<PAGE> 1
As Filed Pursuant to Rule 424(b)(3)
Registration No. 333-33225-01;
333-33225-02; 333-33225-04;
333-33225-05; 333-33225-06
PROSPECTUS
[AMERISERVE LOGO]
AmeriServe Food Distribution, Inc.
8 7/8% New Senior Notes Due 2006
10 1/8% New Senior Subordinated Notes Due 2007
------------------------
The 8 7/8% New Senior Notes due 2006 (the "Senior Notes") and the 10 1/8%
New Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes" and,
together with the Senior Notes, the "Notes") are obligations of AmeriServe Food
Distribution, Inc. (the "Company"), a Delaware corporation. The Senior Notes are
fully and unconditionally guaranteed on a senior unsecured basis, and the Senior
Subordinated Notes are fully and unconditionally guaranteed on a senior
subordinated basis, in each case, by, and are joint and several obligations of,
AmeriServe Transportation, Inc., a Nebraska corporation and a subsidiary of the
Company, Chicago Consolidated Corporation, an Illinois corporation and a
subsidiary of the Company, Northland Transportation Services, Inc., a Nebraska
corporation and a subsidiary of the Company, and Delta Transportation, Ltd., a
Wisconsin corporation and a subsidiary of the company (the "Subsidiary
Guarantors"). See "Description of the Notes -- Senior Notes" and "-- Senior
Subordinated Notes."
Interest on the Senior Notes is payable semiannually on April 15 and October
15 of each year, at a rate equal to 8 7/8% per annum. The Senior Notes are
redeemable at the option of the Company, in whole or in part, at any time on or
after April 15, 2002 in cash at the redemption prices set forth herein, plus
accrued and unpaid interest and liquidated damages, if any, thereon to the date
of redemption. Prior to October 15, 2000, up to 33% of the initially outstanding
aggregate principal amount of Senior Notes will be redeemable at the option of
the Company, on one or more occasions, from the net proceeds of public or
private sales of common stock of, or contributions to the common equity capital
of, the Company, at a price of 108.875% of the principal amount of the Senior
Notes, together with accrued and unpaid interest, and liquidated damages, if
any, to the date of redemption; provided that at least 67% of the initially
outstanding aggregate principal amount of Senior Notes remains outstanding
immediately after such redemption. Upon the occurrence of a Change of Control
(as defined herein), each Holder of Senior Notes may require the Company to
repurchase all or a portion of such Holder's Senior Notes at 101% of the
aggregate principal amount of the Senior Notes, together with accrued and unpaid
interest, and Liquidated Damages, if any, to the date of repurchase. See "Risk
Factors -- Payment Upon a Change of Control" and "Description of Notes -- Senior
Notes -- Repurchase at the Option of Holders."
The Senior Notes are general unsecured obligations of the Company and rank
pari passu in right of payment to all existing and future senior unsecured
indebtedness of the Company and senior in right of payment to all existing and
future subordinated indebtedness of the Company. The Senior Notes will be
effectively subordinated, however, to all secured obligations of the Company,
including the Company's borrowings under the Credit Facility and the sales of
receivables under the Accounts Receivable Program, in each case, to the extent
of the assets securing such obligations. The Senior Notes are fully and
unconditionally guaranteed (the "Senior Note Guarantees") on a joint and several
basis by the Subsidiary Guarantors. The Senior Note Guarantees are general
unsecured obligations of the Subsidiary Guarantors and rank pari passu in right
of payment to all existing and future senior unsecured indebtedness of the
Subsidiary Guarantors and senior in right of payment to all existing and future
subordinated indebtedness of the Subsidiary Guarantors. As of December 27, 1997,
on a pro forma basis, after giving effect to the ProSource Acquisition (as
defined herein), the Senior Notes and the Senior Note Guarantees would have been
effectively subordinated to approximately $29.2 million of secured obligations
of the Company and the Subsidiary Guarantors.
Interest on the Senior Subordinated Notes is payable semiannually on January
15 and July 15 of each year, at a rate equal to 10 1/8% per annum. The Senior
Subordinated Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after July 15, 2002 in cash at the redemption prices set
forth herein, plus accrued and unpaid interest and liquidated damages, if any,
thereon to the date of redemption. Prior to July 15, 2000, up to 33% of the
initially outstanding aggregate principal amount of Senior Subordinated Notes
will be redeemable at the option of the Company, on one or more occasions, from
the net proceeds of public or private sales of common stock of, or contributions
to the common equity capital of, the Company, at a price of 110.125% of the
principal amount of the Senior Subordinated Notes, together with accrued and
unpaid interest, and liquidated damages, if any, to the date of redemption;
provided that at least 67% of the initially outstanding aggregate principal
amount of Senior Subordinated Notes remains outstanding immediately after such
redemption. Upon the occurrence of a Change of Control (as defined herein), each
Holder of Senior Subordinated Notes may require the Company to repurchase all or
a portion of such Holder's Senior Subordinated Notes at 101% of the aggregate
principal amount of the Senior Subordinated Notes, together with accrued and
unpaid interest, and Liquidated Damages, if any, to the date of repurchase. See
"Risk Factors -- Payment Upon a Change of Control" and "Description of
Notes -- Senior Subordinated Notes -- Repurchase at the Option of Holders."
The Senior Subordinated Notes are general, unsecured obligations of the
Company, are subordinated to all Senior Debt and rank senior or pari passu in
right of payment to all existing and future subordinated indebtedness of the
Company. The Senior Subordinated Notes are fully and unconditionally guaranteed
(the "Senior Subordinated Note Guarantees") on a joint and several basis by the
Subsidiary Guarantors. The Senior Subordinated Notes and the Senior Subordinated
Note Guarantees are subordinate to the Senior Debt, which, as of December 27,
1997, on a pro forma basis, after giving effect to the ProSource Acquisition,
would have been approximately $379.2 million. See "Capitalization."
------------------------
SEE "RISK FACTORS," COMMENCING ON PAGE 10, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is to be used by Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") and BancAmerica Robertson Stephens ("BancAmerica") in
connection with the offers and sales in market-making transactions at negotiated
prices related to prevailing market prices at the time of sale. The Notes are
not listed on any securities exchange or admitted to trading in the National
Association of Securities Dealers Automated Quotation System and the Company
does not intend to make any such listing or seek such admission to trading. DLJ
and BancAmerica currently make a market in the Notes; however, they are not
obligated to continue to do so and any market-making may be discontinued at any
time. The Company receives no portion of the proceeds of sales of the Notes and
has paid certain expenses incident to the registration thereof.
DONALDSON, LUFKIN & JENRETTE BANCAMERICA ROBERTSON STEPHENS
SECURITIES CORPORATION
------------------------
The date of this Prospectus is April 14, 1998.
<PAGE> 2
No dealer, salesperson or other person has been authorized to give
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company, DLJ or BancAmerica. This
Prospectus does not constitute an offer to sell or the solicitation of an offer
to buy any security other than the Notes offered hereby, nor does it constitute
an offer to sell or the solicitation of an offer to buy any of the Notes to any
person in any jurisdiction in which it is unlawful to make such an offer or
solicitation to such person. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
the information contained herein is correct as of any date subsequent to the
date hereof.
AVAILABLE INFORMATION
The Notes were originally issued by AmeriServe Food Distribution, Inc., a
Nebraska corporation and predecessor to the Company ("Nebraska AmeriServe"). On
December 28, 1997, pursuant to an Agreement and Plan of Merger by and among
Nebraska AmeriServe, Nebraska AmeriServe's wholly owned subsidiary AmeriServ
Food Company, a Delaware corporation ("AmeriServ") and AmeriServ's wholly owned
subsidiary The Harry H. Post Company ("Post"), Nebraska AmeriServe merged with
and into AmeriServ and Post merged with and into AmeriServ, in each case with
AmeriServ as the surviving Delaware corporation. In the mergers, AmeriServ
changed its name to AmeriServe Food Distribution, Inc. (the surviving
corporation is referred to herein as "AmeriServe" or the "Company"). All
references herein to the Company shall be deemed to include references to
Nebraska AmeriServe, as predecessor to the Company.
The Company and the Subsidiary Guarantors have filed with the Securities
and Exchange Commission ("SEC") Registration Statements on Form S-4 under the
Securities Act for the registration of the Senior Notes (the "Senior Notes
Registration Statement") and the Senior Subordinated Notes (the "Senior
Subordinated Notes Registration Statement" and, together with the Senior Notes
Registration Statement, the "Registration Statements"). This Prospectus, which
constitutes a part of each of the Registration Statements, does not contain all
of the information set forth in the Registration Statements, certain items of
which are contained in exhibits and schedules to the Registration Statements as
permitted by the rules and regulations of the SEC. For further information with
respect to the Company or the Notes offered hereby, reference is made to the
Registration Statements, including the exhibits and financial statement
schedules thereto, which may be inspected without charge at the public reference
facility maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and copies of which may be obtained from the SEC at prescribed
rates. Statements made in this Prospectus concerning the contents of any
document referred to herein are not necessarily complete. With respect to each
such document filed with the SEC as an exhibit to the Registration Statements,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference.
Upon the effectiveness of the Registration Statements, the Company became
subject to the information requirements of the Securities Exchange Act of 1934
(the "Exchange Act"), and in accordance therewith files reports and other
information with the SEC. Such reports and other information filed by the
Company can be inspected and copied at the public reference facilities of the
SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at the Website
(http://www.sec.gov.) maintained by the SEC, and the regional offices of the SEC
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, 14th Floor, Chicago, Illinois 60661.
Copies of such materials may be obtained from the Public Reference Section of
the SEC, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
its public reference facilities in New York, New York and Chicago, Illinois at
prescribed rates.
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it is required to furnish the information required to be filed
with the SEC to (i) State Street Bank and Trust Company, as trustee (the "Senior
Note Trustee"), under the Indenture dated as of October 15, 1997 (the "Senior
Note Indenture") among the Company, the Subsidiary Guarantors and the Senior
Note Trustee, pursuant to which the Senior Notes were issued, (ii) State Street
Bank and Trust Company, as trustee ("Senior Subordinated Note Trustee," and
together with the Senior Note Trustee, the "Note Trustees"),
2
<PAGE> 3
under the Indenture dated as of July 11, 1997 (the "Senior Subordinated Note
Indenture," and, together with the Senior Note Indenture, the "Indentures")
among the Company, the Subsidiary Guarantors and the Senior Subordinated Note
Trustee pursuant to which the Senior Subordinated Notes were issued and (iii)
the holders of the Notes. The Company has agreed that, even if they are not
required under the Exchange Act to furnish such information to the SEC, they
will nonetheless continue to furnish information that would be required to be
furnished by the Company by Section 13 of the Exchange Act to the Trustees and
the holders of the Notes as if they were subject to such periodic reporting
requirements.
In addition, the Company and the Subsidiary Guarantors have agreed that for
so long as any of the Notes remain outstanding, they will make available to any
prospective purchaser of the Notes or holder of the Notes in connection with any
sale thereof, the information required by Rule 144A(d)(4) under the Securities
Act.
3
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to and
should be read in conjunction with the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
An index of certain defined terms used herein can be found on page 104. Unless
the context indicates or otherwise requires, references in this Prospectus to
the "Company" or "AmeriServe" are to AmeriServe Food Distribution, Inc., a
Delaware corporation, its predecessors and its subsidiaries, and references to
"NEHC" are to Nebco Evans Holding Company, a Delaware corporation and the parent
of the Company.
THE COMPANY
AmeriServe is North America's largest systems foodservice distributor
specializing in distribution to chain restaurants. The Company is the primary
supplier to its customers of a wide variety of items, including fresh and frozen
meat and poultry, seafood, frozen foods, canned and dry goods, fresh and
pre-processed produce, beverages, dairy products, paper goods, cleaning supplies
and equipment. The Company currently serves over 30 different restaurant chains
and over 25,500 restaurant locations in North America. The Company has had
long-standing relationships with such leading restaurant concepts as Pizza Hut,
Taco Bell, KFC, Wendy's, Burger King, Dairy Queen, Subway and Applebee's.
On July 11, 1997, the Company acquired (the "PFS Acquisition") the U.S. and
Canadian operations of PFS ("PFS"), a division of PepsiCo, Inc. ("PepsiCo"). PFS
distributed food products and supplies and restaurant equipment to franchised
and company-operated restaurants in the Pizza Hut, Taco Bell and KFC systems.
These systems were spun-off by PepsiCo in October 1997 and are now operating as
TRICON Global Restaurants, Inc. ("Tricon"). In addition, in connection with the
PFS Acquisition, the Company entered into a distribution agreement (the
"Distribution Agreement") whereby it became the exclusive distributor of
selected products until July 11, 2002 to the approximately 9,800 Pizza Hut, Taco
Bell and KFC restaurants in the continental United States owned by Pizza Hut,
Inc., Taco Bell Corp., Kentucky Fried Chicken Corporation and, Kentucky Fried
Chicken of California, Inc. (all subsidiaries of Tricon) and their subsidiaries
(the foregoing, collectively, the "Tricon Subsidiaries,") and previously
serviced by PFS. In October 1997, AmeriServe also acquired PFS de Mexico, S.A.
de C.V., a regional systems food service distributor based in Mexico City,
Mexico for $8.0 million.
On July 11, 1997, in connection with the PFS Acquisition, the Company
issued and sold $500.0 million principal amount of Senior Subordinated Notes
pursuant to the Senior Subordinated Note Indenture. The Senior Subordinated
Notes were sold pursuant to exemptions from, or in transactions not subject to,
the registration requirements of the Securities Act of 1933, as amended, (the
"Securities Act") and applicable state securities laws. On December 12, 1997,
the Company consummated an offer to exchange the Senior Subordinated Notes for
new Senior Subordinated Notes, which are registered under the Securities Act
with terms substantially identical to the Senior Subordinated Notes. See Note 6
to the historical financial statements of the Company included elsewhere herein.
On October 15, 1997, AmeriServe issued and sold $350,000,000 in aggregate
principal amount at maturity of Senior Notes pursuant to the Senior Note
Indenture. The Senior Notes were sold pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act. On December 12, 1997, AmeriServe consummated an offer to exchange the
Senior Notes for new Senior Notes, which are registered under the Securities
Act, with terms substantially identical to the Senior Notes. See Note 6 to the
historical financial statements of the Company included elsewhere herein.
On December 28, 1997, pursuant to an Agreement and Plan of Merger by and
among Nebraska AmeriServe, AmeriServ and Post, Nebraska AmeriServe merged with
and into AmeriServ and Post merged with and into AmeriServ, in each case with
AmeriServ, a Delaware corporation, as the surviving corporation. In the mergers,
AmeriServ changed its name to AmeriServe Food Distribution, Inc. In the mergers,
all of the outstanding equity securities of AmeriServ and Post were cancelled,
and all of the outstanding equity securities of Nebraska AmeriServe were
converted into substantially identical securities of the Company. The
4
<PAGE> 5
Company effected the mergers to rationalize its corporate organization and to
reduce various compliance and regulatory costs arising from having subsidiaries
incorporated in various jurisdictions and to move its jurisdiction of
incorporation from Nebraska to Delaware.
RECENT DEVELOPMENTS
On January 29, 1998, AmeriServe, Steamboat Acquisition Corp., a newly
formed Delaware corporation and wholly owned subsidiary of AmeriServe, and
ProSource, Inc., a Delaware corporation ("ProSource"), entered into an Agreement
and Plan of Merger (the "Merger Agreement") pursuant to which AmeriServe will
acquire all outstanding shares of ProSource (the "ProSource Acquisition") for
cash. ProSource provides foodservice distribution to restaurants in North
America. ProSource also provides purchasing and logistics services to the
foodservice market in North America. ProSource's 3,400 employees serve
approximately 12,700 restaurants, including Burger King, Chick-fil-A, Chili's,
Long John Silver's, Olive Garden, Red Lobster, Sonic, TCBY, TGI Friday's and
Wendy's, from a nationwide network of distribution centers and its Corporate
Support Center in Coral Gables, Florida. The ProSource Acquisition is subject to
the approval of ProSource's stockholders and certain other customary conditions.
In connection with the Merger Agreement, certain stockholders of ProSource have
entered into a voting agreement with AmeriServe pursuant to which such
stockholders have agreed to vote their shares in favor of the ProSource
Acquisition. Such shares are sufficient to assure the approval of the ProSource
Acquisition. ProSource and AmeriServe have been granted early termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
BUSINESS STRATEGY
The Company's strategy is to: (i) pursue profitable internal and external
growth opportunities; (ii) capitalize on its nationwide network of distribution
centers to increase customer density and regional market penetration; (iii)
continue to provide low cost, superior customer service; and (iv) maximize
operating leverage by integrating and consolidating the PFS and, upon
consummation of the ProSource Acquisition, ProSource businesses and by pursuing
selective acquisitions within the fragmented foodservice distribution industry.
The Company's principal executive offices are located at 14841 Dallas
Parkway, Dallas, Texas 75240, and its telephone number is (972) 338-7000.
5
<PAGE> 6
SUMMARY OF TERMS OF SENIOR NOTES
THE COMPANY................ AmeriServe Food Distribution, Inc.
SECURITIES OFFERED......... $350.0 million in aggregate principal amount of the
Company's New 8 7/8% Senior Notes due 2006.
MATURITY DATE.............. October 15, 2006.
INTEREST RATE.............. The Senior Notes bear interest at the rate of
8 7/8% per annum, payable semi-annually on April 15
and October 15 of each year, commencing April 15,
1998.
OPTIONAL REDEMPTION........ The Senior Notes are redeemable at the option of
the Company, in whole or in part, at any time on or
after April 15, 2002 in cash at the redemption
prices set forth herein, plus accrued and unpaid
interest and liquidated damages, if any, thereon to
the date of redemption. In addition, at any time
prior to October 15, 2000, the Company may redeem
up to 33% of the initially outstanding aggregate
principal amount of Senior Notes at a redemption
price equal to 108.875% of the principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the
redemption date, with the net proceeds of a Public
Equity Offering; provided that, in each case, at
least 67% of the initially outstanding aggregate
principal amount of Senior Notes remains
outstanding immediately after the occurrence of any
such redemption. See "Description of Notes--Senior
Notes--Optional Redemption."
CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, each
holder of Senior Notes has the right to require the
Company to repurchase all or any part of such
holder's Senior Notes at an offer price in cash
equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of
repurchase. See "Description of Notes--Senior
Notes--Repurchase at the Option of Holders--Change
of Control." There can be no assurance that, in the
event of a Change of Control, the Company would
have sufficient funds to repurchase all Senior
Notes tendered. See "Risk Factors--Payment Upon a
Change of Control."
