under the 1994 Plan, options to purchase 280,380 shares
of common stock of the Company at an average price of $17.23 per share and
exercisable over terms of five to seven years from the dates of grant, have been
granted and are outstanding. In February 1996, certain members of management
exercised rights to purchase restricted stock from the Company at a 25% discount
to fair market value pursuant to grants awarded in January 1996 under the terms
of the 1994 Plan. The purchase required a minimum of 10% payment in cash with
the remaining balance evidenced by a five-year promissory note to
F-17
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCK RIGHTS AND OPTIONS (CONTINUED)
the Company. Unearned compensation equivalent to the excess of market value of
the shares purchased over the price paid by the recipient at the date of grant,
and the unpaid balance of the promissory note have been charged to stockholders'
equity; amortization of compensation expense was not significant. At January 3,
1998, 32,832 shares of restricted stock have been issued and are outstanding.
Performance unit awards having a maximum potential payout of 340,071 shares have
also been granted and are outstanding.
Reserved for the granting of future stock options, restricted stock awards
and performance unit awards are 120,254 shares.
At January 3, 1998 under the Director Plan, options to purchase 12,000
shares of common stock of the Company, at an average price of $17.47 per share
and exercisable over a term of five years from the date of grant, have been
granted and are outstanding. Reserved for the granting of future stock options
are 26,000 shares.
Changes in outstanding options during the three fiscal years ended January
3, 1998 are summarized as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTION PRICE PER
SHARES SHARE
------ ----------------
<S> <C> <C>
Options outstanding December 31 1994................... 291 $16.86
Exercised............................................ (3) 16.72
Forfeited............................................ (36) 16.88
Granted.............................................. 4 16.06
------ ------
Options outstanding December 30 1995................... 256 16.85
Exercised............................................ (4) 16.77
Forfeited............................................ (45) 17.05
Granted.............................................. 142 17.72
------ ------
Options outstanding December 28, 1996.................. 349 17.18
Exercised............................................ (29) 16.82
Forfeited............................................ (33) 17.08
Granted.............................................. 5 18.38
------ ------
Options outstanding January 3, 1998.................... 292(a) 17.24
------ ------
------ ------
</TABLE>
- ------------------------
(a) Remaining average contractual life of options outstanding at January 3, 1998
was 2.5 years.
<TABLE>
<S> <C> <C>
Options exercisable at:
January 3, 1998...................................... 164 $17.09
December 28, 1996.................................... 147 16.95
</TABLE>
The weighted average fair value of options granted during 1997, 1996 and
1995 are $2.62, $2.40 and $2.26, respectively. The fair value of each option
grant is estimated as of the date of grant using the Black-Scholes single
option-pricing model assuming a weighted average risk-free interest rate of
6.0%, an expected dividend yield of 4.0%, expected lives of two and one-half
years and volatility of 22.1%. Had compensation expense for stock options been
determined based on the fair value method (instead of intrinsic value method) at
the grant dates for awards, the Company's 1997 and 1996 net earnings (loss) and
F-18
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCK RIGHTS AND OPTIONS (CONTINUED)
earnings (loss) per share would have been impacted by less than 1%. The effects
of applying the fair value method of measuring compensation expense for 1997 is
likely not representative of the effects for future years in part because the
fair value method was applied only to stock options granted after December 31,
1994.