RANKING.................... The Senior Notes are senior unsecured obligations
of the Company and rank pari passu in right of
payment with all existing and future senior
unsecured indebtedness of the Company and senior in
right of payment to all existing and future
subordinated indebtedness of the Company. The
Senior Notes are effectively subordinated, however,
to all secured obligations of the Company,
including the Company's borrowings, if any, under
the Credit Facility, to the extent of the assets
securing such obligations. As of December 27, 1997,
on a pro forma basis after giving effect to the
ProSource Acquisition and the application of the
estimated net proceeds therefrom, the Senior Notes
and the Senior Notes Guarantees would have been
effectively subordinated to approximately $29.2
million in aggregate principal amount of secured
obligations of the Company and the Subsidiary
Guarantors. See "Risk Factors -- Subordination to
Senior Secured Debt; Encumbrances on Assets."
6
<PAGE> 7
SENIOR NOTE GUARANTEES..... The Senior Notes are fully and unconditionally
guaranteed on a joint and several basis by the
Subsidiary Guarantors. The Senior Note Guarantees
are general unsecured obligations of the Subsidiary
Guarantors and rank pari passu in right of payment
to all existing and future senior unsecured
indebtedness of the Subsidiary Guarantors and
senior in right of payment to all existing and
future subordinated indebtedness of the Subsidiary
Guarantors.
CERTAIN COVENANTS.......... The Senior Note Indenture contains certain
covenants that limit, among other things, the
ability of the Company to: (i) pay dividends,
redeem capital stock or make certain other
restricted payments or investments; (ii) incur
additional indebtedness or issue preferred equity
interests; (iii) merge, consolidate or sell all or
substantially all of its assets; (iv) create liens
on assets; and (v) enter into certain transactions
with affiliates or related persons. See
"Description of Notes--Senior Notes--Certain
Covenants."
FORM AND DENOMINATION...... The certificates representing the Senior Notes are
issued in fully registered form, deposited with a
custodian for and registered in the name of a
nominee of the Depositary in the form of a Global
Senior Note. Beneficial interests in the
certificates representing the Global Senior Note
are shown on, and transfers thereof are effected
through, records maintained by the Depositary and
its Participants. See "Book Entry, Delivery and
Form."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE SENIOR NOTES, SEE "RISK FACTORS."
7
<PAGE> 8
SUMMARY OF TERMS OF SENIOR SUBORDINATED NOTES
THE COMPANY................ AmeriServe Food Distribution, Inc.
SECURITIES OFFERED......... $500.0 million in aggregate principal amount of the
Company's New 10 1/8% Senior Subordinated Notes due
2007.
MATURITY DATE.............. July 15, 2007.
INTEREST RATE.............. The Senior Notes bear interest at the rate of
10 1/8% per annum, payable semi-annually on January
15 and July 15 of each year, commencing January 15,
1998.
OPTIONAL REDEMPTION........ The Senior Subordinated Notes are redeemable at the
option of the Company, in whole or in part, at any
time on or after July 15, 2002 in cash at the
redemption prices set forth herein, plus accrued
and unpaid interest and liquidated damages, if any,
thereon to the date of redemption. In addition, at
any time prior to July 15, 2000, the Company may
redeem up to 33% of the initially outstanding
aggregate principal amount of Senior Subordinated
Notes at a redemption price equal to 110.125% of
the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
thereon to the redemption date, with the net
proceeds of a Public Equity Offering; provided
that, in each case, at least 67% of the initially
outstanding aggregate principal amount of Senior
Subordinated Notes remains outstanding immediately
after the occurrence of any such redemption. See
"Description of Notes--Senior Subordinated
Notes--Optional Redemption."
CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, each
holder of Senior Subordinated Notes has the right
to require the Company to repurchase all or any
part of such holder's Senior Subordinated Notes at
an offer price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any,
thereon to the date of repurchase. See "Description
of Notes--Senior Subordinated Notes--Repurchase at
the Option of Holders--Change of Control." There
can be no assurance that, in the event of a Change
of Control, the Company would have sufficient funds
to repurchase all Senior Subordinated Notes
tendered. See "Risk Factors--Payment Upon a Change
of Control."
SUBORDINATION.............. The Senior Subordinated Notes are general unsecured
obligations of the Company and rank subordinate in
right of payment to all Senior Debt and rank senior
or pari passu in right of payment to all existing
and future subordinated indebtedness of the Company
and senior in right of payment to all existing and
future subordinated indebtedness of the Company. As
of December 27, 1997, on a pro forma basis after
giving effect to the ProSource Acquisition and the
application of the estimated net proceeds
therefrom, the Senior Subordinated Notes and the
Senior Subordinated Notes Guarantees would have
been subordinate to approximately $379.2 million
See "Risk Factors -- Subordination of Senior
Subordinated Notes to Senior Debt."
8
<PAGE> 9
SENIOR SUBORDINATED NOTE
GUARANTEES............... The Senior Subordinated Notes are fully and
unconditionally guaranteed on a joint and several
basis by the Subsidiary Guarantors. The Senior
Subordinated Note Guarantees are general unsecured
obligations of the Subsidiary Guarantors and rank
subordinate in right of payment to all Senior Debt
of the Subsidiary Guarantors and rank senior or
pari passu in right of payment to all existing and
future subordinated indebtedness of the Subsidiary
Guarantors.
CERTAIN COVENANTS.......... The Senior Subordinated Note Indenture contains
certain covenants that limit, among other things,
the ability of the Company to: (i) pay dividends,
redeem capital stock or make certain other
restricted payments or investments; (ii) incur
additional indebtedness or issue preferred equity
interests; (iii) merge, consolidate or sell all or
substantially all of its assets; (iv) create liens
on assets; and (v) enter into certain transactions
with affiliates or related persons. See
"Description of Notes--Senior Subordinated
Notes--Certain Covenants."
FORM AND DENOMINATION...... The certificates representing the Senior
Subordinated Notes are issued in fully registered
form, deposited with a custodian for and registered
in the name of a nominee of the Depositary in the
form of a Global Senior Subordinated Note.
Beneficial interests in the certificates
representing the Global Senior Subordinated Note
are shown on, and transfers thereof are effected
through, records maintained by the Depositary and
its Participants. See "Book Entry, Delivery and
Form."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE SENIOR SUBORDINATED NOTES, SEE "RISK FACTORS."
9
<PAGE> 10
RISK FACTORS
Investors should consider carefully the factors set forth below, as well as
the other information set forth elsewhere in this Prospectus, before making an
investment in the Notes. This Prospectus includes forward-looking statements,
including statements concerning the Company's business strategy, operations,
cost savings initiatives, economic performance, financial condition and
liquidity and capital resources. Such statements are subject to various risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in such forward-looking statements because of a number of
factors, including those identified in this "Risk Factors" section and elsewhere
in this Prospectus. See "Summary," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "The Business." The
forward-looking statements are made as of the date of this Prospectus, and the
Company assumes no obligation to update the forward-looking statements or to
update the reasons why actual results could differ from those projected in the
forward-looking statements.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
The Company is and will continue to be highly leveraged as a result of
substantial indebtedness it has incurred in connection with previous
acquisitions and related financings. After giving pro forma effect to the
ProSource Acquisition, the Company would have had total indebtedness of $879.2
million and stockholder's equity of $98.1 million as of December 27, 1997, and
the Company's earnings would have been inadequate to cover fixed charges by
$75.1 million for the year ended December 27, 1997. The Company may incur
additional indebtedness in the future, subject to limitations imposed by the
Indentures and the Credit Facility. See "Capitalization," "Unaudited Pro Forma
Combined Financial Statements," "The Business -- Recent Developments" and
"Description of Indebtedness."
The Company's ability to make scheduled payments of principal of, or to pay
interest on, or to refinance its indebtedness (including the Notes) depends on
its future performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors
beyond its control. Based upon the current level of operations and anticipated
growth, the management of the Company believes that available cash flow,
together with available borrowings under the Credit Facility and other sources
of liquidity, including the Accounts Receivable Program, will be adequate to
meet the Company's anticipated future requirements for working capital, capital
expenditures, scheduled payments of principal of and interest on its
indebtedness, and interest on the Notes. However, all or a portion of the
principal payments at maturity on the Notes may require refinancing. There can
be no assurance that the Company's business will generate sufficient cash flow
from operations or that future borrowings will be available in an amount
sufficient to enable the Company to service its indebtedness, including the
Notes, or to make necessary capital expenditures, or that any refinancing would
be available on commercially reasonable terms or at all. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The degree to which the Company is now leveraged could have important
consequences to holders of the Notes, including, but not limited to, the
following: (i) a substantial portion of the Company's cash flow from operations
will be required to be dedicated to debt service and will not be available for
other purposes; (ii) the Company's ability to obtain additional financing in the
future could be limited; (iii) certain of the Company's borrowings are at
variable rates of interest, which could result in higher interest expense in the
event of an increase in interest rates; and (iv) the Indentures and the Credit
Facility contain financial and restrictive covenants that limit the ability of
the Company to, among other things, borrow additional funds, dispose of assets
or pay cash dividends. Failure by the Company to comply with such covenants
could result in an event of default, which, if not cured or waived, could have a
material adverse effect on the Company. In addition, the degree to which the
Company is leveraged could prevent it from repurchasing all Notes tendered to it
upon the occurrence of a Change of Control. See "Description of Notes--Senior
Notes--Repurchase at the Option of Holders--Change of Control," "--Senior
Subordinated Notes--Repurchase at the Option of Holders--Change of Control," and
"Description of Indebtedness--Credit Facility."
10
<PAGE> 11
SUBORDINATION OF SENIOR SUBORDINATED NOTES TO SENIOR DEBT
The Senior Subordinated Notes are subordinated in right of payment to all
existing and future Senior Debt, including the principal of or premium, if any,
and interest on and all other amounts due on or payable in connection with
Senior Debt. At December 27, 1997, on a pro forma basis after giving effect to
the ProSource Acquisition, there would have been outstanding approximately
$379.2 million of Senior Debt. By reason of such subordination, in the event of
the insolvency, liquidation, reorganization, dissolution or other winding-up of
the Company or upon a default in payment with respect to, or the acceleration
of, any Senior Debt, the Holders of such Senior Debt must be paid in full before
the holders of the Senior Subordinated Notes may be paid. If the Company incurs
any additional pari passu debt, the holders of such debt would be entitled to
share ratably with the holders of the Senior Subordinated Notes in any proceeds
distributed in connection with any insolvency, liquidation, reorganization,
dissolution or other winding-up of the Company. This may have the effect of
reducing the amount of proceeds paid to holders of the Senior Subordinated
Notes. In addition, no payments may be made with respect to the principal of,
premium and Liquidated Damages, if any, or interest on the Senior Subordinated
Notes if a payment default exists with respect to Senior Debt and, under certain
circumstances, no payments may be made with respect to the principal of, premium
and Liquidated Damages, if any, or interest on the Senior Subordinated Notes for
a period of up to 179 days if a non-payment default exists with respect to
Senior Debt. In addition, the Senior Subordinated Note Indenture permits the
Company and its subsidiaries to incur additional debt if certain conditions are
met. See "Description of Notes--Senior Subordinated Notes--Subordination" and
"-- Certain Definitions."
EFFECTIVE SUBORDINATION; ENCUMBRANCES ON ASSETS
Under the Credit Facility, NEHC has granted the lenders thereunder (the
"Lenders") security interests in all of the capital stock of the Company, and
the Company has granted to the Lenders security interests in substantially all
of the current and future assets of the Company, including a pledge of all of
the issued and outstanding shares of capital stock of certain of the Company's
subsidiaries. In the event of a default on secured indebtedness (whether as a
result of the failure to comply with a payment or other covenant, a cross-
default, or otherwise), such Lenders will have a prior secured claim on the
capital stock of the Company and the assets of the Company and its subsidiaries.
As a result, the secured assets of the Company would be available to pay
obligations on the Notes only after borrowings under the Credit Facility and
other secured indebtedness have been paid in full. If the Lenders should attempt
to foreclose on their collateral, the Company's financial condition and the
value of the Notes will be materially adversely affected and could be
eliminated. See "Description of Indebtedness." At December 27, 1997, on a pro
forma basis after giving effect to the ProSource Acquisition, the Senior Notes
and the Senior Note Guarantees would have been effectively subordinated to
approximately $29.2 million of secured obligations of the Company and the
Subsidiary Guarantors.
In addition, if the Company incurs any additional senior indebtedness which
would rank pari passu in right of payment with the Senior Notes, and even if
such indebtedness is not secured, the holders of such debt would be entitled to
share ratably with the holders of the Senior Notes in any proceeds distributed
in connection with any insolvency, liquidation, reorganization, dissolution or
other winding-up of the Company. This may have the effect of reducing the amount
of proceeds paid to holders of the Senior Notes.
RELIANCE ON KEY CONTRACTS
In January 1997, the Company entered into a three-year agreement, which
became effective April 1997, to become the primary supplier to approximately
2,600 Arby's restaurants nationwide. The Company expects to generate at least
$325 million of annual net sales during the term of the agreement. No assurance
can be given that the Company's contract with Arby's will be renewed upon
expiration, that any renewal of such contract will be on terms as favorable to
the Company as the current contract or that the Company will realize expected
net sales under the existing contract.
In connection with the PFS Acquisition, the Company and Tricon entered into
a five-year Distribution Agreement pursuant to which the Company became the
exclusive distributor of specified restaurant products
11
<PAGE> 12
purchased by Pizza Hut, Taco Bell and KFC restaurants within the continental
United States, which are owned, directly or indirectly, by Tricon (other than
certain specified restaurants) or which are acquired or built by Tricon during
the term of the Distribution Agreement. On a pro forma basis, assuming the
inclusion of PFS and Post for the full year, approximately 40% of the Company's
1997 sales would have been generated under the Distribution Agreement. The
Distribution Agreement may be terminated at any time (i) by any party in the
event that the other party breaches any material term and such breach remains
unremedied for a period of 30 calendar days after written notice of such breach,
(ii) by Tricon if the Company is in material breach of the Distribution
Agreement for failure to maintain specified service levels for a specified
period of time or (iii) by either party in the event that the other party
becomes the subject of a bankruptcy, insolvency or other similar proceeding.
While exclusive or written arrangements are not typically the basis of
foodservice distribution sales and have not historically been requisite to the
Company's growth, the Distribution Agreement will expire in five years and no
assurance can be given that the Distribution Agreement will be renewed or, if
renewed, whether such renewal will be on terms as favorable as the existing
agreement. Furthermore, no assurance can be given that the Company will be able
to achieve the expected net sales under the current Distribution Agreement.
Gross profit and net pretax profit on certain sales by PFS to Pizza Hut under
the Distribution Agreement are limited.
DEPENDENCE ON CERTAIN CHAINS AND CUSTOMERS
The Company derives substantially all of its net sales from several chain
restaurant concepts. On a pro forma basis (including PFS and Post for all of
1997 but without giving effect to the ProSource Acquisition), the largest chains
serviced by the Company would have been Pizza Hut, Taco Bell and KFC,
representing 28%, 28% and 13% of 1997 sales, respectively. Adverse developments
affecting such chains or a decision by a corporate owner or franchisor to revoke
its approval of the Company as a distributor could have a material adverse
effect on the Company's operating results.
The Company's customers are generally individual franchisees or
corporate-owned restaurants within such restaurant chains. Although the
corporate owner or franchiser of a chain generally reserves the right to approve
the distributors for its franchisees, each customer generally makes its
selection of a foodservice distributor from an approved group of distributors.
On a pro forma basis (including PFS and Post for all of 1997 but without giving
effect to the ProSource Acquisition) restaurants owned by Tricon would have
accounted for approximately 40% of the Company's 1997 sales. No other customer
accounted for more than 10% of 1997 sales on either a pro forma or reported
basis. Adverse events affecting any of the Company's largest customers, a
material decrease in sales to any such customers or the loss of a major customer
through the acquisition thereof by a company with an internal foodservice
distribution business or otherwise could have a material adverse effect on the
Company's operating results. In addition, the Company's continued growth is
dependent in part on the continued growth and expansion of its customers.
A significant portion of the Company's business is conducted with customers
with which the Company does not have contracts. Such customers could cease doing
business with the Company on little or no notice. The Company's contracts with
its other customers are subject to termination by the customer prior to
expiration of the stated term under circumstances specified in each contract,
including, in some cases, failure to comply with performance reliability
standards. Although the Company is not aware of any issues of non-compliance
that could reasonably be expected to result in termination of any such contracts
prior to expiration of the stated term, and has not been notified by any
customer that it intends to terminate its contract with the Company, there can
be no assurance that historic levels of business from any customer of the
Company will be maintained in the future. See "--Key Contracts" and "The
Business--Customers."
ABILITY TO INTEGRATE ACQUISITIONS
The Company has achieved a significant portion of its growth through
acquisitions and will continue to try to grow in this way. Although each of the
previously acquired companies has a significant operating history, the Company
has a limited history of owning and operating the most recently acquired of
these businesses on a
12
<PAGE> 13
consolidated basis. Holberg Industries, Inc. ("Holberg") acquired NEBCO
Distribution of Omaha, Inc. ("NEBCO") in 1986. NEBCO acquired Evans Brothers
Company ("Evans") in January 1990 and the combined company was renamed "NEBCO
EVANS Distribution, Inc." ("NEBCO EVANS"). NEBCO EVANS acquired L.L.
Distribution Systems Inc. in 1990, Condon Supply Company in 1991, AmeriServ Food
Company in January 1996 and, in April 1997, changed its name to "AmeriServe Food
Distribution, Inc." As a result of the PFS Acquisition and, if consummated, the
ProSource Acquisition; the Company will have to integrate PFS and ProSource with
its existing business, including its prior acquisitions. While the Company
believes that such integration provides significant opportunities to reduce
costs, there can be no assurance that the Company will be able to meet
performance expectations or successfully integrate these businesses on a timely
basis without disruption in the quality and reliability of service to its
customers or diversion of management resources. In addition, while the Company
has made acquisitions successfully before, both the PFS Acquisition and the
ProSource Acquisition are substantially larger than the Company's prior
acquisitions. The integration of such businesses will also require improvements
in the Company's management information systems. There can be no assurance that
such improvements will be realized on a timely basis.
DEPENDENCE ON KEY PERSONNEL
The Company's success is, and will continue to be, substantially dependent
upon the continued services of its senior management, particularly Mr. John V.
Holten, Chairman and Chief Executive Officer of the Company, and Mr. Raymond E.
Marshall, President and Treasurer of the Company. The loss of the services of
one or more members of senior management could adversely affect the Company's
operating results. The Company has entered into employment agreements with Mr.
Marshall and other members of senior management, and has obtained key-man life
insurance in the amount of $3.0 million on Mr. Marshall. In addition, the
Company's continued growth depends on the ability to attract and retain skilled
operating managers and employees and the ability of its key personnel to manage
the Company's growth and consolidate and integrate its operations. See
"Management."
COMPETITION
The foodservice distribution industry is highly competitive. The Company
competes with other systems foodservice distribution companies that focus on
chain restaurants and with broadline foodservice distributors that distribute to
a wide variety of customers. Further, the Company could face increased
competition to the extent that there is an increase in the number of foodservice
distributors specializing in distribution to chain restaurants on a nationwide
basis. See "The Business--Competition."
CONTROL BY PRINCIPAL STOCKHOLDER
Holberg indirectly owns a majority of the issued and outstanding capital
stock of NEHC, which in turn directly owns all of the issued and outstanding
capital stock of the Company. See "Security Ownership of Certain Beneficial
Holders and Management." Holberg and DLJ collectively have sufficient voting
power to elect the entire Board of Directors of each of NEHC, and through NEHC,
the Company, and thereby exercise control over the business, policies and
affairs of NEHC and the Company, and, in general, determine the outcome of any
corporate transaction or other matters submitted to stockholders for approval,
such as any amendment to the Amended and Restated Certificate of Incorporation
of the Company (the "Certificate of Incorporation"), the authorization of
additional shares of capital stock, and any merger, consolidation or sale of all
or substantially all of the assets of the Company, all of which could adversely
affect the Company and holders of the Notes.
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes may
require the Company to repurchase 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, and Liquidated Damages, if any, to the date of repurchase. The
Indentures require that prior to such a repurchase, the Company must either
repay all outstanding indebtedness under the Credit Facility or obtain any
required consent to such repurchase. If a Change of Control were to occur, the
Company may not have the financial resources to repay all of its obligations
under the Credit Facility, the
13
<PAGE> 14
Notes and the other indebtedness that would become payable upon such event. See
"Description of Notes--Senior Notes--Repurchase at the Option of Holders--Change
of Control" and "--Senior Subordinated Notes--Repurchase at the Option of
Holders--Change of Control."
FRAUDULENT CONVEYANCE RISKS
Management of the Company believes that the indebtedness represented by the
Notes was incurred for proper purposes and in good faith, and that, based on
then-present forecasts, asset valuations and other financial information, after
the consummation of the transactions giving rise to the indebtedness, the
Company was solvent, had sufficient capital for carrying on its business and was
able to pay its debts as they mature. See "--Substantial Leverage and Debt
Service." Notwithstanding management's belief, however, if a court of competent
jurisdiction in a suit by an unpaid creditor or a representative of creditors
(such as a trustee in bankruptcy or a debtor-in-possession) were to find that,
at the time of the incurrence of such indebtedness, the Company was insolvent,
was rendered insolvent by reason of such incurrence, was engaged in a business
or transaction for which its remaining assets constituted unreasonably small
capital, intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, or intended to hinder, delay or
defraud its creditors, and that the indebtedness was incurred for less than
reasonably equivalent value, then such court could, among other things, (i) void
all or a portion of the Company's obligations to the holders of the Notes, the
effect of which would be that the holders of the Notes may not be repaid in full
and/or (ii) subordinate the Company's obligations to the holders of the Notes to
other existing and future indebtedness of the Company to a greater extent than
would otherwise be the case, the effect of which would be to entitle such other
creditors to be paid in full before any payment could be made on the Notes.
The Company's obligations under the Senior Notes are guaranteed, jointly
and severally, on a senior unsecured basis, by each of the Subsidiary
Guarantors. The Company's obligations under the Senior Subordinated Notes are
guaranteed, jointly and severally, on a senior subordinated basis, by each of
the Subsidiary Guarantors. Management of the Company believes that indebtedness
represented by the Senior Note Guarantees and the Senior Subordinated Note
Guarantees was incurred by the Subsidiary Guarantors for proper purposes and in
good faith, and that, based on present forecasts, asset valuations and other
financial information, after consummation of the transactions giving rise to the
indebtedness, each of the Subsidiary Guarantors was solvent, had sufficient
capital for carrying on its business, and was able to pay its debts as they
mature. See "--Substantial Leverage and Debt Service." Notwithstanding
management's belief, however, if a court of competent jurisdiction in a suit by
an unpaid creditor or a representative of creditors (such as a trustee in
bankruptcy or a debtor-in-possession) were to find that, at the time of the
incurrence of such indebtedness, the Subsidiary Guarantors were insolvent, were
rendered insolvent by reason of such incurrence, were engaged in a business or
transaction for which their remaining assets constituted unreasonably small
capital, intended to incur, or believed that they would incur, debts beyond
their ability to pay such debts as they matured, or intended to hinder, delay or
defraud their creditors, and that the indebtedness was incurred for less than
reasonably equivalent value, then such court could, among other things, (i) void
all or a portion of such Subsidiary Guarantors' obligations to the holders of
the Notes, the effect of which would be that the holders of the Notes may not be
repaid in full or at all and/or (ii) subordinate such Subsidiary Guarantors'
obligations to the holders of the Notes to other existing and future
indebtedness of such Subsidiary Guarantors, the effect of which would be to
entitle such other creditors to be paid in full before any payment could be made
on the Notes. Among other things, a legal challenge to a Note Guarantee on
fraudulent conveyance grounds may focus on the benefits, if any, realized by the
Subsidiary Guarantors as a result of the issuance by the Company of the Notes.
TRADING MARKET FOR THE NOTES
Prior to the offering of the Notes there was no existing trading market for
the Notes, and there can be no assurance regarding the existence of a market for
the Notes or the ability of the Holders of the Notes to sell their Notes or the
price at which such Holders may be able to sell their Notes. The Notes could
trade at prices that may be higher or lower than their initial offering price
depending on many factors, including prevailing interest rates, the Company's
operating results and the market for similar securities. Although they are not
obligated to do so, DLJ and BancAmerica currently make a market in the Notes.
Any such market-making
14
<PAGE> 15
activity may be discontinued at any time, for any reason, without notice at the
sole discretion of DLJ and BancAmerica. No assurance can be given as to the
liquidity of or the trading market for the Notes.
DLJ and BancAmerica may be deemed to be affiliates of the Company and, as
such, may be required to deliver a prospectus in connection with their
market-making activities in the Notes. Pursuant to the Registration Rights
Agreements entered into between the Company, the Subsidiary Guarantors and DLJ
and BancAmerica, the Company and the Subsidiary Guarantors agreed to use their
respective best efforts to file and maintain a registration statement that would
allow DLJ and BancAmerica to engage in market-making transactions in the Notes
for up to 120 days from the date on which the exchange offer for each of the
Senior Notes and the Senior Subordinated Notes, respectively, was consummated.
The Company has agreed to bear substantially all the costs and expenses related
to such registration statement.
FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements, including statements
concerning the Company's business strategy, operations, cost savings
initiatives, economic performance, financial condition and liquidity and capital
resources. Such statements are subject to various risks and uncertainties. The
Company's actual results may differ materially from the results discussed in
such forward-looking statements because of a number of factors, including those
identified in the sections of this Prospectus captioned "Prospectus Summary,"
"Risk Factors," "Management's Discussion of Financial Condition and Results of
Operations" and "The Business." Forward-looking statements are made as of the
date of this Prospectus, and the Company assumes no obligation to update the
forward-looking statements, or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
USE OF PROCEEDS
This Prospectus is delivered in connection with the sale of the Notes by
DLJ and BancAmerica in market-making transactions. The Company will not receive
any of the proceeds from such transactions.
15
<PAGE> 16
CAPITALIZATION
(DOLLARS IN THOUSANDS)
The following table sets forth the consolidated cash and capitalization of
the Company as of December 27, 1997 and the pro forma consolidated
capitalization of the Company as of December 27, 1997, adjusted to reflect the
ProSource Acquisition. This table should be read in conjunction with the
historical and unaudited pro forma financial statements of the Company and the
related notes thereto included elsewhere herein. See "The Company--Recent
Developments."
<TABLE>
<CAPTION>
AS OF DECEMBER 27, 1997
-----------------------
ACTUAL PRO FORMA
--------- ----------
<S> <C> <C>
Cash and cash equivalents................................... $231,131 $ 86,732
======== ========
Long-term debt (including current portion):
Revolving Credit Facility................................. $ -- $ --
Senior Notes due 2006..................................... 350,000 350,000
Capital lease obligations................................. 29,238 29,238
Senior Subordinated Notes due 2007........................ 500,000 500,000
-------- --------
Total long-term debt.............................. 879,238 879,238
Total common stockholder's equity........................... 98,055 98,055
-------- --------
Total capitalization........................................ $977,293 $977,293
======== ========
</TABLE>
16
<PAGE> 17
SELECTED AMERISERVE HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following table presents selected historical financial data of the
Company at and for the fiscal years 1993, 1994, 1995, 1996 and 1997, which have
been derived from the audited financial statements of the Company. The
historical financial statements of the Company for the fiscal years 1994, 1995,
1996 and 1997 were audited by Ernst & Young LLP. The selected financial data set
forth below should be read in conjunction with "The Business -- Recent
Developments," "Summary Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the historical
financial statements of the Company and the related notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................... $ 327,606 $ 358,516 $ 400,017 $1,280,598 $3,446,191
Gross profit................................. 35,153 37,914 40,971 128,849 342,179
Operating expenses........................... 32,054 34,488 36,695 114,560 353,069
--------------- --------------- --------------- --------- ----------
Operating income (loss)...................... 3,099 3,426 4,276 14,289 (10,890)
Interest expense, net........................ (2,759) (3,294) (3,936) (10,999) (46,805)
Loss on sale of accounts receivable.......... -- -- -- -- (6,757)
Interest income-Holberg and affiliate........ 150 533 749 528 632
--------------- --------------- --------------- --------- ----------
Income (loss) before income taxes,
extraordinary loss, and cumulative effect
of accounting change....................... 490 665 1,089 3,818 (63,820)
Provision (credit) for income taxes.......... 172 523 583 1,300 1,030
--------------- --------------- --------------- --------- ----------
Income (loss) before extraordinary loss and
cumulative effect of accounting change..... 318 142 506 2,518 (64,850)
Extraordinary loss on early extinguishment of
debt....................................... (613) -- -- -- (9,373)
Cumulative effect of change in method of
accounting for income taxes................ (495) -- -- -- --
--------------- --------------- --------------- --------- ----------
Net income (loss)............................ $ (790) $ 142 $ 506 $ 2,518 $ (74,223)
=============== =============== =============== ========= ==========
OTHER DATA:
EBITDA(1).................................... $ 6,195 $ 6,710 $ 7,038 $ 26,041 $ 75,487
Depreciation and amortization................ 3,096 3,284 2,762 10,061 33,928
Capital expenditures......................... 2,205 1,331 2,496 12,518 22,921
Net cash provided by (used in):
Operating activities....................... 4,680 4,276 4,505 1,213 62,846
Investing activities....................... (6,556) (5,422) (5,574) (105,013) (877,808)
Financing activities....................... 2,676 490 619 105,387 1,043,931
Ratio of earnings to fixed charges(2)........ 1.1x 1.1x 1.2x 1.2x N/A
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 1,682 $ 1,025 $ 575 $ 2,162 $ 231,131
Total assets................................. 75,265 79,218 77,503 291,103 1,462,321
Long-term debt, including current portion.... 34,170 32,160 32,779 129,905 879,238
Total stockholder's equity................... 14,779 17,205 10,157 42,675 98,055
</TABLE>
- ---------------
(1) EBITDA represents operating income plus depreciation, amortization and
excludes one-time, non-recurring gains and losses. EBITDA in fiscal 1996
adds back a net one-time, non-recurring charge of $1.7 million. EBITDA in
fiscal 1997 excludes $52.4 million of impairment, restructuring and other
unusual charges. EBITDA is presented because management believes it is a
widely accepted financial indicator used by certain investors and analysts
to analyze and compare companies on the basis of operating performance.
EBITDA is not intended to represent cash flows for the period, nor has it
been presented as an alternative to operating income as an indicator of
operating performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles. The Company understands that, while EBITDA
is frequently used by securities analysts in the evaluation of companies,
EBITDA, as used herein, is not necessarily comparable to other similarly
titled captions of other companies due to potential inconsistencies in the
method of calculation. See the historical and unaudited pro forma financial
statements of the Company and the related notes thereto included elsewhere
herein.
(2) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest expense,
amortization of deferred finance fees and one-third of the rent expense from
operating leases, which management believes is a reasonable approximation of
the interest factor of the rent. For the fiscal year 1997, earnings were
inadequate to cover fixed charges by $63.8 million.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is North America's largest foodservice distributor to chain
restaurants, distributing a wide variety of items, including meat, poultry,
frozen foods, canned and dry goods, produce, beverages, dairy products, paper
goods, cleaning and other supplies and equipment to approximately 25,500
restaurants. The Company's major customers are franchisers and/or franchisees in
the Pizza Hut, Taco Bell, KFC, Wendy's, Arby's, Burger King and Dairy Queen
restaurant systems.
On July 11, 1997, the Company acquired the U.S. and Canadian operations of
PFS. The effective date of the acquisition was June 11, 1997, the end of PFS'
second quarter. PFS distributed food products, supplies and equipment to
franchised and company-owned restaurants in the Pizza Hut, Taco Bell and KFC
systems, which were spun-off by PepsiCo, Inc. in October 1997 and are now
operating as Tricon Global Restaurants, Inc. As the acquisition has been
accounted for under the purchase method, twenty-eight weeks of PFS operating
results are included in the Company's operating results for the year ended
December 27, 1997. Because of the relative sizes of the Company and PFS, which
had net sales of $1.3 billion and $3.4 billion, respectively, for fiscal 1996,
the comparisons of operating results for 1997 to 1996 presented below are
significantly impacted by the PFS acquisition.
In April 1997, the Company began providing foodservice distribution to
approximately 2,600 Arby's restaurants under a three-year contract. While the
majority of Arby's restaurants are serviced directly by the Company, some are
serviced by other cooperating independent distributors.
On January 25, 1996, the Company acquired AmeriServ, a distributor of food
products and supplies to chain restaurants in such systems as Wendy's, Dairy
Queen, Burger King, KFC and Applebee's. Because of the relative sizes of the
Company and AmeriServ, which had net sales of $400 million and $939 million,
respectively, for fiscal 1995, the comparisons of operating results for 1996 to
1995 presented below are significantly impacted by the AmeriServ acquisition.
RECENT DEVELOPMENTS
On January 29, 1998, the Company entered into a definitive merger agreement
pursuant to which the Company will acquire all of the approximately 9.4 million
outstanding shares of ProSource for $15.00 per share in cash. The Company will
also refinance the existing indebtedness of ProSource of approximately $174
million. The transaction is expected to close in the second quarter of 1998.
ProSource, which reported sales of $3.9 billion for its fiscal year ended
December 27, 1997, is in the foodservice distribution business, specializing in
quick-service and casual dining chain restaurants. ProSource services
approximately 12,700 restaurants, principally in the United States, in such
chains as Burger King, Red Lobster, Olive Garden, TGI Friday's, Long John
Silver's, Chili's, Sonic, Chick-fil-A, Wendy's and TCBY. The Company will fund
the acquisition with cash and cash equivalents on hand as well as additional
capital expected from the accounts receivable sale program as discussed below.
Because of similarities in activities, the Company intends to consolidate
certain operations of ProSource with those of the Company. With opportunities to
combine certain warehousing, transportation and administrative activities, the
Company believes that significant cost efficiencies are achievable.
18
<PAGE> 19
RESULTS OF OPERATIONS
The following table presents certain financial information of the Company,
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................. 100.0% 100.0% 100.0%
Cost of goods sold.................... 89.8 89.9 90.1
Gross profit.......................... 10.2 10.1 9.9
Distribution, selling and
administrative expenses............. 8.8 8.6 8.2
Operating income before amortization
of intangible assets and impairment,
restructuring and other unusual
charges............................. 1.4 1.5 1.7
</TABLE>
Fiscal 1997 compared to Fiscal 1996
Net sales increased $2.2 billion, or 169% to $3.4 billion in 1997. The
acquisition of PFS accounted for $1.8 billion of the increase. The remaining
sales growth was largely due to the addition of service to Arby's.
Gross profit increased $213.3 million, or 166%, to $342.2 million in 1997
due primarily to the acquisition of PFS. The gross profit margin decreased from
10.1% in 1996 to 9.9% in 1997 reflecting a customer mix shift towards business
with relatively higher product costs.
Distribution, selling and administrative expenses increased $174.1 million,
or 159%, to $283.9 million in 1997 due primarily to the acquisition of PFS.
Distribution, selling and administrative expenses as a percent of net sales
decreased from 8.6% in 1996 to 8.2% in 1997. This change reflects the impact of
PFS lower operating expense margin, as well as leveraging of the incremental
Arby's business.
Operating income before amortization of intangible assets and impairment,
restructuring and other unusual charges increased $39.2 million, or 205%, to
$58.3 million in 1997 due primarily to the acquisition of PFS. As a percent of
net sales, this income measure rose from 1.5% in 1996 to 1.7% in 1997. This
change was driven by the lower distribution, selling and administrative expense
as a percent of net sales as discussed above.
Amortization of intangible assets increased $12.0 million to $16.8 million
in 1997, reflecting the amortization of the intangible assets arising from the
allocation of the PFS purchase price.
Impairment, restructuring and other unusual charges in 1997 totaled $52.4
million. This charge includes (a) impairment of property, equipment and other
assets ($12.4 million), (b) restructuring (exit) costs for future lease
terminations and employee severance ($13.4 million), (c) costs incurred to date
to integrate the AmeriServ and PFS operations and other unusual items ($13.0
million) and (d) bridge financing fees, commitment fees for the accounts
receivable sale program (see discussion below) and other one-time costs
associated with the acquisition of PFS ($13.6 million). The impairment charge
and the accrued restructuring (exit) costs reflect actions to be taken with
respect to the Company's existing facilities as a result of the acquisition of
PFS. During the third quarter of 1997, management performed an extensive review
of the existing and recently acquired PFS operations with the objective of
developing a business plan for the restructuring and consolidation of the
organizations. The business plan, which was approved by the Company's Board of
Directors late in the third quarter, identified a number of actions designed to
improve the efficiency and effectiveness of the combined entity's warehouse and
transportation network and operations support infrastructure. These actions,
which are expected to be completed by mid-1999, include construction of new
strategically located warehouse facilities, closures of certain existing
warehouse facilities and expansions of others, dispositions of property and
equipment, conversion of computer systems, reductions in workforce and
relocation of the Company's headquarters from Brookfield, Wisconsin to Dallas,
Texas. The costs incurred to date to integrate the AmeriServ and PFS operations
include start-up costs of new warehouse facilities and
19
<PAGE> 20
employee relocation and other expenses to realign the operations support
infrastructure. Ongoing integration costs will continue to be reported as a
separate component of operating expenses.
Interest expense net of interest income increased $35.8 million to $46.8
million in 1997, reflecting interest on additional debt primarily to finance the
acquisition of PFS.
Loss on sale of accounts receivable relates to an ongoing program
established by the Company to provide additional financing capacity. Under the
program, accounts receivable are sold to a consolidated, wholly owned special
purpose bankruptcy remote subsidiary, which in turn transfers the receivables to
a master trust. The loss on sale of accounts receivable of $6.8 million
represents the return to investors in certificates issued by the master trust.
In a transaction expected to be completed in April 1998, the current series of
certificates issued by the master trust will be restructured, resulting in
additional capital to the Company under the program of approximately $50
million. See Note 7 to the historical financial statements of the Company
included elsewhere herein.