(8) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Numerator:
Net earnings (loss)................................... $(1,228) 20,032 17,414
------- ------ ------
Denominator:
Denominator for basic earnings per share; weighted
average shares...................................... 11,270 10,947 10,875
Effect of dilutive securities:
Employee stock options................................ -- 8 20
Contingent shares..................................... 46 138 --
------- ------ ------
Dilutive common shares.................................. 46 146 20
Denominator for diluted earnings per share; adjusted
weighted average shares............................... 11,316 11,093 10,895
------- ------ ------
------- ------ ------
Basic earnings (loss) per share......................... $ (0.11) 1.83 1.60
------- ------ ------
------- ------ ------
Diluted earnings (loss) per share....................... $ (0.11) 1.81 1.60
------- ------ ------
------- ------ ------
</TABLE>
(9) LEASE AND OTHER COMMITMENTS
A substantial portion of the store and warehouse properties of the Company
are leased. The following table summarizes assets under capitalized leases (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Buildings and improvements.................................... $ 25,048 26,105
Less accumulated amortization................................. (10,243) (10,147)
-------- -------
Net assets under capitalized leases........................... $ 14,805 15,958
-------- -------
-------- -------
</TABLE>
F-19
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) LEASE AND OTHER COMMITMENTS (CONTINUED)
At January 3, 1998, future minimum rental payments under non-cancelable
leases and subleases are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- --------
<S> <C> <C>
1998........................................................ $ 29,877 $ 6,006
1999........................................................ 26,186 6,168
2000........................................................ 23,488 6,035
2001........................................................ 20,548 5,934
2002 and thereafter......................................... 117,400 57,161
--------- --------
Total minimum lease payments (a)............................ $ 217,499 81,304
Less imputed interest (rates ranging from 7.8% to 16.0%).... (41,207)
--------
Present value of net minimum lease payments................. 40,097
Less current maturities..................................... (1,580)
--------
Capitalized lease obligations............................... $ 38,517
--------
--------
</TABLE>
- ------------------------
(a) Future minimum payments for operating and capital leases have not been
reduced by minimum sublease rentals receivable under non-cancelable
subleases. Total future minimum sublease rentals related to operating and
capital lease obligations as of January 3, 1998 are $91.8 million and $41.7
million, respectively.
Total rental expense under operating leases for fiscal years 1997, 1996 and
1995 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------ ------
<S> <C> <C> <C>
Total rentals.......................................... $ 42,584 33,316 27,533
Less real estate taxes, insurance and other occupancy
costs................................................ (2,731) (2,070) (2,095)
-------- ------ ------
Minimum rentals........................................ 39,853 31,246 25,438
Contingent rentals..................................... 244 183 312
Sublease rentals....................................... (13,744) (9,449) (7,964)
-------- ------ ------
$ 26,353 21,980 17,786
-------- ------ ------
-------- ------ ------
</TABLE>
Most of the Company's leases provide that the Company pay real estate taxes,
insurance and other occupancy costs applicable to the leased premises.
Contingent rentals are determined on the basis of a percentage of sales in
excess of stipulated minimums for certain store facilities. Operating leases
often contain renewal options. Management expects that, in the normal course of
business, leases that expire will be renewed or replaced by other leases.
The Company has guaranteed certain lease and promissory note obligations of
customers aggregating approximately $28.6 million.
F-20
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) LEASE AND OTHER COMMITMENTS (CONTINUED)
In addition, the Company had outstanding letters of credit in the amounts of
$9.1 million and $9.0 million at January 3, 1998 and December 28, 1996,
respectively, primarily supporting workers' compensation obligations.
(10) CONCENTRATION OF CREDIT RISK
The Company provides financial assistance in the form of secured loans to
some of its independent retailers for inventories, store fixtures and equipment,
working capital and store improvements. Loans are secured by liens on inventory
or equipment or both, by personal guarantees and by other types of collateral.
In addition, the Company may guarantee lease and promissory note obligations of
customers.
As of January 3, 1998, the Company has guaranteed outstanding promissory
note obligations of one customer in the amount of $8.4 million and of another
customer in the amount of $7.1 million.
In the normal course of business, the Company's produce marketing operation
in California makes cash advances to produce growers during various product
growing seasons to fund production costs. Such advances are repayable at the end
of the respective growing seasons. Unpaid advances are generally secured by
liens on real estate and in certain instances, on crops yet to be harvested. At
January 3, 1998, $9.2 million in notes and growers advances were outstanding.
The Company establishes allowances for doubtful accounts based upon the
credit risk of specific customers, historical trends and other information.
Management believes that adequate provisions have been made for any doubtful
accounts.
(11) PROFIT SHARING PLAN
The Company has a profit sharing plan covering substantially all employees
meeting specified requirements. Contributions, determined by the Board of
Directors, are made to a noncontributory profit sharing trust based on profit
performances. Profit sharing expense for 1997, 1996 and 1995 was $2.5 million,
$4.1 million and $3.8 million, respectively.
Certain officers and key employees are participants in a deferred
compensation plan providing fixed benefits payable in equal monthly installments
upon retirement. Annual increments to the deferred compensation plan are charged
to earnings. No annual contribution was made in 1997.
(12) PENSION
Super Food has a qualified noncontributory retirement plan to provide
retirement income for eligible full-time employees who are not covered by union
retirement plans. Pension benefits under the plan are based on length of service
and compensation. The Company contributes amounts necessary to meet minimum
funding requirements.