Provision for income taxes represents estimated current income taxes
payable. The Company's net deferred tax assets are offset entirely by a
valuation allowance, reflecting the Company's net operating loss carryforward
position.
Extraordinary loss of $9.4 million in 1997 resulted from early
extinguishment of debt. This charge represents the unamortized balance of
deferred financing costs associated with previous credit facilities.
Net loss of $74.2 million in 1997 compared to net income of $2.5 million in
1996 was driven by the impairment, restructuring and other unusual charges, as
well as the increased interest expense.
Fiscal 1996 Compared to Fiscal 1995
Net sales increased $880.6 million, or 220%, to $1.3 billion in 1996 due
primarily to the AmeriServ acquisition. The increase in net sales was net of
certain account resignations made during fiscal 1996. The Company regularly
reviews the profitability of its account portfolio, and at times decides to
discontinue relationships with accounts deemed not sufficiently profitable for
the Company.
Gross profit increased $87.9 million, or 215%, to $128.8 million in 1996
due primarily to the AmeriServ acquisition. Gross margin declined slightly from
10.2% in 1995 to 10.1% in 1996, due to the slightly higher cost of products
purchased by customers added through the AmeriServ acquisition.
Distribution, selling and administrative expenses increased $74.4 million,
or 210%, to $109.8 million in 1996 due primarily to the AmeriServ acquisition.
Distribution, selling and administrative expenses as a percent of net sales
decreased from 8.8% in 1995 to 8.6% in 1996, reflecting a gain on sale of
property by an affiliate and certain cost benefits in integrating the AmeriServ
business.
Operating income before amortization of intangible assets increased $13.5
million, or 243%, to $19.1 million in 1996 due primarily to the AmeriServ
acquisition. As a percent of net sales, this income measure rose slightly from
1.4% in 1995 to 1.5% in 1996, due primarily to the operating expense margin
improvements discussed above.
Amortization of intangible assets increased $3.5 million to $4.8 million in
1996 reflecting the amortization of intangible assets arising from the
allocation of the AmeriServ purchase price.
Interest expense net of interest income increased $7.1 million to $11.0
million in 1996, reflecting interest on additional debt primarily to finance the
acquisition of AmeriServ.
Provision for income taxes represents estimated current income taxes
payable. The Company's net deferred tax assets are offset entirely by a
valuation allowance, reflecting the Company's net operating loss carryforward
position.
Net income increased $2.0 million to $2.5 million in 1996, reflecting the
operating income from the acquired AmeriServ business, partially offset by the
increased interest expense.
20
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
Capital resources are expected to be sufficient to support ongoing business
needs as well as activities to integrate acquisitions. These resources include
cash provided by operating activities, capital lease financing of capital
expenditures, cash and cash equivalents on hand, capital contributions from NEHC
and an available revolving credit facility of approximately $137 million at
March 15, 1998.
Fiscal 1997 compared to Fiscal 1996
Net cash provided by operating activities increased $61.6 million to $62.8
million in 1997. Net cash provided by operating activities in 1997 included
$13.6 million in cash outflows for bridge financing fees, commitment fees
related to the accounts receivable sale program and other indirect costs
associated with the acquisition of PFS and $7.2 million of cash extraordinary
loss. Excluding these nonrecurring items, net cash provided by operating
activities was $83.6 million in 1997, compared to $1.2 million in 1996. This
increase reflects favorable working capital changes due primarily to timing of
payments as well as the cash earnings generated by the PFS operations, partially
offset by higher interest payments.
Unusual charges in 1997 also included $12.4 million in noncash impairment
of property, equipment and other assets and $13.4 million in restructuring
(exit) cost accruals for future lease terminations and employee severance. These
exit costs represent cash outflows in future periods.
Net cash used for investing activities increased $772.8 million to $877.8
million in 1997 reflecting the $841 million acquisition of PFS. Capital
expenditures increased $10.4 million to $22.9 million in 1997, driven by the
impact of the acquisition of PFS as well as additional warehouse capacity. Cash
capital expenditures (excluding capital leases) are expected to approximate $50
million in 1998, including spending related to new computer systems, warehouse
equipment purchases and leasehold improvements.
Net cash provided by financing activities in 1997 reflected debt and equity
financing transactions to support both the acquisition of PFS and future capital
needs and to refinance existing borrowings. The debt transactions included
issuance in July 1997 of $500 million of 10 1/8% Senior Subordinated Notes due
2007 and $205 million in term loans. The term loans were repaid in October 1997
with proceeds from issuance of $350 million of 8 7/8% Senior Notes due 2006.
Also included in net cash provided by financing activities is $225 million in
proceeds from the initial sale under the accounts receivable program described
above. NEHC, the Company's parent, provided $130 million in equity financing.
Fiscal 1996 compared to Fiscal 1995
Net cash provided by operating activities decreased $3.3 million to $1.2
million in 1996. This change reflected an increase in working capital required
to service the customer base of the acquired AmeriServ business, partially
offset by an increase in cash earnings driven by the AmeriServ acquisition.
Net cash used for investing activities increased $99.4 million to $105.0
million in 1996 reflecting the $92.9 million acquisition of AmeriServ. Capital
expenditures increased $10.0 million to $12.5 million in 1996 as a result of
expenditures to modify and expand certain distribution centers.
Net cash provided by financing activities in 1996 reflected a net increase
of $120 million in borrowings under the Company's credit facilities and proceeds
of $30 million from the issuance of preferred stock to fund the acquisition of
AmeriServ and refinance existing borrowings.
SEASONALITY AND INFLATION
Historically, the Company's sales and operating results have reflected
seasonal variations. The Company experiences lower net sales and income from
operations in the first and fourth quarters, with the effects being more
pronounced in the first quarter. Additionally, the effect of these seasonal
variations is more pronounced in regions where winter weather is generally more
inclement.
Inflation has not had a significant impact on the Company's operations.
Food price deflation could adversely affect the Company's profitability as a
significant portion of the Company's sales are at prices based
21
<PAGE> 22
on product cost plus a percentage markup. The Company has not experienced
significant adverse effects of food price deflation in recent years.
COMPUTER SYSTEMS AND POTENTIAL YEAR 2000 ISSUE
An important component of the consolidation effort is the replacement of
most existing management information systems with a new software platform and
hardware configuration. The new computer system will complement the
consolidation effort by providing the flexibility to support the varied
processes of the combined business as well as allowing greater centralization of
support functions. The Company expects to incur significant internal staff costs
as well as significant consulting and other expenditures to implement the new
system. Another critical benefit of the new system is that it replaces
applications that are not Year 2000 compliant. The implementation of the new
system is underway and expected to be completed in mid-1999. Because of the Year
2000 issue, a delay in the implementation of the new system could have a
significant adverse impact on the Company's operations. Further, the Company is
working with vendors and customers who are at various stages in analyzing this
issue. There can be no assurance that the systems of other companies on which
the Company's systems rely on or interface with will be timely converted. While
the cost to implement the new system is significant ($40-50 million), the
anticipated expenses to resolve Year 2000 issues with other peripheral systems
used by the Company are not expected to be significant.
22
<PAGE> 23
THE BUSINESS
AmeriServe is a wholly-owned subsidiary of NEHC. NEHC is also the parent
company of Holberg Warehouse Properties, Inc., a Delaware corporation ("HWPI").
AmeriServe accounts for substantially all of NEHC's assets and NEHC conducts
substantially all of its business through AmeriServe. HWPI's sole operation
consists of owning two distribution centers occupied by AmeriServe. AmeriServe
operates in a single business segment, as described below.
NEHC is a wholly owned subsidiary of Nebco Evans Distributors, Inc.
("NED"), which is a majority owned subsidiary (92.9%) of Holberg. Holberg is a
privately held diversified service company with subsidiaries operating within
the food service distribution and parking services industries in North America.
Holberg was formed in 1986 to acquire and manage food service distribution
businesses. Holberg acquired NEBCO in 1986. NEBCO acquired Evans in January 1990
and the combined company was renamed NEBCO EVANS Distribution, Inc. NEBCO EVANS
acquired L.L. Distribution Systems Inc. in 1990, Condon Supply Company in 1991
and AmeriServ, a distributor of food products and supplies to chain restaurants
in such systems as Wendy's, Dairy Queen, Burger King, KFC and Applebee's, in
January 1996. In conjunction with the AmeriServ acquisition, on January 25,
1996, NEHC was formed as a wholly-owned subsidiary of NED and acquired all of
the stock of NEBCO EVANS. In April 1997, NEBCO EVANS, a Nebraska corporation,
changed its name to AmeriServe Food Distribution, Inc.
AmeriServe is North America's largest systems foodservice distributor
specializing in distribution to chain restaurants. The Company is the primary
supplier to its customers of a wide variety of items, including fresh and frozen
meat and poultry, seafood, frozen foods, canned and dry goods, fresh and
pre-processed produce, beverages, dairy products, paper goods, cleaning supplies
and equipment. The Company currently serves over 30 different restaurant chains
and over 25,500 restaurant locations in North America. The Company has had
long-standing relationships with such leading restaurant concepts as Pizza Hut,
Taco Bell, KFC, Wendy's, Burger King, Dairy Queen, Subway and Applebee's.
On July 11, 1997, the Company consummated the PFS Acquisition. PFS
distributed food products and supplies and restaurant equipment to franchised
and company-operated restaurants in the Pizza Hut, Taco Bell and KFC systems.
These systems were spun-off by PepsiCo in October 1997 and are now operating as
Tricon. In addition, in connection with the PFS Acquisition, the Company entered
into the Distribution Agreement whereby it became the exclusive distributor of
selected products until July 11, 2002 to the approximately 9,800 Pizza Hut, Taco
Bell and KFC restaurants in the continental United States owned by Pizza Hut,
Inc., Taco Bell Corp., Kentucky Fried Chicken Corporation and, Kentucky Fried
Chicken of California, Inc. (all subsidiaries of Tricon) and their subsidiaries
(the foregoing, collectively, the "Tricon Subsidiaries,") and previously
serviced by PFS. In October 1997, AmeriServe also acquired PFS de Mexico, S.A.
de C.V., a regional systems food service distributor based in Mexico City,
Mexico for $8.0 million.
On July 11, 1997, in connection with the PFS Acquisition, the Company
issued and sold $500.0 million principal amount of Senior Subordinated Notes.
The Senior Subordinated Notes were sold pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. On December 12, 1997, the Company
consummated an offer to exchange the Senior Subordinated Notes for new Senior
Subordinated Notes, which are registered under the Securities Act with terms
substantially identical to the Senior Subordinated Notes. See Note 6 to the
historical financial statements of the Company included elsewhere herein.
On October 15, 1997, AmeriServe issued and sold $350,000,000 in aggregate
principal amount at maturity of Senior Notes pursuant to the Senior Note
Indenture. The Senior Notes were sold pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act. On December 12, 1997, AmeriServe consummated an offer to exchange the
Senior Notes for new Senior Notes, which are registered under the Securities
Act, with terms substantially identical to the Senior Notes. See Note 6 to the
historical financial statements of the Company included elsewhere herein.
On December 28, 1997, pursuant to an Agreement and Plan of Merger by and
among Nebraska AmeriServe, AmeriServ and Post, Nebraska AmeriServe merged with
and into AmeriServ and Post merged
23
<PAGE> 24
with and into AmeriServ, in each case with AmeriServ, a Delaware corporation, as
the surviving corporation. In the mergers, AmeriServ changed its name to
AmeriServe Food Distribution, Inc. In the mergers, all of the outstanding equity
securities of AmeriServ and Post were cancelled, and all of the outstanding
equity securities of Nebraska AmeriServe were converted into substantially
identical securities of the Company. The Company effected the mergers to
rationalize its corporate organization and to reduce various compliance and
regulatory costs arising from having subsidiaries incorporated in various
jurisdictions and to move its jurisdiction of incorporation from Nebraska to
Delaware.
RECENT DEVELOPMENTS
On January 29, 1998, AmeriServe, Steamboat Acquisition Corp., a newly
formed Delaware corporation and wholly owned subsidiary of AmeriServe, and
ProSource entered into the Merger Agreement pursuant to which AmeriServe will
acquire all outstanding shares of ProSource for cash. ProSource provides
foodservice distribution to restaurants in North America. ProSource also
provides purchasing and logistics services to the foodservice market in North
America. ProSource's 3,400 employees serve approximately 12,700 restaurants,
including Burger King, Chick-fil-A, Chili's, Long John Silver's, Olive Garden,
Red Lobster, Sonic, TCBY, TGI Friday's and Wendy's, from a nationwide network of
distribution centers and its Corporate Support Center in Coral Gables, Florida.
The ProSource Acquisition is subject to the approval of ProSource's stockholders
and certain other customary conditions. In connection with the Merger Agreement,
certain stockholders of ProSource have entered into a voting agreement with
AmeriServe pursuant to which such stockholders have agreed to vote their shares
in favor of the ProSource Acquisition. Such shares are sufficient to assure the
approval of the ProSource Acquisition. ProSource and AmeriServe have been
granted early termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
FOODSERVICE DISTRIBUTION INDUSTRY
The foodservice distribution business involves the purchasing, receiving,
warehousing, marketing, selecting, loading and delivery of fresh and frozen meat
and poultry, seafood, frozen foods, canned and dry goods, fresh and preprocessed
produce, beverages, dairy products, paper goods, cleaning supplies, equipment
and other supplies from manufacturers and vendors to a broad range of
enterprises, including restaurants, cafeterias, nursing homes, hospitals, other
health care facilities and schools (but generally does not include supermarkets
and other retail grocery stores). The United States foodservice distribution
industry was estimated to generate $134 billion in sales in 1997.
Within the foodservice distribution industry, there are two primary types
of distributors: broadline foodservice distributors and specialist foodservice
distributors, such as the Company. Broadline foodservice distributors service a
wide variety of customers including both independent and chain restaurants,
schools, cafeterias and hospitals. Broadline distributors may purchase and
inventory as many as 25,000 different food and food-related items. Customers
utilizing broadline foodservice distributors typically purchase inventory from
several distributors. Specialist foodservice distributors may be segregated into
three categories: product specialists, which distribute a limited number of
products (such as produce or meat); market specialists, which distribute to one
type of restaurant (such as Mexican); and systems specialists, which focus on
one type of customer (such as chain restaurants or health care facilities).
The Company operates as a systems distributor that specializes in servicing
chain restaurants. Systems specialists, such as the Company, typically purchase
and inventory between 1,100 and 5,500 different food and food-related items and
often serve as a single source of supply for their customers. Broadline food
service distributors generally rely on sales representatives who must call on
customers regularly. Systems distributors, however, regularly process orders
electronically without the need for a sales representative's involvement.
BUSINESS STRATEGY
The Company's objective is to continue to grow net sales and EBITDA by
implementing the following key elements of its business strategy:
24
<PAGE> 25
- Continue to Pursue Internal and External Growth Opportunities. The
Company intends to continue to grow through a combination of the
development of new business from existing customers, the addition of new
chains, international expansion and selective acquisitions.
Growth From Existing Chains. As the primary foodservice
distributor to most of its customers, the Company expects to benefit
from the continued growth of the domestic chain restaurant industry, the
fastest growing sector of the restaurant industry. From 1985 to 1995,
the chain restaurant segment experienced an approximately 7.4% net sales
CAGR, which exceeds the estimated 3.0% CAGR experienced by the overall
restaurant industry. The Company expects to realize growth from its
existing base of customers and concepts primarily due to: (i) increased
traffic within existing restaurants; (ii) the addition of new product
lines; (iii) new restaurant development and restaurant acquisitions by
existing customers; and (iv) the addition of new customers within
concepts currently serviced by the Company.
Growth Through Addition of New Chains. The Company continually
monitors the marketplace for opportunities to expand its portfolio of
customers and concepts. The Company targets (i) chains operating in
geographic areas where the Company could benefit from increased customer
density, further enhancing its operating leverage, and (ii) concepts
that could benefit from the Company's national presence and superior
customer service. In April 1997, the Company began operating under a
recently awarded three-year exclusive contract to provide foodservice
distribution to over 2,600 Arby's restaurants nationwide. In addition,
the Company plans to pursue additional export opportunities and further
expand its operations in international markets. After giving effect to
the PFS Acquisition, the Company exports products from its distribution
centers in the United States to approximately 65 foreign countries.
Pursue Selective Acquisition Opportunities. As North America's
largest systems foodservice distributor serving chain restaurants, the
Company believes it is well positioned to capitalize on the
consolidation taking place in the fragmented foodservice distribution
industry. The number of foodservice distributors has decreased from
approximately 3,600 in 1985 to approximately 3,000 in 1997, with a
significant increase in the market shares of the largest distributors.
The Company intends to continue to make strategic fold-in acquisitions
in order to augment its operations in existing markets, enhance customer
density and further reduce costs, and may also make larger acquisitions
as appropriate opportunities arise.
- Capitalize on the Benefits of the PFS and ProSource
Acquisitions. Management believes that combining the operations of
AmeriServe, PFS and ProSource will present it with opportunities to
eliminate duplicative costs and realign the Company's distribution center
network to effectively capitalize on economies of scale and the benefits
of higher customer density. Management has identified approximately $25
million of annual cost savings as a result of the PFS Acquisition, which
it believes it can achieve through the elimination of general and
administrative expenses and the consolidation of distribution centers in
certain markets. In connection with the PFS Acquisition, the Company
expects to reduce the number of current distribution centers from 40 to
25. In addition, the five-year Distribution Agreement further secures the
Company's customer base and provides for a long-term contract covering
approximately 40% of the Company's pro forma 1997 sales (assuming the
inclusion of PFS and Post for the full year).
- Continue to Maximize Operating Leverage. As the largest systems
foodservice distributor in North America, the Company pursues a low-cost
operating strategy based primarily on achieving economies of scale in the
areas of warehousing, transportation, general and administrative functions
and management information systems. The Company generates significant
operating leverage by utilizing large distribution centers strategically
within each of its geographic markets, enabling it to: (i) service
multiple concepts from the same warehouse; (ii) maximize the density of
restaurants served from each facility; (iii) optimize delivery routes;
(iv) invest in advanced technology, which increases operational
efficiencies and enhances customer service; and (v) manage inventory more
efficiently.
- Continue to Provide Superior Customer Service. The Company believes it
enjoys a reputation for providing consistent, high quality service based
on its customer focus, its commitment to service
25
<PAGE> 26
excellence and the depth of its management team. The Company has
successfully implemented a decentralized management structure that enables
the Company to respond quickly and flexibly to local customer needs. The
Company typically interacts with its customers on a daily basis, and
generally makes multiple deliveries to each restaurant each week. The
Company measures daily its service performance by continuously monitoring
the accuracy and promptness of deliveries. The Company's advanced computer
systems are linked to many of its customers' locations, enabling customers
to communicate electronically with the Company, thereby reducing the
Company's administrative costs, and enabling it to more efficiently
respond to customers' needs. In addition, the Company's national presence
allows it to provide consistent and reliable service to national
restaurant concepts with geographically diverse locations.