During 1997, the Company formalized a curtailment plan affecting all
participants under the age of 55. The plan, effective January 1, 1998, did not
result in a material effect on the Company's financial position or results of
operations. All employees impacted by the curtailment will be transferred into
the Company's existing defined contribution plan.
F-21
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) PENSION (CONTINUED)
The plan's funded status at January 3, 1998 was (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits............................................. $ 36,772 28,979
Nonvested benefits.......................................... -- 388
-------- -------
Accumulated benefit obligation............................ 36,772 29,367
Additional benefits based on future salary levels............. 874 3,193
-------- -------
Projected benefit obligation................................ 37,646 32,560
Plan assets at fair value, principally listed securities.... (36,261) (34,274)
-------- -------
Plan assets (over) under projected benefit obligation....... 1,385 (1,714)
Unrecognized net (gain) loss.................................. 2,098 (911)
-------- -------
Net prepaid pension cost.................................. $ 713 (803)
-------- -------
-------- -------
</TABLE>
Assumptions used in the determination of the above amounts, in conjunction
with the recording of the Super Food acquisition, include the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Discount rate for determining estimated obligations and interest
cost............................................................... 7.25% 8.5%
Expected aggregate average long-term change in compensation.......... 5.0% 4.5%
Expected long-term return on assets.................................. 8.0% 8.5%
</TABLE>
Approximately 49% of Super Food employees are covered by
collectively-bargained, multi-employer pension plans. Contributions are
determined in accordance with the provisions of negotiated union contracts and
generally are based on the number of hours worked. The Company does not have the
information available to determine its share of the accumulated plan benefits or
net assets available for benefits under the multi-employer plans.
Aggregate cost for the Company's retirement plans includes the following
components (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Defined benefit plan:
Service cost benefits earned during the year.................. $ 660 237
Interest cost on projected benefit obligation................. 2,663 882
Return on assets.............................................. (3,587) (1,855)
Net amortization and deferral................................. 730 931
------- ------
Net pension expense............................................. 466 195
Multi-employer plans............................................ 2,166 370
------- ------
Total pension and retirement plan expense................... $ 2,632 565
------- ------
------- ------
</TABLE>
Fiscal 1996 costs reflect the two month period following the acquisition of
Super Food.
F-22
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) POSTRETIREMENT HEALTH CARE BENEFITS
The Company provides certain health care benefits for retired employees.
Substantially all of the Company's employees not subject to collective
bargaining agreements, become eligible for those benefits when they reach normal
retirement age and who meet minimum age and service requirements. Health care
benefits for retirees are provided under a self-insured program administered by
an insurance company.
The estimated future cost of providing postretirement health costs is
accrued over the active service life of the employee. The periodic
postretirement benefit costs were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ---- ----
<S> <C> <C> <C>
Service costs................................................ $ 354 260 273
Interest costs............................................... 576 403 382
Amortization of unrecognized transition obligation........... 235 248 249
------ ---- ----
Net postretirement costs..................................... $1,165 911 904
------ ---- ----
------ ---- ----
</TABLE>
The actuarial present value of benefit obligations at January 3, 1998,
December 28, 1996 and December 30, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Retirees eligible for benefits............................ $3,092 1,969 1,903
Active employees fully eligible........................... 617 428 493
Active employees not fully eligible....................... 4,895 3,204 3,147
------ ------ -----
$8,604 5,601 5,543
------ ------ -----
------ ------ -----
</TABLE>
The assumed annual rate of future increases in per capita cost of health
care benefits was 10.5% in fiscal 1997 declining at a rate of .5% per year to
6.5% in 2005 and thereafter. Increasing the health care cost trend rate by 1% in
each year would increase the accumulated benefit obligation by $475,000 at
January 3, 1998 and the service and interest costs by $77,000 for fiscal 1997.
The discount rate used in determining the accumulated benefit obligation was
6.75%.
(14) SEGMENT INFORMATION
The Company and its subsidiaries sell and distribute food and nonfood
products that are typically found in supermarkets. The Company's wholesale
distribution segment sells to independently owned retail food stores,
institutional and military customers while the retail distribution segment sells
directly to the consumer. Produce marketing includes farming, packing and
marketing operations. The Company's market areas are in the Midwest, West,
Mid-Atlantic and Southeastern United States.
Operating profit is net sales and other revenues, less operating expenses.
In computing operating profit, none of the following items have been added or
deducted: general corporate expenses, interest expense, interest income, income
taxes and earnings from equity investments. Wholesale distribution operating
profits on sales through Company-owned stores have been allocated to the retail
segment.
Identifiable assets are those used exclusively by that industry segment or
an allocated portion of assets used jointly by two industry segments. Corporate
assets are principally cash and cash equivalents, notes receivable, corporate
office facilities and equipment.
F-23
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) SEGMENT INFORMATION (CONTINUED)
MAJOR SEGMENTS OF BUSINESS
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales and other operating revenues:
Wholesale distribution............................... $3,502,822 2,468,695 1,968,982
Retail distribution.................................. 822,178 850,404 859,956
Produce marketing and other.......................... 50,949 50,410 48,154
---------- ---------- ----------
Total net sales and other operating revenues....... $4,375,949 3,369,509 2,877,092
---------- ---------- ----------
---------- ---------- ----------
Operating profit (loss):
Wholesale distribution............................... $ 32,576 37,115 30,047
Retail distribution.................................. (6,041) 7,709 4,143
Produce marketing and other.......................... (303) 2,124 2,439
---------- ---------- ----------
Total operating profit............................. 26,232 46,948 36,629
Interest income...................................... 6,379 1,613 2,759
Interest expense..................................... (32,845) (14,894) (10,793)
---------- ---------- ----------
Earnings (loss) before income taxes................ $ (234) 33,667 28,595
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets:
Wholesale distribution............................... 620,644 649,470 205,288
Retail distribution.................................. 171,326 203,217 201,493
Produce marketing and other.......................... 47,191 41,948 45,662
Corporate............................................ 65,722 50,842 61,817
---------- ---------- ----------
$ 904,883 945,477 514,260
---------- ---------- ----------
---------- ---------- ----------
Capital expenditures:
Wholesale distribution............................... $ 18,245 15,511 8,704
Retail distribution.................................. 23,246 19,795 15,517
Produce marketing and other.......................... 4,166 2,234 5,259
Corporate............................................ 22,068 13,793 3,784
---------- ---------- ----------
$ 67,725 51,333 33,264
---------- ---------- ----------
---------- ---------- ----------
Depreciation and amortization:
Wholesale distribution............................... $ 25,148 14,996 11,121
Retail distribution.................................. 16,158 15,791 14,454
Produce marketing and other.......................... 1,481 1,511 1,597
Corporate............................................ 4,910 2,461 2,234
---------- ---------- ----------
$ 47,697 34,759 29,406
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Fiscal 1997 operating profit before the effects of the special charges for
the wholesale, retail and produce marketing segments would have been $50.8
million, $5.8 million and $.9 million, respectively.
F-24
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUBSEQUENT EVENT
During the first quarter of 1998, and in conjunction with a planned $150
million unregistered subordinated debt offering, the Company prepaid $106.3
million of senior notes and paid prepayment premiums totaling $9.4 million, all
with drawings under the Revolving Credit Facility. As a result, the Company
recorded an extraordinary charge of $5.5 million, net of $4.0 million in taxes,
consisting of prepayment premiums and the write-off of deferred financing costs
related to early extinguishment of debt.
(16) SUBSIDIARY GUARANTEES
The following table presents summarized combined financial information for
certain wholly owned subsidiaries which guarantee on a full, unconditional and
joint and several basis, $165.0 million of Senior Subordinated Notes due May 1,
2008, which were offered and sold on April 24, 1998 by the Company:
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------------ --------- ---------
<S> <C> <C> <C>
Operating revenues......................................... $ 1,068,857 269,090 43,785
Operating expenses......................................... 1,058,695 266,386 45,364
------------ --------- ---------
Operating income (loss).................................. 10,162 2,703 (1,579)
Other income............................................... 4,168 1,108 1,101
------------ --------- ---------
Income (loss) before income tax.......................... 14,330 3,812 (478)
Income tax expense (benefit)............................... 5,621 1,524 (158)
------------ --------- ---------
Net income (loss)........................................ $ 8,709 2,288 (320)
------------ --------- ---------
------------ --------- ---------
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Current assets......................................................... $ 160,125 176,813
Non-current assets..................................................... 117,698 140,613
Current liabilities.................................................... 57,862 78,670
Long-term debt and obligations......................................... 27,152 60,263
Deferred credits and other liabilities................................. $ 14,452 17,254
</TABLE>
The following table sets forth summarized combined financial information
relating to non-wholly owned subsidiaries which have on a full, unconditional
and joint and several basis, guaranteed the aforementioned debt of the Company.