CUSTOMERS
The Company's customers are generally individual franchisees or
franchiser-owned restaurants of chain restaurant concepts. The Company's
customers include over 30 restaurant concepts with over 25,500 restaurant
locations prior to the ProSource Acquisition. The corporate owner or franchiser
of the restaurant concept generally reserves the right to designate one or more
approved foodservice distributors within a geographic region, and each
franchisee is typically allowed to select its foodservice distributor from such
approved list.
Including sales to franchiser-owned and franchised restaurants, the
Company's sales to the following restaurant concepts as an approximate
percentage of total pro forma sales (including PFS for all of 1997 and Post for
all of 1996 and 1997 but without giving effect to the ProSource acquisition)
were:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Pizza Hut................................................... -- 28%
Taco Bell................................................... -- 28%
KFC......................................................... 9% 13%
Wendy's..................................................... 35% 11%
Burger King................................................. 17% 5%
</TABLE>
On a pro forma basis, assuming the inclusion of PFS and Post for the full
year, restaurants owned by the Tricon Subsidiaries would have accounted for
approximately 40% of the Company's 1997 sales. No other customer accounted for
more than 10% of 1997 sales on either a pro forma or reported basis. One
customer, a franchiser, accounted for approximately 11% of 1996 net sales on a
reported basis.
The Distribution Agreement entered into with the Tricon Subsidiaries
provides the Company with exclusive distribution rights for certain restaurant
products to approximately 9,800 Pizza Hut, Taco Bell and KFC restaurants for a
five-year term expiring on July 11, 2002. Gross profit and net pretax profit on
certain sales to Pizza Hut under the Distribution Agreement are limited. Tricon
is actively engaged in the sale to franchisees of Taco Bell and Pizza Hut
restaurants covered by the Distribution Agreement. While the Distribution
Agreement provides that prior to such sales, such franchisees will enter into
distribution agreements on substantially similar terms, there can be no
assurance that the transition from company-operated to franchised status will
not affect the Company's results. In addition, the Company's future results may
be impacted by the planned closure of poorly performing Tricon Subsidiaries'
restaurants announced by Tricon in December 1997.
In January 1997, the Company entered into a three-year agreement, which
became effective April 1997, to become the primary supplier to approximately
2,600 Arby's restaurants nationwide. The Company services these restaurants
together with three other cooperating distributors. The cooperating distributors
currently serve Arby's restaurants located outside the Company's pre-PFS
Acquisition primary service territories.
26
<PAGE> 27
OPERATIONS AND DISTRIBUTION
The Company's operations generally can be categorized into three business
processes: product replenishment, product storage and order fulfillment. Product
replenishment involves the management of logistics from the vendors through the
delivery of products to the Company's distribution centers. Product storage
involves the warehousing and rotation of temperature-controlled inventory at the
distribution centers pending sale to customers. Order fulfillment involves all
activities from customer order placement and selecting and loading through
delivery from the distribution centers to the restaurant location. Supporting
these processes is the Company's nationwide network of 40 distribution centers,
its fleet of approximately 900 tractors and 1,200 trailers and its management
information systems. Substantially all of the Company's products are purchased,
stored and delivered in sealed cases which the Company does not open or alter.
In connection with the PFS Acquisition, the Company expects to reduce the number
of current distribution centers from 40 to 25. In order to accomplish this
consolidation, the Company will operate its business in new and larger
facilities. See Note 3 to the historical financial statements of the Company
included elsewhere herein.
Product Replenishment
While the Company is responsible for purchasing products to be delivered to
its customers, chain restaurants typically approve the vendors and negotiate the
price for their proprietary products. The Company determines the distribution
centers that will warehouse products for each customer and the quantities in
which such products will be purchased. Order quantities for each product are
systematically determined for each distribution center, taking into account both
recent sales history and projected customer demand. The distribution centers
selected to serve a customer are based on the location of the restaurants to be
serviced.
Product Storage
The Company currently warehouses approximately 1,100 to 5,500 stock keeping
units ("SKU's") (excluding the redistribution and equipment distribution
centers) for its customers at 40 facilities in 33 metropolitan areas. Upon
receipt of the product at the distribution centers, the product is inspected and
stored on pallets, in racks or in bulk in the appropriate temperature-controlled
environment. Products stored at the distribution centers are generally not
reserved for a specific customer. Rather, customer orders are filled from the
common inventory at the relevant distribution center. The Company's computer
systems continuously monitor inventory levels in an effort to maintain optimal
levels, taking into account required service levels, buying opportunities and
capital requirements. Each distribution center contains ambient, refrigerated
(including cool docks) and frozen space, as well as offices for operations,
sales and customer service personnel and a computer network, accessing systems
at other distribution centers and the Company's corporate support centers.
A majority of the Company's distribution centers are between 100,000 to
200,000 square feet with approximately 20% refrigerated storage space, 30%
frozen storage space and 50% dry storage area. The Company uses sophisticated
logistics programs to strategically locate new distribution centers in areas
near key highways with specific consideration given to the proximity of
customers and suppliers. The Company also employs consultants in distribution
center layout and product flow to design the distribution center with the
objective of maximizing product throughput. The Company estimates that each
distribution center can effectively service customers within a 350 mile radius,
although the Company's objective is to service customers within a 150 mile
radius. The Company expects to begin operations at a new distribution center in
Orlando, Florida (269,000 sq. ft.) in April 1998. The Company expects to begin
operations at a new distribution center in Denver, Colorado (161,000 sq. ft.) in
September, 1998.
Order Fulfillment
The Company places a significant emphasis on providing high quality service
in order fulfillment. By providing high quality service and reliability, the
Company believes it can reduce the number of reorders and redeliveries, reducing
costs for both the Company and its customers. Each restaurant places product
orders based on recent usage, estimated sales and existing restaurant
inventories. The Company uses its management information systems to continually
update routes and delivery times with each customer in order to lower
27
<PAGE> 28
fulfillment costs. Product orders are placed with the Company one to three times
a week either through the Company's customer service representatives or through
electronic transmission using specially designed software. Many of the
restaurants served by the Company transmit product orders electronically.
Once ordered by the customer, products are picked and labeled at each
distribution center, and the products are generally placed on a pallet for the
loading of outbound trailers. Delivery routes are scheduled to both fully
utilize the trailer's load capacity and minimize the number of miles driven in
order to exploit the cost benefit of customer density.
Fleet
The Company operates a fleet of approximately 900 tractors and 1,200
trailers. The Company leases approximately 300 of the tractors from General
Electric Capital Corp. pursuant to full-service leases that include maintenance,
licensing and fuel tax reporting. The Company owns approximately 600 tractors
and approximately 800 trailers. The remaining trailers are leased under similar
full-service leases from a variety of leasing companies. Lease terms average six
years for new tractors and nine years for new trailers.
Most of the Company's tractors contain onboard computers. The computers
assist in managing fleet operations and provide expense controls, automated
service level data collection and real-time driver feedback, thereby enhancing
the Company's service level to customers. Data from the onboard computers are
loaded into the routing software after each route in order to continually
optimize the route structure. Substantially all of the Company's trailers
contain three temperature-controlled compartments, which allow the Company to
simultaneously deliver frozen food, refrigerated food and dry goods.
Management Information Systems
AmeriServe and the former PFS business currently operate with different
computer systems. AmeriServe utilizes a variety of personal computers and IBM
AS/400-based software applications. PFS also operates with a variety of
applications, the core of which are mainframe-based. Both companies have
invested significantly in their systems, and both consider their systems to be
among the leaders in the industry. Programs in use include various customized
and special-purpose applications, such as warehouse management tools, remote
order entry, automated replenishment, delivery routing, and onboard computers
for delivery trucks.
The Company is in the process of replacing its core applications with
software from J.D. Edwards in order to integrate the systems of AmeriServe and
PFS. This conversion process is expected to be substantially completed by
mid-1999 and will result in all of the Company's distribution centers operating
with the same computer systems and the same operating policies and practices.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Computer Systems and Potential Year 2000 Issue."
Procurement, Logistics and Re-Distribution
The Company procures a wide range of food, paper and cleaning products for
ultimate distribution to its chain restaurant customers. These products include
fresh and frozen meat and poultry, seafood, frozen foods, canned and dry goods,
fresh and preprocessed produce, beverages, dairy products, paper goods, cleaning
supplies and equipment. The Company also operates two re-distribution centers
for the purpose of purchasing slow-moving inventory items and consolidating
these items into full truckload shipments to the Company's distribution centers
nationally, as well as to customers outside the Company. The re-distribution
division has been approved as a national consolidation point for Burger King,
Dairy Queen, Arby's, KFC and other chains. The Company also offers
re-distribution services to customers outside of the continental United States.
The Company operates a freight logistics division for the purpose of
achieving the lowest landed costs to its distribution centers through the review
of purchase orders generated at the various distribution centers. The Company
generates freight savings through leveraged purchasing, with key carriers
operating in defined traffic lanes. This division also provides logistical
services to a substantial number of customers outside of the Company on a fee
basis. Current inbound purchase orders controlled by this division exceed 2,500
truckloads monthly. Further, the Company operates a nationally registered common
carrier fleet of temperature-
28
<PAGE> 29
controlled tractor-trailer units. This division serves as a "core-carrier" to
several national food manufacturers and is an integral part of the Company's
inbound freight logistics initiative.
MARKETING AND CUSTOMER SERVICE
The Company employs national and regional marketing representatives who
service existing customers, as well as focus on developing new customers from
among other restaurant concepts. Additionally, each division president and
certain members of senior management are active in maintaining relationships
with current and potential customers. The Company compensates its sales and
marketing representatives under various compensation plans, which combine a base
pay with an incentive bonus.
The Company's customer service activities are highly customized to the
unique needs of each customer. Each customer has a dedicated account manager who
is responsible for overseeing all of a customer's needs and coordinating the
services provided to such customer. In order to manage problem resolution, the
Company tracks customer calls to ensure that appropriate action and follow-up
occur. The Company's representatives travel frequently to the customer's
restaurant or office for regularly scheduled meetings and key project reviews to
ensure close coordination between the Company and the customer.
A key component of the Company's marketing plan is the use of customized
information systems to improve customer service, and to assist the customer in
the daily operation of its business. The Company utilizes on-line order entry
inventory systems, which permit the Company to simultaneously take orders,
compare the order to previous orders, track and replenish inventory and schedule
the delivery. In addition to placing orders, certain customers may also access
their own accounts, and inventory information, and print copies of order
acknowledgments, invoices and account statements. This electronic data
interchange system provides certain customers with access to the Company's
information systems at their convenience and enables the Company to accept
orders 24 hours a day, seven days a week. The electronic data interchange not
only allows for greater efficiencies, but also produces reduced administrative
expenses and fewer ordering errors.
COMPETITION
The foodservice distribution industry is highly competitive. Competitors
include other systems distribution companies focused on the chain restaurants
and captive, multi-unit franchiser-owned distribution companies and broadline
foodservice distributors.
The Company competes directly with other systems specialists that target
chain restaurant concepts. The Company's principal competitors are ProSource,
Inc., Sysco Corporation's Sygma division, Marriott Distribution Services Inc.,
Alliant Foodservice Inc., Performance Food Group, U.S. Foodservice (formerly JP
Foodservice), McLane Company, Inc. and MBM Corp. The Company also competes with
regional and local distributors in the foodservice industry, principally for
business from franchisee-owned chain restaurants. National and regional chain
restaurant concepts typically receive service from one or more systems
distributors. Distributors are appointed or approved to service these concepts
and/or their franchisees on either a national or regional basis. The Company
believes that distributors in the foodservice industry compete on the basis of
quality, reliability of service and price. Because a number of the Company's
customers prefer a distributor that is able to service their restaurants on a
nationwide basis, the Company believes it is in a strong position to retain and
compete for national chain restaurant customers and concepts.
Opportunities for growth by gaining access to new chains typically occur at
the expense of a competitor and are awarded in a bid or negotiation situation,
in which large blocks of business are awarded to the most efficient distributor.
The Company believes that a key competitive advantage is continuously pursuing a
strategy of being the low-cost provider of distribution and other value-added
services within the industry.
29
<PAGE> 30
LITIGATION
From time to time the Company is involved in litigation relating to claims
arising out of their normal business operations. The Company is not currently
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company.
REGULATORY MATTERS
The Company is subject to a number of federal, state and local laws,
regulations and codes, including those relating to the protection of human
health and the environment, compliance with which has required, and will
continue to require, capital and operating expenditures. The Company believes
that it is in compliance, in all material respects, with all such laws,
regulations and codes. The Company, however, is not able to predict the impact
of any changes in the requirements or mode of enforcement of these laws,
regulations and codes on its operating results.
ENVIRONMENTAL MATTERS
Under applicable environmental laws, the Company may be responsible for
remediation of environmental conditions and may be subject to associated
liabilities (including liabilities resulting from lawsuits brought by private
litigants) relating to its distribution centers and the land on which its
distribution centers are situated, regardless of whether the Company leases or
owns the land in question and regardless of whether such environmental
conditions were created by the Company or by a prior owner or tenant.
The Company believes it currently conducts its business, and in the past
has conducted its business, in substantial compliance with applicable
environmental laws and regulations. In addition, compliance with federal, state
and local laws enacted for protection of the environment has had no material
effect on the Company. However, there can be no assurance that environmental
conditions relating to prior, existing or future distribution centers or
distribution center sites will not have a material adverse effect on the
Company.
In connection with the PFS Acquisition, the Company reviewed existing
reports and retained environmental consultants to conduct an environmental audit
of PFS's operations in order to identify conditions that could have material
adverse effects on the Company. The Company has obtained final reports on the
results of such audit with regard to PFS, which concluded that there are no
environmental matters that are likely to have a material adverse effect on the
Company.
EMPLOYEES
As of December 27, 1997, the Company had approximately 5,000 full-time
employees, approximately 500 of whom were employed in corporate support
functions and approximately 4,500 of whom were warehouse, transportation, sales,
and administrative staff at the distribution centers. As of such date,
approximately 275 of the Company's employees were covered by two collective
bargaining agreements. One such collective bargaining agreement, covering
approximately 200 employees and which expired in January 1998 is in the process
of being renewed. The other such collective bargaining agreement, covering
approximately 75 employees, will expire at the end of November 1998. The Company
has not experienced any labor disputes or work stoppages and believes that its
relationships with its employees are good.
FACILITIES
The Company currently operates 40 distribution centers located throughout
the United States, Canada and Mexico and is constructing two new distribution
centers as follows:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET LEASED/OWNED
- -------- ----------- ------------
<S> <C> <C>
Albany, NY................................................. 104,000 Leased
Albuquerque, NM............................................ 65,000 Leased
Arlington, TX.............................................. 105,600 Leased
Canton, MS................................................. 80,500 Leased
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET LEASED/OWNED
- -------- ----------- ------------
<S> <C> <C>
Charlotte, NC.............................................. 158,500 Owned
Charlotte, NC.............................................. 91,771 Leased
Columbus, OH............................................... 143,903 Leased
Denver, CO................................................. 119,000 Leased
Denver, CO................................................. 74,360 Leased
Denver, CO(2).............................................. 165,000 Leased
Fort Worth, TX............................................. 113,000 Leased
Gainesville, FL............................................ 53,000 Leased
Grand Rapids, MI........................................... 180,000 Owned
Gulfport, MS............................................... 63,792 Leased
Hebron, KY................................................. 124,000 Leased
Houston, TX................................................ 69,800 Leased
Indianapolis, IN........................................... 115,200 Leased
Indianapolis, IN(3)........................................ 180,100 Leased
Jacksonville, FL........................................... 119,600 Leased
Jonesboro, GA.............................................. 124,076 Leased
Lemont, IL(1).............................................. 105,000 Leased
Lenexa, KS................................................. 105,600 Leased
Madison, WI(1)............................................. 123,000 Leased
Manassas, VA............................................... 100,337 Owned
Memphis, TN................................................ 70,750 Leased
Mexico City, MX............................................ 35,000 Owned
Milwaukee, WI.............................................. 123,185 Leased
Mississauga, Ontario....................................... 53,487 Leased
Mt. Holly, NJ.............................................. 126,637 Leased
Norcross, GA............................................... 169,900 Owned
Novi, MI................................................... 72,830 Leased
Oklahoma City, OK (4)...................................... 52,500 Leased
Omaha, NE (6).............................................. 105,000 Leased
Ontario, CA................................................ 201,454 Leased
Orlando, FL(2)............................................. 269,000 Leased
Orlando, FL................................................ 115,240 Leased
Plymouth, MN............................................... 104,200 Leased
Portland, OR............................................... 81,815 Leased
Salt Lake City, UT......................................... 31,000 Leased
Stockton, CA............................................... 105,000 Leased
Tempe, AZ.................................................. 67,660 Leased
Waukesha, WI(5)............................................ 196,000 Leased
</TABLE>
- ---------------
(1) Re-distribution facilities
(2) Under construction
(3) Restaurant equipment distribution center
(4) This facility is scheduled to close in April 1998.
(5) NEHC capital lease
(6) Owned by NEHC
31
<PAGE> 32
Within four years of December 27, 1997, two of the Company's distribution
center leases are due to expire. The Company believes it will be able to renew
expiring leases at reasonable rates in the future. In addition, in connection
with the PFS Acquisition, the Company expects to reduce the number of current
distribution centers from 40 to 25. In order to accomplish this integration and
consolidation, the Company will operate its business in new and larger
facilities. The Company believes its existing distribution centers, together
with planned modifications, expansions and new distribution centers provide
sufficient space to support the Company's expected expansion over the next
several years.
32
<PAGE> 33
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of March 27, 1998,
with respect to each person who is an executive officer, a significant employee,
or director of AmeriServe:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
John V. Holten........... 41 Director, Chairman and Chief Executive Officer
John R. Evans............ 58 Director and Vice Chairman
Raymond E. Marshall...... 48 Director, President and Treasurer
Daniel W. Crippen........ 46 Director and Executive Vice President
Gunnar E. Klintberg...... 49 Director and Assistant Secretary
A. Petter Ostberg........ 36 Vice President
Diana M. Moog............ 38 Senior Vice President and Chief Financial Officer
William F. Woodall....... 50 President and Chief Operating Officer, Procurement
Group
Kurt E. Twining.......... 42 Senior Vice President -- Human Resources
Kenneth W. Gerhardt...... 47 Senior Vice President-Information Technology*
Kenneth R. Lane.......... 50 Acting Chief Operating Officer
Kevin J. Rogan........... 46 Vice President, General Counsel and Secretary
Stanley J.
Szlauderbach........... 49 Vice President and Controller
Leif F. Onarheim......... 62 Director
Peter T. Grauer.......... 51 Director
Benoit Jamar............. 42 Director
</TABLE>
- ---------------
* Mr. Gerhardt has announced his resignation effective April 15, 1998. A
successor has not yet been named.