F-25
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) SUBSIDIARY GUARANTEES (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating revenues.............................................. $ 34,929 36,695 33,342
Operating expenses.............................................. 33,075 35,370 31,675
--------- --------- ---------
Operating income.............................................. 1,854 1,325 1,667
Other income.................................................... 276 240 186
--------- --------- ---------
Income before income tax...................................... 2,130 1,565 1,583
Income tax expense.............................................. 773 564 669
--------- --------- ---------
Net income.................................................... $ 1,357 1,001 1,184
--------- --------- ---------
--------- --------- ---------
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current assets.............................................................. $ 3,129 3,545
Non-current assets.......................................................... 3,289 3,343
Current liabilities......................................................... 2,524 2,190
Long-term debt and obligations.............................................. $ 447 621
</TABLE>
Non-guarantor subsidiaries, all of which are wholly owned, are
inconsequential.
F-26
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
----------------------
MARCH 28, MARCH 22,
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Net sales............................................................................... $ 925,958 935,997
Other revenues.......................................................................... 11,143 11,835
---------- ----------
Total revenues........................................................................ 937,101 947,832
Cost and expenses:
Cost of sales........................................................................... 820,360 825,189
Selling, general and administrative and other operating expenses........................ 94,310 99,158
Depreciation and amortization........................................................... 11,078 10,905
Interest expense........................................................................ 6,860 7,321
---------- ----------
Total costs and expenses.............................................................. 932,608 942,573
Earnings before income taxes and extraordinary charge................................. 4,493 5,259
Income taxes.............................................................................. 1,865 2,203
---------- ----------
Earnings before extraordinary charge.................................................. 2,628 3,056
Extraordinary charge from early extinguishment of debt, net of income tax benefit of
$3,951 (5,569) --
---------- ----------
Net earnings (loss)................................................................... $ (2,941) 3,056
---------- ----------
---------- ----------
Basic and diluted earnings (loss) per share:
Earnings before extraordinary charge.................................................. $ .23 .27
Extraordinary charge from early extinguishment of debt................................ (.49) --
---------- ----------
Net earnings (loss)................................................................... $ (.26) .27
---------- ----------
---------- ----------
Weighted average number of common and common equivalent shares outstanding
Basic................................................................................. 11,301 11,193
Diluted............................................................................... 11,362 11,321
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 3,
1998
MARCH 28, -----------
1998
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................................... $ 773 933
Accounts and notes receivable, net..................................................... 176,634 173,962
Inventories............................................................................ 287,991 287,801
Prepaid expenses....................................................................... 23,742 22,582
Deferred tax assets.................................................................... 12,340 9,072
----------- -----------
Total current assets............................................................... 501,480 494,350
Investments in affiliates................................................................ 7,681 7,679
Notes receivable, noncurrent............................................................. 23,600 23,092
Property, plant and equipment:
Land................................................................................... 30,548 31,229
Buildings and improvements............................................................. 136,591 137,070
Furniture, fixtures and equipment...................................................... 307,285 306,762
Leasehold improvements................................................................. 61,003 60,578
Construction in progress............................................................... 36,906 28,485
Assets under capitalized leases........................................................ 24,878 25,048
----------- -----------
597,211 589,172
Less accumulated depreciation and amortization......................................... (319,203) (312,939)
Net property, plant and equipment.................................................. 278,008 276,233
Intangible assets, net................................................................... 69,305 70,732
Investment in direct financing leases.................................................... 18,901 19,094
Deferred tax asset--net.................................................................. 2,622 2,622
Other assets............................................................................. 10,826 11,081
----------- -----------
Total assets....................................................................... $ 912,423 904,883
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Outstanding checks..................................................................... $ 22,110 36,271
Short-term debt payable to banks....................................................... 16,155 11,300
Current maturities of long-term debt and capitalized lease obligations................. 2,769 7,964
Accounts payable....................................................................... 203,246 177,548
Accrued expenses....................................................................... 71,086 60,599
Income taxes........................................................................... -- 737
----------- -----------
Total current liabilities............................................................ 315,366 294,419
Long-term debt........................................................................... 324,145 325,489
Capitalized lease obligations............................................................ 38,116 38,517
Deferred compensation.................................................................... 6,682 6,768
Other.................................................................................... 7,144 14,072
Stockholders' equity:
Preferred stock--no par value
Authorized 500 shares; none issued................................................... -- --
Common stock of $1.66 2/3 par value
Authorized 25,000 shares, issued 11,575 shares issued in 1998 and 1997 19,292 19,292
Additional paid-in capital............................................................. 17,908 17,648
Restricted stock....................................................................... (384) (391)
Retained earnings...................................................................... 186,005 190,984
----------- -----------
222,821 227,533
Less cost of 237 shares and 252 shares of common stock in treasury, respectively....... (1,851) (1,915)
----------- -----------
Total stockholders' equity......................................................... 220,970 225,618
----------- -----------
Total liabilities and stockholders' equity......................................... $ 912,423 904,883
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-28
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
------------------------------
MARCH 28, 1998 MARCH 22, 1997
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net earnings (loss).............................................................. $ (2,941) 3,056
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Provision for (use of) special charge........................................ (850) --
Depreciation and amortization................................................ 11,078 10,905
Provision for bad debts...................................................... 160 1,293
Provision for (use of) losses on closed lease locations...................... (680) (153)
Extraordinary charge--write off deferred financing costs..................... 142 --
Deferred income taxes........................................................ (3,268) (1,618)
Deferred compensation........................................................ (86) (311)
Earnings (loss) of equity investments........................................ (220) (377)
Other........................................................................ 108 773
Changes in operating assets and liabilities:
Accounts and notes receivable................................................ 9,127 12,056
Inventories.................................................................. (190) 2,251
Prepaid expenses............................................................. (1,160) (5,908)
Accounts payable and outstanding checks...................................... 11,537 (29,145)
Accrued expenses............................................................. 5,037 8,849
Income taxes................................................................. (737) 3,311
-------------- -------
Net cash provided by operating activities.................................. 27,057 4,982
-------------- -------
Investing activities:
Dividends received............................................................. -- 800
Disposals of property, plant and equipment, net................................ 2,189 1,292
Additions to property, plant and equipment excluding capital leases............ (13,474) (7,939)
Loans to customers............................................................. (5,389) (4,632)
Payments from customers on loans............................................... 5,035 1,485
Sale (repurchase) of receivables............................................... (11,700) --
Other.......................................................................... (30) 28
-------------- -------
Net cash used in investing activities...................................... (23,369) (8,966)
-------------- -------
Financing activities:
Proceeds from revolving debt................................................... 100,000 15,000
Dividends paid................................................................. (2,038) (2,015)
Payments of short-term debt.................................................... 4,855 (6,550)
Payments of from long-term debt................................................ (106,570) (2,264)
Payments of capitalized lease obligations...................................... (370) (275)
Other.......................................................................... 275 53
-------------- -------
Net cash (used in) provided by financing activities........................ (3,848) 3,949
-------------- -------
Net decrease in cash..................................................... $ (160) (35)
-------------- -------