John V. Holten. Mr. Holten has served as Chairman and Chief Executive
Officer of Holberg since its inception in 1986 and of NEHC since its inception
in 1996. Mr. Holten was Managing Director of DnC Capital Corporation, a merchant
banking firm in New York City, from 1984 to 1986. Mr. Holten has been a member
of the NEHC Board since 1996, and the AmeriServe Board since 1986.
John R. Evans. Mr. Evans became President of Evans in 1971, and was named
Chief Executive Officer of the combined company when Evans merged with NEBCO in
1990. Mr. Evans serves on the Board of Directors of each of M&I Northern Bank,
Aerial Company, Inc., and AFI Inc. Mr. Evans has been an officer of NEHC and a
member of the NEHC Board since 1996, and an officer of AmeriServe and a member
of its Board since 1990.
Raymond E. Marshall. Mr. Marshall has 28 years of food service
distribution experience, including 24 years with AmeriServe or its predecessors.
Mr. Marshall served as President and Chief Executive Officer of NEBCO from 1980
to 1989. Mr. Marshall has served as President of AmeriServe since 1990. Mr.
Marshall serves on the Board of Directors of Independent Distributors of America
("IDA"). Mr. Marshall has been an officer of NEHC and a member of the NEHC Board
since 1996, and a member of the AmeriServe Board since 1986.
Daniel W. Crippen. Mr. Crippen has spent the last 21 years in the
foodservice distribution business beginning with The Harry H. Post Company. In
addition, Mr. Crippen was appointed to his present position as Executive Vice
President of AmeriServe in 1997. He is Chairman of the Board of Directors of
IDA. Mr. Crippen has been an officer of NEHC and a member of the NEHC Board
since 1997, and an officer of AmeriServe and a member of its Board since 1997.
Gunnar E. Klintberg. Mr. Klintberg has served as Vice Chairman of Holberg
since its inception in 1986. Mr. Klintberg was a Managing Partner of DnC Capital
Corporation, a merchant banking firm in New York City, from 1983 to 1986. Mr.
Klintberg has been an officer of NEHC and a member of the NEHC Board since 1996,
and an officer of AmeriServe and its Board since 1986.
33
<PAGE> 34
A. Petter Ostberg. Mr. Ostberg joined Holberg in 1994 and was appointed as
Senior Vice President and Chief Financial Officer in 1997. Prior to joining
Holberg, Mr. Ostberg held various finance positions from 1990 to 1994 with New
York Cruise Lines, Inc., including Group Vice President, Treasurer and
Secretary.
Diana M. Moog. Ms. Moog was named Sr. Vice President and Chief Financial
Officer in January 1998. Ms. Moog joined AmeriServe as Senior Vice President and
Treasurer at the time of the PFS Acquisition in 1997. Previously, she had served
as Vice President, Controller of PFS. Ms. Moog had held various positions at
PepsiCo from 1989 to 1997 including Manager, Financial Reporting for PepsiCo and
Assistant Controller, Frito-Lay.
William F. Woodall. In 1982, Mr. Woodall became President of IDA, and in
1990 founded Chicago Consolidated Company. Mr. Woodall was appointed to his
present position as President and Chief Operating Officer of Procurement Group
at AmeriServe in 1996. He is currently on the Board of Directors of EMCO, Inc.
and holds various other positions with industry organizations.
Kurt E. Twining. Mr. Twining joined AmeriServe in 1997 as Senior Vice
President-Human Resources in connection with the PFS Acquisition. Mr. Twining
joined PFS in 1986 as Manager, Employee Relations. He then held positions of
Manager, Staffing and Development; Director, Employee Relations; Senior
Director, Employee Relations; Senior Director, Organization and Management
Development; and Vice President, Field Human Resources and Safety.
Kenneth R. Lane. Mr. Lane was named Acting Chief Operating Officer in
November 1997. He joined AmeriServe in 1997 as a Senior Vice President in
connection with the PFS Acquisition. The prior 24 years were spent with PepsiCo
in positions including as PFS Vice President Operations, North, overseeing the
Northern United States as well as international operations in Mexico, Canada and
Puerto Rico.
Kevin J. Rogan. Mr. Rogan joined AmeriServe in 1997 as its Vice President,
General Counsel, and Secretary. Previously he worked at McKesson Corporation
where he served as Vice President-Legal after McKesson acquired the assets of
FoxMeyer Health Corporation for whom he served as Senior Vice President and
General Counsel from 1994 through 1996. Previously, Mr. Rogan served as legal
counsel to Grand Metropolitan, PLC and PepsiCo.
Stanley J. Szlauderbach. Mr. Szlauderbach joined AmeriServe in 1996 as
Vice President and Controller. Before joining AmeriServe, Mr. Szlauderbach spent
14 years at PepsiCo where his experience included eight years as Corporate
Director, Financial Reporting and two years as Assistant Controller at Pizza
Hut.
Leif F. Onarheim. In 1996, Mr. Onarheim was elected chairman of NHO, the
country's largest association of business and industry. From 1992 to 1997, Mr.
Onarheim served as President of Norway's largest business school and was Vice
Chairman of the Board of the Norwegian School of Management from 1980 to 1992.
Mr. Onarheim served as CEO of Nora Industries. When Nora merged with Orkla
Borregaard to form the Orkla Group in 1991, Onarheim briefly served as the new
group's Chairman. The Orkla Group is one of Scandinavia's largest branded goods
company with production facilities in the US, Germany, Poland and England. He
serves as Chairman of the Board of Directors of H. Aschehoug & Co. publishers,
Norwegian Fair, Netcom ASA and Narvesen ASA, Vice Chairman of Saga Petroleum ASA
and is a board member of Wilhelm Wihelmsen Ltd. (shipping). He has been a
director of NEHC since 1996, a director of AmeriServe since 1986, and a director
of Holberg since 1997.
Peter T. Grauer. Mr. Grauer has been a Managing Director of Donaldson,
Lufkin & Jenrette Merchant Banking, Inc. since 1992. Mr. Grauer serves on the
Board of Directors of each of Doane Products Co. and Total Renal Care, Inc. Mr.
Grauer has been a member of the NEHC Board since 1996, and the AmeriServe Board
since January 1996.
Benoit Jamar. Mr. Jamar is a Managing Director in the Mergers &
Acquisitions group at Donaldson, Lufkin & Jenrette Securities Corporation
("DLJSC"). He joined DLJSC in 1989. Mr. Jamar has been a member of the NEHC
Board since 1997, and the AmeriServe Board since 1997.
The directors of AmeriServe are elected annually and each serves until his
successor has been elected and qualified, or until his earlier death,
resignation or removal. The officers of AmeriServe are elected by the Board of
Directors, and each serves until his or her successor is elected and qualified,
or until his or her death, resignation or removal.
34
<PAGE> 35
EXECUTIVE COMPENSATION
The following table sets forth the information for the three most recently
completed fiscal years with regard to compensation for services rendered in all
capacities to the Company by the Chief Executive Officer and the other four most
highly compensated executive officers of the Company (collectively, the "Named
Executive Officers"). Information set forth in the table reflects compensation
earned by such individuals for services with the Company or its respective
subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER
ANNUAL ALL OTHER
FISCAL SALARY BONUS COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) ($) ($)(2)
- --------------------------- ------ ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
John V. Holten....................... 1997 -- -- -- --
Chairman and Chief Executive
Officer 1996 -- -- -- --
1995 -- -- -- --
Raymond E. Marshall.................. 1997 301,375 500,000(3) 191,021(4) 11,600
President and Treasurer 1996 273,793 265,000(5) -- 11,600
1995 212,492 109,200 -- 10,400
Daniel W. Crippen.................... 1997 283,942 500,000(3) -- 9,659
Executive Vice President 1996 246,764 265,076 -- 9,659
1995 202,538 129,464 -- 9,788
Donald J. Rogers(6).................. 1997 190,811 350,000(3) 63,662(4) 11,600
Chief Financial Officer 1996 158,629 125,000(5) 33,000(7) 11,600
and Vice President 1995 115,671 45,000 33,000(7) 10,400
John R. Evans........................ 1997 260,000 -- -- 4,800
Vice Chairman 1996 263,000 -- -- 4,800
1995 262,832 -- -- 4,800
</TABLE>
- ---------------
(1) The amounts shown in this column include amounts contributed by the Company
to its 401(k) plan under a contribution matching program.
(2) The amounts shown in this column reflect premiums paid by the Company on
behalf of Named Executive Officers for whole life insurance policies and
annuities to which the Named Executive Officers are entitled to the cash
surrender value.
(3) These amounts include discretionary cash bonuses paid by AmeriServe for
services provided during 1997 in connection with the PFS Acquisition.
(4) These amounts were paid to Messrs. Marshall and Rogers to reimburse
relocation expenses.
(5) These amounts include discretionary cash bonuses paid by Holberg for
services provided during 1995 in connection with the acquisition of
AmeriServ.
(6) As of January 5, 1998, Mr. Rogers is no longer an employee of NEHC or the
Company.
(7) This amount reflects forgiveness by the Company of a portion of a $100,000
relocation assistance loan.
The Company pays an annual management fee to Holberg for management
services. The amount of this fee is not set or allocated with respect to any
particular employee's compensation from Holberg.
DIRECTOR COMPENSATION
Leif F. Onarheim is paid $15,000 per year to serve as a director of the
Company. The other directors serve without compensation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a compensation committee in fiscal 1997. Executive
officer compensation is determined by the Board of Directors of the Company. The
Company intends to form a compensation
35
<PAGE> 36
committee in fiscal 1998. The members of such committee have not yet been
determined. During fiscal 1997, no executive officer of the Company served as a
member of the compensation committee of another entity.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Mr. Marshall's current employment agreement with the Company provides for a
three year term, scheduled to lapse on January 1, 1999, with default annual
renewals, and an annual base salary of $285,000, which will increase for 1998 to
$315,000, plus an annual bonus to be determined by the Board of Directors after
considering the Company's Reported Operating Profit (as defined in the
employment agreement), plus participation in any employee benefit plans
sponsored by the Company. Mr. Marshall agrees not to disclose confidential
information for so long as such information remains competitively sensitive.
During the term of the employment agreement and for one year after its
termination, Mr. Marshall agrees not to render services to, or have any
ownership interest in, any business which is competitive with the Company. Mr.
Marshall's employment agreement does not contain any change of control
provisions.
36
<PAGE> 37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the Company's common stock is owned by NEHC. The following table
sets forth certain information as of March 27, 1998, regarding the beneficial
ownership of the common stock of NEHC by (i) each person known to NEHC to own
beneficially more than 5% of any class of the common stock of NEHC, (ii) each
director of NEHC, (iii) each Named Executive Officer of NEHC and (iv) all
executive officers and directors of NEHC as a group. All information with
respect to beneficial ownership has been furnished to NEHC by the respective
stockholders of NEHC. Except as otherwise indicated in the footnotes, each
beneficial owner has the sole power to vote and to dispose of all shares held by
such holder.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP OUTSTANDING
---------------- ----------------------- -----------------
<S> <C> <C>
NED.................................... 6,508 shares of Class A Common Stock 100%(+)
1,733 shares of Class B Common Stock 100%(+)
Orkla ASA ("Orkla").................... (1)
DLJ Merchant Banking Partners, L.P. and
certain of its affiliates
("DLJMB")............................ Warrants to purchase 3,540 shares of 30%(++)
Class A Common Stock
Warrants to purchase 370 shares of 30%(++)
Class B Common Stock
Holberg................................ Warrants to purchase 753 shares of 6%(++)
Class A Common Stock
John V. Holten......................... (2)
Daniel W. Crippen...................... (3)
John R. Evans.......................... --
Peter T. Grauer........................ (4)
Benoit Jamar........................... (4)
Gunnar E. Klintberg.................... (5)
Raymond E. Marshall.................... (6)
Leif F. Onarheim....................... (7)
</TABLE>
- ---------------
(+) Computed with respect to the currently outstanding shares of Class A common
stock of NEHC (the "Class A Common Stock") and Class B Common Stock of NEHC
(the "Class B Common Stock"), and without taking into account any options or
convertible interests of NEHC.
(++) Computed with respect to the currently outstanding shares of Class A Common
Stock and Class B Common Stock of NEHC and the warrants held by DLJMB and
Holberg, but without taking into account any other options or convertible
interests of NEHC. On January 6, 1998, Holberg consummated a repurchase
from DLJMB and affiliates of (i) 49% of the Junior Preferred Stock acquired
by DLJMB and affiliates in connection with the PFS Acquisition ("Certain
Relationships and Related Party Transactions"), and (ii) warrants
conferring the right to acquire 753.30 shares of the Class A Common Stock.
(1) Orkla owns approximately 7% of the outstanding common stock of NED, and has
an additional interest in the common stock of NED of approximately 8%
through certain warrants to purchase such common stock. In addition, Orkla
owns approximately 30% of the outstanding common stock of Holberg (which
itself owns the balance of the common stock of NED not owned directly by
Orkla and has an additional interest in the common stock of NED of
approximately 75% through certain preferred stock convertible into common
stock), and an additional interest in the common stock of Holberg of
approximately 17% through certain preferred stock convertible into common
stock. The warrant and convertible interests described in this note have
been computed based upon the outstanding common shares of NED and Holberg,
without taking into account any options or convertible interests of NED or
Holberg. Orkla also has certain contractual rights as to NED and NEHC
pursuant to an Amended and Restated Investors Agreement, dated as of July
11, 1997, among DLJMB, NEHC, NED, Holberg, Holberg Incorporated
("Incorporated") and Orkla.
37
<PAGE> 38
(2) Mr. Holten owns all of the outstanding common stock of Incorporated, the
corporate parent of Holberg, which entity owns approximately 70% of the
outstanding common stock of Holberg, and an additional interest in the
common stock of Holberg of approximately 25% through certain preferred stock
convertible into common stock. As noted above, Holberg owns approximately
93% of the outstanding NED common stock and has an additional interest
through certain preferred stock convertible into common stock. The
convertible interests described in this note have been computed based upon
the outstanding common shares of Holberg and NED, without taking into
account any options or convertible interests of Holberg or NED.
(3) Mr. Crippen owns shares of a series of convertible preferred stock of NEHC
that, if converted, would result in his ownership of approximately 1.6% of
the outstanding common stock of NEHC, taking into account the actually
outstanding shares and the warrants held by DLJMB.
(4) Messrs. Grauer and Jamar are Managing Directors of DLJSC, and may be
considered to have beneficial ownership of the interests of DLJMB in the
Company and NEHC. Messrs. Grauer and Jamar disclaim such beneficial
ownership.
(5) Mr. Klintberg is an officer and director of NED and certain of its corporate
parents, but disclaims beneficial ownership of any of the shares owned by
NED.
(6) Mr. Marshall has an interest of 5% in NED through certain options that have
been granted to him by NED. Such interest has been computed based upon the
outstanding common shares of NED, without taking into account any options or
convertible interests of NED.
(7) Mr. Onarheim has an interest of less than 1% in NED through certain options
that have been granted to him by NED. Such interest has been computed based
upon the outstanding common shares of NED, without taking into account any
options or convertible interests of NED. Mr. Onarheim has also had a long
affiliation with Orkla and acts as Orkla's representative on the Board of
Directors of the Company and NEHC, but disclaims beneficial ownership of any
interests held by Orkla.
38
<PAGE> 39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DLJMB, an affiliate of DLJSC, and certain of its affiliates beneficially
own approximately 30% of the common stock of NEHC. Mr. Grauer, a principal of
DLJSC, is a member of the Board of Directors of NEHC and the Company; Mr. Jamar,
a principal of DLJSC, is a member of the Board of Directors of NEHC and the
Company. Holberg indirectly owns a majority of the issued and outstanding
capital stock of NEHC. See "Security Ownership of Certain Beneficial Owners and
Management." Subject to the rights of holders of Preferred Stock, Holberg and
affiliates of DLJSC collectively have sufficient voting power to elect the
entire Board of Directors of each of NEHC, and through NEHC, the Company.
In connection with the PFS Acquisition, DLJSC received a merger advisory
fee of $4.0 million in cash from the Company upon consummation of the PFS
Acquisition and related financings. An affiliate of DLJ also received customary
fees in connection with their commitment to finance a portion of the purchase
price for PFS, in the event that the Company could not arrange alternative
financing prior to the closing.
In connection with the Credit Facility, DLJ Capital Funding, Inc., an
affiliate of DLJSC, acted as documentation agent for which it received certain
customary fees and expenses. (See Note 6 to the historical financial statements
of the Company included elsewhere herein.)
DLJSC has acted as an initial purchaser in connection with each of the
offerings of the Senior Discount Notes, the Senior Subordinated Notes, the
Senior Notes and the Preferred Stock for which it received certain customary
underwriting fees and discounts.
In connection with the ProSource acquisition, it is expected that DLJSC
will receive a merger advisory fee from the Company, at such time as the
acquisition is consummated.
Holberg has received customary investment banking and advisory fees from
the Company and its affiliates in connection with certain prior transactions,
including a $4.0 million merger advisory fee in connection with the PFS
Acquisition. Holberg also received fees of $1.0 million in connection with the
offering of the Senior Notes.
Holberg also receives an annual management fee from the Company of $4.0
million, commencing in 1997. In addition, in connection with the ProSource
acquisition, it is expected that Holberg will receive a merger advisory fee from
the Company, at such time as the acquisition is consummated.
A portion of the net proceeds of NEHC's sale of preferred stock on March 6,
1998 was used to finance the repurchase cost of certain other classes of NEHC
preferred stock held by Holberg and certain affiliates of DLJSC and certain
preferred stock held by NED.
With the January 1996 acquisition of AmeriServ, the Company acquired a
minority interest in Post Holdings Company ("Post Holdings"), a 93.6% owner of
Post. On November 25, 1996 NEHC acquired: (i) the Company's ownership interest
in Post Holdings; and (ii) Daniel W. Crippen's 50% ownership of Post Holdings.
In connection with this transaction, Mr. Crippen, the Company's and NEHC's
Executive Vice President, received $4.4 million ($2.0 million cash and $2.4
million in NEHC 8% Senior Convertible Preferred Stock) in exchange for his 50%
equity interest in Post Holdings.
In connection with the PFS Acquisition: (i) the remaining 6.4% of the
capital stock outstanding of Post was acquired from the minority stockholder;
(ii) a dividend of $4.7 million was declared to eliminate the intercompany
balance between Post and NEHC; (iii) all of the capital stock of Post was
transferred to AmeriServ, then a wholly-owned subsidiary of the Company; (iv)
Post's $10.6 million of outstanding indebtedness was refinanced; and (v)
AmeriServ's investment in NEHC preferred stock of $2.5 million was cancelled.