-------------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL PERIOD ENDED MARCH 28, 1998,
JANUARY 3, 1998 AND DECEMBER 28, 1996
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
------------------------ PAID-IN RETAINED TRANSLATION RESTRICTED
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT STOCK
----------- ----------- ----------- ----------- --------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 30, 1995............ 11,224 $ 18,706 12,013 188,578 (950) --
Net earnings............................ -- -- -- 20,032 -- --
Dividend declared of $.75 per share..... -- -- -- (8,288) -- --
Shares issued in connection with
acquisition of a business............. 350 584 5,064 -- --
Treasury stock issued upon exercise of
options............................... -- -- 47 -- --
Issuance of restricted stock............ -- -- (308) -- -- (524)
Amortized compensation under restricted
stock plan............................ -- -- -- -- -- 24
Treasury stock purchased................ -- -- -- -- -- --
----------- ----------- ----------- ----------- --- ---
Balance at December 28, 1996............ 11,574 19,290 16,816 200,322 (950) (500)
Net earnings (loss)..................... -- -- -- (1,228) -- --
Dividend declared of $.72 per share..... -- -- -- (8,110) -- --
Treasury stock issued upon exercise of
options............................... -- -- 354 -- -- --
Amortized compensation under restricted
stock plan............................ -- -- -- -- -- 29
Repayment of notes receivable from
holder of restricted stock............ -- -- -- -- 80
Distribution of stock pursuant to
performance awards.................... -- -- 460 -- -- --
Treasury stock purchased................ -- -- -- -- -- --
Foreign currency translation
adjustment............................ -- -- -- -- 950 --
Other................................... 1 2 18 -- -- --
----------- ----------- ----------- ----------- --- ---
Balance at January 3, 1998.............. 11,575 19,292 17,648 190,984 -- (391)
Net earnings (loss)..................... -- -- -- (2,941) -- --
Dividend declared of $.18 per share..... -- -- -- (2,038) -- --
Treasury stock issued upon exercise of
options............................... -- -- 33 -- -- --
Amortized compensation under restricted
stock plan............................ -- -- -- -- -- 7
Distribution of stock pursuant to
performance awards.................... -- -- 226 -- -- --
Treasury stock purchased................ -- -- -- -- -- --
Foreign currency translation
adjustment............................ -- -- -- -- -- --
Other................................... -- -- -- -- -- --
-- -- 1 -- -- --
----------- ----------- ----------- ----------- --- ---
Balance at March 28, 1998 (unaudited) 11,575 $ 19,292 17,908 186,005 -- (384)
----------- ----------- ----------- ----------- --- ---
----------- ----------- ----------- ----------- --- ---
<CAPTION>
TREASURY STOCK TOTAL
------------------------ STOCKHOLDERS'
SHARES AMOUNT EQUITY
----------- ----------- -------------
<S> <C> <C> <C>
Balance at December 30, 1995............ (346) $ (3,034) 215,313
Net earnings............................ -- -- 20,032
Dividend declared of $.75 per share..... -- -- (8,288)
Shares issued in connection with
acquisition of a business............. -- 5,648
Treasury stock issued upon exercise of
options............................... 6 42 89
Issuance of restricted stock............ 40 995 163
Amortized compensation under restricted
stock plan............................ -- -- 24
Treasury stock purchased................ (7) (120) (120)
--- ----------- -------------
Balance at December 28, 1996............ (307) (2,117) 232,861
Net earnings (loss)..................... -- -- (1,228)
Dividend declared of $.72 per share..... -- -- (8,110)
Treasury stock issued upon exercise of
options............................... 29 143 497
Amortized compensation under restricted
stock plan............................ -- -- 29
Repayment of notes receivable from
holder of restricted stock............ -- -- 80
Distribution of stock pursuant to
performance awards.................... 30 148 608
Treasury stock purchased................ (4) (89) (89)
Foreign currency translation
adjustment............................ -- -- 950
Other................................... -- -- 20
--- ----------- -------------
Balance at January 3, 1998.............. (252) (1,915) 225,618
Net earnings (loss)..................... -- -- (2,941)
Dividend declared of $.18 per share..... -- -- (2,038)
Treasury stock issued upon exercise of
options............................... 3 15 48
Amortized compensation under restricted
stock plan............................ -- -- 7
Distribution of stock pursuant to
performance awards.................... 13 65 291
Treasury stock purchased................ -- -- --
Foreign currency translation
adjustment............................ -- -- --
Other................................... -- -- --
(1) (16) (15)
--- ----------- -------------
Balance at March 28, 1998 (unaudited) (237) $ (1,851) 220,970
--- ----------- -------------
--- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1998
NOTE 1
The accompanying financial statements include all adjustments which are, in
the opinion of management, necessary to present fairly the financial position of
the Company and its subsidiaries at March 28, 1998 and January 3, 1998, and the
results of operations for the 12-weeks ending March 28, 1998 and March 22, 1997,
and the changes in cash flows for the 12-week periods ending March 28, 1998 and
March 22, 1997, respectively. All material intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2
The Company uses the LIFO method for valuation of a substantial portion of
inventories. If the FIFO method had been used, inventories would have been
approximately $42.6 million and $43.1 million higher at March 28, 1998 and at
January 3, 1998, respectively.
NOTE 3
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED FOR OR OBTAINED FOR INTERNAL USE. Although the SOP is
effective beginning on January 1, 1999, the Company has chosen early adoption as
of January 4 1998. The SOP requires the capitalization of certain costs incurred
after the date of adoption in connection with developing or obtaining software
for internal use. Certain costs that are required to be capitalized by the SOP
were previously being expensed as incurred by the Company. As a result of this
change in accounting, during the quarter the Company capitalized $1.5 million in
payroll and payroll-related costs for employees who are directly involved with
and devote time to internal-use software development projects.
NOTE 4
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE, the weighted average shares used in computing basic
and diluted earnings per share (EPS) are as follows:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
------------------------
MARCH 29, MARCH 23,
1998 1997
----------- -----------
(IN THOUSANDS OF SHARES)
<S> <C> <C>
Shares for computation of basic EPS.................................... 11,301 11,193
Effect of assumed option exercises..................................... 35 45
Effect of contingent shares............................................ 26 83
----------- -----------
Shares for computation of diluted EPS.................................. 11,362 11,321
----------- -----------
----------- -----------
</TABLE>
F-31
<PAGE>
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1998
NOTE 5
On December 29, 1997, a Receivables Purchase Agreement (the "Agreement") was
executed by the Company, Nash Finch Funding Corporation ("NFFC"), a wholly-owned
subsidiary of the Company, and a certain third party purchaser (the "Purchaser")
pursuant to a securitization transaction. On this date the Company sold $44.6
million of accounts receivable on a non-recourse basis to NFFC. NFFC sold $37.0
million of its undivided interest in such receivables to the Purchaser, subject
to specified collateral requirements. NFFC maintains a variable undivided
interest in these receivables and is subject to losses on its share of the
receivables and, accordingly, maintains an allowance for doubtful accounts. The
Agreement is a five-year $50 million revolving receivable purchase facility
allowing the Company to sell additional receivables to NFFC, and NFFC to sell,
from time to time, variable undivided interests in these receivables to the
Purchaser. At March 28, 1998, the balance of receivables sold under the
revolving agreement was $25.3 million.
On September 8, 1995, the Company entered into an agreement with a financial
institution which allowed the Company to sell on a revolving basis customer
notes receivable. Although the agreement lapsed on December 28, 1996, the notes,
which have maturities through the year 2002, were sold at face value with
recourse. As a result, the Company is contingently liable should these notes
become uncollectible. The remaining balances of such sold notes receivable
totaled $8.4 million and $9.1 million at March 28, 1998 and January 3, 1998,
respectively.
NOTE 6
During the third quarter of 1997, the Company recorded special charges,
totaling $31.3 million relative to asset impairment and consolidation of certain
warehouses and retail stores. During the first quarter the Company closed
distribution facilities in Lexington, Kentucky and Lincoln, Nebraska and closed
or sold a total of four retail stores. Costs totaling $.9 million dollars
incurred as a result of the shut down of these units were charged to accrued
expenses. At March 28, 1998, accrued liabilities established for purposes of the
special charges total $15.2 million.
F-32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE ISSUERS OR ANY OF THE INITIAL PURCHASERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION TO BUY, THE EXCHANGE
NOTES OR GUARANTEES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, IN ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE ISSUERS SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Incorporation of Certain Documents by Reference........................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 14
The Exchange Offer........................................................ 23
Use of Proceeds........................................................... 31
Capitalization............................................................ 32
Selected Consolidated Financial Data...................................... 33
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 34
Business.................................................................. 42
Management................................................................ 51
Principal Stockholders.................................................... 55
Description of Certain Other Indebtedness................................. 57
Description of the Exchange Notes......................................... 60
Description of Certain Federal Income Tax Consequences of an Investment in
the Notes............................................................... 91
Exchange Offer; Registration Rights....................................... 93
Book Entry; Delivery and Form............................................. 96
Plan of Distribution...................................................... 98
Legal Matters............................................................. 98
Experts................................................................... 98
Index to Consolidated and Unaudited Condensed Consolidated Financial
Statements.............................................................. F-1
</TABLE>
[LOGO]
OFFER TO EXCHANGE
$165,000,000
8 1/2 SENIOR SUBORDINATED
NOTES DUE 2008, SERIES B
FOR
8 1/2% SENIOR SUBORDINATED
NOTES DUE 2008, SERIES A
----------------------------
PROSPECTUS
----------------------------
JULY 6, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