In connection with the PFS Acquisition, NEHC contributed $130.0 million of
cash to the Company. This contribution was financed in part through NEHC's sale
of the Senior Discount Notes, 13 1/2% Senior Exchangeable Preferred Stock and
the 15% Junior Exchangeable Preferred Stock, as well as warrants to purchase
NEHC Class A Common Stock, to affiliates of DLJSC. On January 6, 1998, Holberg
purchased from DLJ Merchant Banking Partners II, L.P. and certain of its
affiliates ("DLJMBII") warrants to purchase
39
<PAGE> 40
753.30 shares of Class A Common Stock, which had originally been issued to
DLJMBII in connection with the PFS Acquisition in July 1997.
In addition to the equity contribution to AmeriServe, the proceeds from the
offering of the Senior Discount Notes were used to redeem the 12 1/2% Senior
Secured Notes of NEHC (the "Old NEHC Notes"), with an initial purchase amount of
$22.0 million beneficially owned by DLJMB and Old NEHC Notes, with an initial
principal amount of $8.0 million held by Orkla. The respective accrued principal
and interest of the Old NEHC Notes held by DLJMB and Orkla as of June 28, 1997
were $26.2 million and $9.5 million, respectively.
In connection with the PFS Acquisition, NEHC contributed to the Company an
aggregate principal amount of $45.0 million of outstanding non-convertible
preferred stock of the Company.
Prior to the PFS Acquisition, HWPI was owned 55% by Holberg and 45% by the
Company. In connection with the PFS Acquisition, NEHC purchased for $1.5 million
Holberg's 55% interest in HWPI. HWPI's sole operations consist of owning two
distribution centers, located in Omaha, Nebraska and Waukesha, Wisconsin,
occupied by the Company.
The Company leases a warehouse and office facility in Waukesha, Wisconsin
from an affiliated partnership owned by certain former shareholders of an
acquired company, including Mr. John Evans, for approximately $810,000 per year
through May 31, 2008.
The Company and Holberg also periodically engage in bi-lateral
interest-bearing loans and advances. See Note 12 to the historical financial
statements of AmeriServe included elsewhere herein.
See "Plan of Distribution."
40
<PAGE> 41
DESCRIPTION OF INDEBTEDNESS
The following sets forth information concerning the Company's indebtedness,
other than the Notes, outstanding immediately following the consummation of the
Refinancing.
ACCOUNTS RECEIVABLE PROGRAM
In connection with the PFS Acquisition, the Company entered into the
Accounts Receivable Program (the "Accounts Receivable Program"). The Accounts
Receivable Program is structured as an off-balance sheet financing for
accounting purposes.
Under the Accounts Receivable Program, the Company transfers to AmeriServe
Funding Corporation ("AmeriServe Funding"), a wholly-owned, special purpose
bankruptcy-remote subsidiary, on a daily basis, all of the trade receivables
(the "Receivables") generated by the Company and/or one or more of its
subsidiaries. AmeriServe Funding then sells the receivables to a master trust,
AmeriServe Master Trust (the "Trust"), which issued a series of certificates
representing an undivided interest in the assets of the Trust. The certificates
were purchased by any of (i) Bank of America, (ii) a commercial paper conduit
administered by Bank of America National Trust and Savings Association ("Bank of
America NT&SA"), and/or (iii) a group of banks (all of the foregoing,
collectively, referred to as the "Banks").
Up to $225.0 million of proceeds are presently available under the Accounts
Receivable Program. However, when the Company satisfies certain reporting
requirements, up to $250.0 million of total proceeds will be available. The
Company expects to create an additional accounts receivable program for the sale
of up to $150.0 million of accounts receivable in connection with the ProSource
Acquisition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources -- Pro Forma." The
Accounts Receivable Program is available to AmeriServe Funding for five years
from the closing of the PFS Acquisition, subject to early termination in
accordance with the terms of the transaction documents.
All of the Receivables are transferred on a daily basis to AmeriServe
Funding. The exchange price for the Receivables conveyed to AmeriServe Funding
is a dollar amount equal to the aggregate unpaid balance of the Receivables less
a discount specified in the transaction documents. AmeriServe Funding may also
pay the exchange price for such Receivables by increasing the principal amount
of notes payable by it to the Company and subsidiaries of the Company rather
than paying cash for such Receivables. Certain of the Receivables have been
transferred by the Company to AmeriServe Funding as a contribution of capital.
AmeriServe Funding (and the Trust, in turn) has obtained first priority,
perfected ownership interests in the Receivables, and any related security and
proceeds thereof. The Company serves as the initial master servicer of the
Accounts Receivable Program.
The Banks' yield on their Invested Amount will be based on either LIBOR or
a Base Rate plus a margin. The "Invested Amount" generally will be calculated as
the sum of the purchase prices paid by the Banks from time to time for undivided
interests in the Receivables in the Trust, reduced by the aggregate amount of
distributions made to the Banks on account of principal. As of September 27,
1997, the Banks' yield would have been 6.656%.
A non-usage fee of 3/8 of 1% per annum on a daily average of (i) the
aggregate commitments of the Banks under the Accounts Receivable Program minus
(ii) the Invested Amount is payable by AmeriServe Funding monthly in arrears.
Prior to termination of the Banks' commitment under the Accounts Receivable
Program, AmeriServe Funding may cause the Trust to sell undivided interests in
the Receivables to the Banks from time to time so long as certain conditions are
satisfied, including, without limitation, that after giving effect to such sale,
the Invested Amount (less amounts held in certain Trust accounts) would not
exceed the Base Amount. The "Base Amount" generally will be equal to the result
of (a)(i) the Net Eligible Receivables, times (ii) 100% minus the Applicable
Reserve Ratio, minus (b) the Carrying Cost Receivables Reserve. The "Net
Eligible Receivables" generally will be calculated as the aggregate unpaid
balance of Receivables held by the Trust that satisfy certain eligibility
criteria, less unapplied cash held by the Trust, less funds not yet made
available
41
<PAGE> 42
by lockbox banks holding collections on Receivables, less the aggregate amount
of excess concentrations of Receivables as specified in the transaction
documents. The "Applicable Reserve Ratio" will be calculated consistent with the
trade receivable rating methodology of Standard & Poor's and/or Duff & Phelps,
will incorporate specified loss reserve ratios and dilution reserve ratios, and
will be subject to a floor of 15%. The "Carrying Cost Receivables Reserve"
generally will be calculated to reflect interest payable to the Banks, the
servicing fee payable from the Assets of the Trust, certain accrued and unpaid
expenses and certain additional amounts based on days sales outstanding.
The Accounts Receivable Program contains customary conditions, including,
without limitation, delivery of true sale and non-consolidation opinions. In
addition, Bank of America NT&SA has been satisfied that structural enhancements
are in place so that the Accounts Receivable Program satisfies, at a minimum,
the "BBB" rating criteria of Standard & Poor's and/or Duff & Phelps. The
Accounts Receivable Program also contains customary termination events,
including, without limitation, bankruptcy or insolvency of the Company or
AmeriServe Funding, cross-acceleration to other material indebtedness of the
Company and Receivables performance triggers.
CREDIT FACILITY
The Company has entered into a senior credit facility (the "Credit
Facility"), pursuant to which the Company has available a new revolving credit
facility (the "Revolving Credit Facility"). The undrawn amount of $150.0 million
under the Revolving Credit Facility is available for working capital and general
corporate purposes, including the issuance of letters of credit, which were
$13.5 million at March 15, 1998 subject to the achievement of certain financial
ratios and compliance with certain conditions.
The initial interest rate for borrowings under the Revolving Credit
Facility was, at the option of the Company, LIBOR plus 2.50% or the Base Rate
plus 1.25%. The initial rates for borrowings under the Revolving Credit Facility
remained in effect until December 31, 1997, and now may be reduced according to
a pricing grid contained in the Credit Facility agreements. The Company may
elect interest periods of one, two, three or six months for LIBOR borrowings.
Calculation of interest shall be on the basis of actual days elapsed in a year
of 360 days (or 365 or 366 days, as the case may be, in the case of the Base
Rate Loans based on the Administrative Agent's "reference rate") and interest
shall be payable at the end of each interest period and, in any event, at least
every three months or 90 days, as the case may be. The "Base Rate" is the higher
of (i) the Administrative Agent's reference rate and (ii) the Federal Funds
Effective Rate plus one-half of 1%. LIBOR will at all times include statutory
reserves to the extent actually incurred.
NEHC and all domestic subsidiaries of the Company guarantee indebtedness
under the Credit Facility (the "Guarantors"). All extensions of credit under the
Credit Facility to the Company and guaranties of subsidiaries of the Company are
secured by all existing and after acquired personal property (other than
accounts receivable transferred in connection with the Accounts Receivable
Program or any securitization refinancing of the Accounts Receivable Program) of
the Company and its subsidiaries, including all outstanding capital stock of the
Company and of all of its domestic subsidiaries, 65% of outstanding capital
stock of the Company's foreign subsidiaries and any intercompany debt
obligations, and, subject to exceptions to be agreed upon all existing and
after-acquired real property fee and leasehold interests. NEHC's guaranty is
secured by a pledge of all outstanding capital stock of the Company. With
certain exceptions, NEHC, the Company and its subsidiaries are prohibited from
pledging any of their assets other than under the Credit Facility agreements.
Under the Credit Facility, the letter of credit fee is 2.50% per annum for
standby letters of credit, which will be shared by all Lenders, and an
additional 0.25% per annum to be retained by the issuing bank for issuing the
standby letters of credit, based upon the amount available for drawing under
outstanding standby letters of credit. After December 31, 1997, adjustments in
the letter of credit fees described above may be made, according to a pricing
grid contained in the Credit Facility agreements.
Indebtedness under the Credit Facility may be prepaid in whole or in part
without premium or penalty (subject in some cases to related breakage) and the
Lenders' commitments relative thereto reduced or terminated upon such notice and
in such amounts as may be agreed upon.
42
<PAGE> 43
The Company is required to make the following mandatory prepayments and
permanent reduction of the commitments under the Revolving Credit Facility
(subject to certain exceptions and basket amounts set forth in the Credit
Facility): (a) with respect to asset sales, prepayments in an amount equal to
100% of (i) the net after-tax cash proceeds of the sale or other disposition of
any property or assets of the Company or any of its subsidiaries other than net
cash proceeds of sales or certain other dispositions in the ordinary course of
business, or (ii) the net after-tax cash proceeds in excess of $275 million from
the sale or other disposition of receivables payable upon receipt; (b) with
respect to debt financings of the Company or any of its subsidiaries,
prepayments in an amount equal to 100% of the net cash proceeds received from
such debt financings (excluding, among other things, the Senior Subordinated
Notes and, with respect to the Revolving Credit Facility, the Senior Notes),
payable upon receipt; (c) with respect to equity offerings of the Company or any
of its subsidiaries, prepayments in an amount equal to 50% of the net cash
proceeds received from the issuance of such equity securities, payable upon
receipt; and (d) with respect to Excess Cash Flow (as defined in the Credit
Facility), prepayments in an amount equal to 50% of Excess Cash Flow, payable
within 90 days of fiscal year-end.
The Credit Facility contains customary and appropriate representations and
warranties, including without limitation those relating to due organization and
authorization, no conflicts, financial condition, no material adverse changes,
title to properties, liens, litigation, payment of taxes, no material adverse
agreements, compliance with laws, environmental liabilities and full disclosure.
The Credit Facility also contains customary and appropriate conditions to
all borrowings under the Revolving Credit Facility including requirements
relating to prior written notice of borrowing, the accuracy of representations
and warranties, and the absence of any default or potential event of default.
The Credit Facility also contains customary affirmative and negative
covenants (including, where appropriate, certain exceptions and baskets),
including but not limited to furnishing information and limitations on other
indebtedness, liens, investments, guarantees, restricted payments, restructuring
and reserve costs, mergers and acquisitions, sales of assets, capital
expenditures, leases, and affiliate transactions. The Credit Facility also
contains financial covenants relating to minimum interest coverage; minimum
fixed charge coverage; and maximum leverage.
Events of default under the Credit Facility include those relating to: (a)
non-payment of interest, principal or fees payable under the Credit Facility;
(b) non-performance of certain covenants; (c) cross default to other material
debt of the Company and its subsidiaries; (d) bankruptcy or insolvency; (e)
judgments in excess of specified amounts; (f) impairment of security interests
in collateral; (g) invalidity of guarantees; (h) materially inaccurate or false
representations or warranties; and (i) change of control.
43
<PAGE> 44
DESCRIPTION OF NOTES
SENIOR NOTES
GENERAL
The Senior Notes were issued pursuant to the Senior Note Indenture among
the Company, the direct or indirect domestic Restricted Subsidiaries of the
Company (together, the "Subsidiary Guarantors"), and the Senior Note Trustee.
The terms of the Senior Notes include those stated in the Senior Note Indenture
and those made part of the Senior Note Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Senior Notes
are subject to all such terms, and Holders of Senior Notes are referred to the
Senior Note Indenture and the Trust Indenture Act for a statement thereof. The
following summary of the material provisions of the Senior Note Indenture does
not purport to be complete and is qualified in its entirety by reference to the
Senior Note Indenture, including the definitions therein of certain terms used
below. Copies of the Senior Note Indenture are available as set forth below
under "--Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions."
The Senior Notes are general unsecured obligations of the Company and rank
pari passu in right of payment with all current and future unsecured senior
Indebtedness of the Company. The Company's obligations under the Senior Notes
are fully and unconditionally guaranteed (the "Senior Note Guarantees") on a
senior unsecured basis by, and are joint and several obligations of, the
Subsidiary Guarantors. See "--Senior Note Guarantees." As of December 27, 1997,
on a pro forma basis giving effect to the ProSource Acquisition, the Senior
Notes and the Senior Note Guarantees would have been effectively subordinated to
approximately $29.2 million of secured obligations of the Company and the
Subsidiary Guarantors. The Senior Note Indenture permits the incurrence of
additional secured Indebtedness in the future.
The operations of the Company are conducted in part through its
Subsidiaries, and the Company may, therefore, be dependent upon the cash flow of
its Subsidiaries to meet its debt obligations, including its obligations under
the Senior Notes. All of the existing domestic Restricted Subsidiaries of the
Company are, and all future domestic Restricted Subsidiaries are expected to be,
Subsidiary Guarantors. As of the date of the Senior Note Indenture, all of the
Company's Subsidiaries, except for the Receivables Subsidiary, are Restricted
Subsidiaries. However, under certain circumstances, the Company will be able to
designate current or future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Senior Note Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes are limited in aggregate principal amount to $350.0
million and mature on October 15, 2006. Interest on the Senior Notes accrues at
the rate of 8 7/8% per annum and is payable semi-annually in arrears on April 15
and October 15 of each year, commencing on April 15, 1998, to Holders of record
on the immediately preceding April 1 and October 1. Interest on the Senior Notes
accrues from the most recent date to which interest has been paid or, if no
interest has been paid, from October 15, 1997. Interest is computed on the basis
of a 360-day year comprised of twelve 30-day months. Principal, premium and
Liquidated Damages, if any, and interest on the Senior Notes is payable at the
office or agency of the Company maintained for such purpose within the City and
State of New York or, at the option of the Company, payment of interest and
Liquidated Damages, if any, may be made by check mailed to the Holders of the
Senior Notes at their respective addresses set forth in the register of Holders
of Senior Notes; provided that all payments of principal, premium and Liquidated
Damages, if any, and interest with respect to Senior Notes the Holders of which
have given wire transfer instructions to the Company are required to be made by
wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's office
or agency in New York is the office of the Trustee maintained for such purpose.
The Senior Notes are issued in denominations of $1,000 and integral multiples
thereof.
44
<PAGE> 45
SENIOR NOTE GUARANTEES
The Company's payment obligations under the Senior Notes are fully and
unconditionally guaranteed by the Subsidiary Guarantors on a joint and several
basis. The Senior Note Guarantees are general unsecured obligations of the
Subsidiary Guarantors, rank senior in right of payment to all subordinated
Indebtedness of the Subsidiary Guarantors and pari passu in right of payment to
all existing and future senior Indebtedness of the Subsidiary Guarantors, if
any. The obligations of any Subsidiary Guarantor under its Senior Note Guarantee
are limited so as not to constitute a fraudulent conveyance under applicable
law.
The Senior Note Indenture provides that no Subsidiary Guarantor may
consolidate with or merge with or into (whether or not such Subsidiary Guarantor
is the surviving Person), another corporation, Person or entity whether or not
affiliated with such Subsidiary Guarantor unless, subject to the provisions of
the following paragraph, (i) the Person formed by or surviving any such
consolidation or merger (if other than such Subsidiary Guarantor) assumes all
the obligations of such Subsidiary Guarantor pursuant to a supplemental
indenture in form and substance reasonably satisfactory to the Trustee, under
the Senior Notes and the Senior Note Indenture; (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists; (iii) such
Subsidiary Guarantor, or any Person formed by or surviving any such
consolidation or merger, would have Consolidated Net Worth (immediately after
giving effect to such transaction) equal to or greater than the Consolidated Net
Worth of such Subsidiary Guarantor immediately preceding the transaction; and
(iv) the Company would be permitted by virtue of its pro forma Fixed Charge
Coverage Ratio, immediately after giving effect to such transaction, to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the covenant described below under the caption
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock." The requirements of clauses (iii) and (iv) of this paragraph will not
apply in the case of a consolidation with or merger with or into (a) the Company
or another Subsidiary Guarantor or (b) any other Person if the acquisition of
all of the Equity Interests in such Person would have complied with the
provisions of the covenants described below under the captions "--Certain
Covenants--Restricted Payments" and "--Incurrence of Indebtedness and Issuance
of Preferred Stock."
The Senior Note Indenture provides that (a) in the event of a sale or other
disposition of all of the assets of any Subsidiary Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the capital
stock of any Subsidiary Guarantor, or (b) in the event that the Company
designates a Subsidiary Guarantor to be an Unrestricted Subsidiary, or such
Subsidiary Guarantor ceases to be a Subsidiary of the Company, then such
Subsidiary Guarantor (in the event of a sale or other disposition, by way of
such a merger, consolidation or otherwise, of all of the capital stock of such
Subsidiary Guarantor or any such designation) or the entity acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Subsidiary Guarantor) will be released and relieved of any obligations
under its Senior Note Guarantee; provided that the Net Proceeds of such sale or
other disposition are applied in accordance with the applicable provisions of
the Indenture. See "--Repurchase at the Option of Holders." In the case of a
sale, assignment, lease, transfer, conveyance or other disposition of all or
substantially all of the assets of a Subsidiary Guarantor, upon the assumption
provided for in clause (ii) of the covenant described under the caption
"--Certain Covenants--Merger, Consolidation, or Sale of Assets," such Subsidiary
Guarantor shall be discharged from all further liability and obligation under
the Senior Note Indenture.
OPTIONAL REDEMPTION
The Senior Notes are not redeemable at the Company's option prior to April
15, 2002. Thereafter, the Senior Notes are subject to redemption at any time at
the option of the Company, in whole or in part, upon not less than 30 nor more
than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the
45
<PAGE> 46
applicable redemption date, if redeemed during the twelve-month period beginning
on April 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 104.438%
2003........................................................ 102.219%
2004 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to October 15, 2000, the
Company may redeem up to 33% of the original aggregate principal amount of
Senior Notes at a redemption price of 108.875% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the
redemption date, with the net cash proceeds of a Public Equity Offering;
provided that at least 67% of the original aggregate principal amount of Senior
Notes remains outstanding immediately after the occurrence of such redemption;
and provided, further, that such redemption shall occur within 45 days of the
date of the closing of such Public Equity Offering.
SELECTION AND NOTICE
If less than all of the Senior Notes are to be redeemed at any time,
selection of Senior Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Senior Notes are listed, or, if the Senior Notes are not so
listed, on a pro rata basis, by lot or by such method as the Trustee shall deem
fair and appropriate; provided that no Senior Notes of $1,000 or less shall be
redeemed in part. Notices of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each Holder of
Senior Notes to be redeemed at its registered address. Notices of redemption may
not be conditional. If any Senior Note is to be redeemed in part only, the
notice of redemption that relates to such Senior Note shall state the portion of
the principal amount thereof to be redeemed. A new Senior Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Senior Note. Senior Notes
called for redemption become due on the date fixed for redemption. On and after
the redemption date, interest ceases to accrue on Senior Notes or portions of
them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Senior Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Senior Notes has
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Senior Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase (the
"Change of Control Payment"). Within 30 days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Senior Notes on the date specified in such notice, which date shall be no
earlier than 30 days and no later than 60 days from the date such notice is
mailed (the "Change of Control Payment Date"), pursuant to the procedures
required by the Indenture and described in such notice. The Company will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Senior Notes
as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Senior Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit
46
<PAGE> 47
with the Paying Agent an amount equal to the Change of Control Payment in
respect of all Senior Notes or portions thereof so tendered and (3) deliver or
cause to be delivered to the Trustee the Senior Notes so accepted together with
an Officers' Certificate stating the aggregate principal amount of Senior Notes
or portions thereof being purchased by the Company. The Paying Agent will
promptly mail to each Holder of Senior Notes so tendered the Change of Control
Payment for such Senior Notes, and the Trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each Holder a new Senior Note
equal in principal amount to any unpurchased portion of the Senior Notes
surrendered, if any; provided that each such new Senior Note will be in a
principal amount of $1,000 or an integral multiple thereof.
The Change of Control provisions described above are applicable whether or
not any other provisions of the Senior Note Indenture are applicable. Except as
described above with respect to a Change of Control, the Senior Note Indenture
does not contain provisions that permit the Holders of the Senior Notes to
require that the Company repurchase or redeem the Senior Notes in the event of a
takeover, recapitalization or similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Senior Note Indenture applicable to a Change of Control Offer made by the
Company and purchases all Senior Notes validly tendered and not withdrawn under
such Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of that phrase under applicable
law. Accordingly, the ability of a Holder of Senior Notes to require the Company
to repurchase such Senior Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale other than transfers
of Receivables to a Receivables Subsidiary in connection with a Receivables
Transaction unless (i) the Company (or the Restricted Subsidiary, as the case
may be) receives consideration at the time of such Asset Sale at least equal to
the fair market value (evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee) of the assets or
Equity Interests issued or sold or otherwise disposed of and (ii) at least 80%
of the consideration therefor received by the Company or such Restricted
Subsidiary is in the form of cash; provided that the amount of (x) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet) of the Company or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Senior Notes or any guarantee thereof) that are assumed by the transferee of
any such assets pursuant to a customary novation agreement that releases the
Company or such Restricted Subsidiary from further liability and (y) any
securities, notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are converted by the Company or
such Restricted Subsidiary into cash within 180 days (to the extent of the cash
received), shall be deemed to be cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to permanently repay
Senior Debt (and to correspondingly reduce commitments with respect thereto in
the case of revolving borrowings), or (b) to the acquisition of a controlling
interest in another business, the making of a capital expenditure or the
acquisition of other long-term assets, in each case, in a Permitted Business.
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce the revolving Indebtedness under the Credit Facility or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
47
<PAGE> 48
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $15.0
million, the Company will be required to make an offer to all Holders of Senior
Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Senior
Notes that may be purchased out of the Excess Proceeds, at an offer price in
cash in an amount equal to 100% of the principal amount thereof plus accrued and
unpaid interest and Liquidated Damages thereon, if any, to the date of purchase,
in accordance with the procedures set forth in the Senior Note Indenture. To the
extent that the aggregate amount of Senior Notes tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company may use any remaining
Excess Proceeds for general corporate purposes. If the aggregate principal
amount of Senior Notes surrendered by Holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Senior Notes to be purchased on a
pro rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
CERTAIN COVENANTS
Restricted Payments
The Senior Note Indenture provides that from and after the date of the
Senior Note Indenture the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation involving
the Company) or to the direct or indirect holders of the Company's or any of its
Restricted Subsidiaries' Equity Interests in their capacity as such (other than
dividends or distributions payable in Equity Interests (other than Disqualified
Stock) of the Company); (ii) purchase, redeem or otherwise acquire or retire for
value (including without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company or any
direct or indirect parent of the Company; (iii) make any payment on or with
respect to, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is pari passu with or subordinated to the Senior
Notes (other than Senior Notes), except scheduled payments of interest or
principal at Stated Maturity of such Indebtedness; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i) through
(iv) above being collectively referred to as "Restricted Payments"), unless, at
the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under caption "--Incurrence of Indebtedness
and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by the Company and its Subsidiaries
after the date of the Indenture (excluding Restricted Payments permitted by
clause (ii) of the next succeeding paragraph), is less than the sum of (i)
50% of the Consolidated Net Income of the Company for the period (taken as
one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company from
the issue or sale since the date of the Indenture of Equity Interests of
the Company (other than Disqualified Stock) or of Disqualified Stock or
debt securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Company and other
than Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock), plus (iii) to the extent that any
Restricted Investment that was made after the date of the Indenture is sold
for cash or otherwise liquidated or repaid for cash, the lesser of (A) the
cash return of capital with respect to such Restricted Investment (less the
48
<PAGE> 49
cost of disposition, if any) and (B) the initial amount of such Restricted
Investment, plus (iv) if any Unrestricted Subsidiary (A) is redesignated as
a Restricted Subsidiary, the fair market value of such redesignated
Subsidiary (as determined in good faith by the Board of Directors) as of
the date of its redesignation or (B) pays any cash dividends or cash
distributions to the Company or any of its Restricted Subsidiaries, 50% of
any such cash dividends or cash distributions made after the date of the
Indenture.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any pari passu or subordinated Indebtedness or Equity Interests
of the Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale or issuance (other than to a Restricted Subsidiary
of the Company) of, other Equity Interests of the Company (other than any
Disqualified Stock); provided that the amount of any such net cash proceeds that
are utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of
pari passu or subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any
dividend by a Restricted Subsidiary of the Company to the holders of its Equity
Interests on a pro rata basis; (v) the declaration or payment of dividends to
NEHC for expenses incurred by NEHC or Holberg in its capacity as a holding
company that are attributable to the operations of the Company and its
Restricted Subsidiaries, including, without limitation, (a) customary salary,
bonus and other benefits payable to officers and employees of NEHC or Holberg,
(b) fees and expenses paid to members of the Board of Directors of NEHC or
Holberg, (c) general corporate overhead expenses of NEHC or Holberg, (d)
foreign, federal, state or local tax liabilities paid by NEHC or Holberg, (e)
management, consulting or advisory fees paid to Holberg not to exceed $4.0
million in any fiscal year, and (f) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of NEHC or Holberg
held by any member of NEHC's or the Company's (or any of their Restricted
Subsidiaries') management pursuant to any management equity subscription
agreement or stock option agreement in effect as of the date of the Senior Note
Indenture; provided, however, the aggregate amount paid pursuant to the
foregoing clauses (a) through (f) does not exceed $7.0 million in any fiscal
year; (vi) Investments in any Person (other than the Company or a Wholly-Owned
Restricted Subsidiary) engaged in a Permitted Business in an amount not to
exceed $5.0 million; (vii) other Investments in Unrestricted Subsidiaries having
an aggregate fair market value, taken together with all other Investments made
pursuant to this clause (vii) that are at that time outstanding, not to exceed
$2.0 million; (viii) Permitted Investments; (ix) payments to NEHC or Holberg
pursuant to the tax sharing agreement among Holberg and other members of the
affiliated corporations of which Holberg is the common parent; (x) optional and
mandatory prepayments on any Indebtedness incurred under the Credit Facility or
other senior secured Indebtedness allowed to be incurred pursuant to the
covenant described below under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock"; or (xi) other Restricted Payments in an aggregate
amount not to exceed $10.0 million.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default; provided
that in no event shall the business currently operated by any Subsidiary
Guarantor be transferred to or held by an Unrestricted Subsidiary. For purposes
of making such determination, all outstanding Investments by the Company and its
Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary
so designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the fair market value of
such Investments at the time of such designation (as determined in good faith by
the Board of Directors). Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such
49
<PAGE> 50
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined in good
faith by the Board of Directors whose resolution with respect thereto shall be
delivered to the Trustee; such determination will be based upon an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
national standing if such fair market value exceeds $10.0 million. Not later
than the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "--Restricted Payments" were computed, together with a copy of any
fairness opinion or appraisal required by the Senior Note Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Senior Note Indenture provides that the Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Subsidiaries to issue any
shares of preferred stock; provided, however, that the Company may incur
Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if
the Fixed Charge Coverage Ratio for the Company's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least 2.0 to 1,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The provisions of the first paragraph of this covenant do not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness represented by the Senior Subordinated Notes and the
guarantees thereof, respectively;
(ii) the incurrence by the Company of Indebtedness and letters of
credit pursuant to the Credit Facility; provided that the aggregate
principal amount of all such Indebtedness (with letters of credit being
deemed to have a principal amount equal to the maximum potential liability
of the Company thereunder) outstanding under the Credit Facility after
giving effect to such incurrence does not exceed the sum of $225.0 million
plus the Borrowing Base.
(iii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness;
(iv) the incurrence by the Company and the Subsidiary Guarantors of
Indebtedness represented by the Senior Notes and the Senior Note
Guarantees, respectively;
(v) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary (whether through the
direct purchase of assets or the Capital Stock of any Person owning such
Assets), in an aggregate principal amount not to exceed $125.0 million;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness in connection with the acquisition of assets
or a new Restricted Subsidiary; provided that such Indebtedness was
incurred by the prior owner of such assets or such Restricted Subsidiary
prior to such acquisition by the Company or one of its Subsidiaries and was
not incurred in connection with, or in contemplation of, such acquisition
by the Company or one of its Subsidiaries; provided further that the
principal amount (or accreted value, as applicable) of such Indebtedness,
together with any other outstanding Indebtedness incurred pursuant to this
clause (vi), does not exceed $5.0 million;
50
<PAGE> 51
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace Indebtedness
that was permitted by the Senior Note Indenture to be incurred;
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Wholly-Owned Restricted Subsidiaries; provided, however, that
(i) if the Company is the obligor on such Indebtedness and the payee is not
a Subsidiary Guarantor, such Indebtedness is expressly subordinated to the
prior payment in full in cash of all Obligations with respect to the Senior
Notes and (ii)(A) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than the
Company or a Wholly Owned Restricted Subsidiary and (B) any sale or other
transfer of any such Indebtedness to a Person that is not either the
Company or a Wholly Owned Restricted Subsidiary shall be deemed, in each
case, to constitute an incurrence of such Indebtedness by the Company or
such Restricted Subsidiary, as the case may be;
(ix) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging currency risk or interest rate risk with respect to any
floating rate Indebtedness that is permitted by the terms of the Senior
Note Indenture to be outstanding;
(x) the guarantee by the Company or any of its Restricted Subsidiaries
of Indebtedness of the Company or a Restricted Subsidiary of the Company
that was permitted to be incurred by another provision of this covenant;
(xi) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company;
(xii) Asset Sales in the form of Receivables Transactions;
(xiii) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation to letters of credit in respect to workers' compensation claims
or self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; provided, however, that
upon the drawing of such letters of credit or the incurrence of such
Indebtedness, such obligations are reimbursed within 30 days following such
drawing or incurrence;
(xiv) Indebtedness arising from agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, asset or Subsidiary, other
than guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or Subsidiary for the purpose of financing
such acquisition; provided that the maximum aggregate liability of all such
Indebtedness shall at no time exceed 50% of the gross proceeds actually
received by the Company or a Restricted Subsidiary in connection with such
disposition;
(xv) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business;
(xvi) guarantees incurred in the ordinary course of business in an
aggregate principal amount not to exceed $5.0 million at any time
outstanding; and
(xvii) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness, including Attributable Debt
incurred after the date of the Senior Note Indenture, in an aggregate
principal amount (or accreted value, as applicable) at any time
outstanding, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any other Indebtedness incurred pursuant to
this clause (xvii), not to exceed $25.0 million.
51
<PAGE> 52
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xvii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Accrual of interest and the accretion of accreted
value will not be deemed to be an incurrence of Indebtedness for purposes of
this covenant.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, create, incur, assume or otherwise cause or
suffer to exist or become effective any Lien (other than Permitted Liens) upon
any of their property or assets, now owned or hereafter acquired.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Senior Note Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (a) Existing Indebtedness as in effect on the date of the Senior Note
Indenture, (b) the Credit Facility as in effect as of the date of the Senior
Note Indenture, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
provided that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are no more restrictive in
the aggregate (as determined by the Credit Agent in good faith) with respect to
such dividend and other payment restrictions than those contained in the Credit
Facility as in effect on the date of the Senior Note Indenture, (c) the Senior
Note Indenture and the Senior Notes, (d) any applicable law, rule, regulation or
order, (e) any instrument governing Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Senior Note Indenture to be
incurred, (f) by reason of customary non-assignment provisions in leases entered
into in the ordinary course of business and consistent with past practices, (g)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iii) above
on the property so acquired, (h) Permitted Refinancing Indebtedness, provided
that the material restrictions contained in the agreements governing such
Permitted Refinancing Indebtedness are no more restrictive than those contained
in the agreements governing the Indebtedness being refinanced, (i) contracts for
the sale of assets, including without limitation customary restrictions with
respect to a Subsidiary pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Subsidiary, and (j) restrictions on cash or other deposits or net
worth imposed by customers under contracts entered into in the ordinary course
of business.
Merger, Consolidation, or Sale of Assets
The Senior Note Indenture provides that the Company may not consolidate or
merge with or into (whether or not the Company is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company is
the surviving corporation or the entity or the Person
52
<PAGE> 53
formed by or surviving any such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made is a corporation organized or existing under
the laws of the United States, any state thereof or the District of Columbia;
(ii) the entity or Person formed by or surviving any such consolidation or
merger (if other than the Company) or the entity or Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made assumes all the obligations of the Company under the Senior Notes and the
Senior Note Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Senior Note Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly-Owned Restricted Subsidiary of
the Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made will, at the time of such transaction and after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described above under the caption "--Incurrence
of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Senior Note Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, make any payment to, or sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction") involving consideration in excess of $3.0 million unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company or
the relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Restricted Subsidiary with an
unrelated Person and (ii) the Company delivers to the Senior Note Trustee (a)
with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $7.5 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
either aggregate consideration in excess of $15.0 million or an aggregate
consideration in excess of $10.0 million where there are no disinterested
members of the Board of Directors, an opinion as to the fairness to the Holders
of such Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing; provided
that the following shall not be deemed Affiliate Transactions: (q) any
employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Restricted Subsidiary, (r) transactions between
or among the Company and/or its Restricted Subsidiaries, (s) Permitted
Investments and Restricted Payments that are permitted by the provisions of the
Senior Note Indenture described above under the caption "--Restricted Payments,"
(t) customary loans, advances, fees and compensation paid to, and indemnity
provided on behalf of, officers, directors, employees or consultants of the
Company or any of its Restricted Subsidiaries, (u) annual management fees paid
to Holberg not to exceed $5.0 million in any one year, (v) transactions pursuant
to any contract or agreement in effect on the date of the Senior Note Indenture
as the same may be amended, modified or replaced from time to time so long as
any such amendment, modification or replacement is no less favorable to the
Company and its Restricted Subsidiaries than the contract or agreement as in
effect on the Issue Date or is approved by a majority of the disinterested
directors of NEHC, (w) transactions between the Company or its Restricted
Subsidiaries on the one hand, and Holberg on the other hand, involving the
provision of financial or advisory services by Holberg; provided that fees
payable to Holberg do not exceed the usual and customary fees for similar
services, (x) transactions between the Company or its Restricted Subsidiaries on
the one hand, and Donaldson, Lufkin & Jenrette Securities Corporation or its
Affiliates ("DLJ") on the other hand, involving the provision of financial,
advisory, placement or underwriting services by DLJ; provided that fees payable
to DLJ do not exceed the usual and customary fees of DLJ for similar services,
(y) the insurance arrangements between
53
<PAGE> 54
NEHC and its Subsidiaries and an Affiliate of Holberg that are not less
favorable to the Company or any of its Subsidiaries than those that are in
effect on the date hereof provided such arrangements are conducted in the
ordinary course of business consistent with past practices, and (z) payments
under the tax sharing agreement among Holberg and other members of the
affiliated group of corporations of which it is the common parent.
Sale and Leaseback Transactions
The Senior Note Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that the Company may enter into a sale and leaseback
transaction if (i) the Company could have (a) incurred Indebtedness in an amount
equal to the Attributable Debt relating to such sale and leaseback transaction
pursuant to the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien to secure
such Indebtedness pursuant to the covenant described above under the caption
"--Liens," (ii) the gross cash proceeds of such sale and leaseback transaction
are at least equal to the fair market value (as determined in good faith by the
Board of Directors and set forth in an Officers' Certificate delivered to the
Senior Note Trustee) of the property that is the subject of such sale and
leaseback transaction and (iii) the transfer of assets in such sale and
leaseback transaction is permitted by, and the Company applies the proceeds of
such transaction in compliance with, the covenant described above under the
caption "--Repurchase at the Option of Holders--Asset Sales."
Limitation on Issuances and Sales of Capital Stock of Wholly-Owned
Restricted Subsidiaries
The Senior Note Indenture provides that the Company (i) will not, and will
not permit any Wholly-Owned Restricted Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any
Wholly-Owned Subsidiary of the Company to any Person (other than the Company or
a Wholly-Owned Restricted Subsidiary of the Company), unless (a) such transfer,
conveyance, sale, lease or other disposition is of all the Capital Stock of such
Wholly-Owned Restricted Subsidiary and (b) the cash Net Proceeds from such
transfer, conveyance, sale, lease or other disposition are applied in accordance
with the covenant described above under the caption "--Asset Sales," and (ii)
will not permit any Wholly-Owned Restricted Subsidiary of the Company to issue
any of its Equity Interests (other than, if necessary, shares of its Capital
Stock constituting directors' qualifying shares) to any Person other than to the
Company or a Wholly-Owned Restricted Subsidiary of the Company.
Limitations on Issuances of Guarantees of Indebtedness
The Senior Note Indenture provides that the Company will not permit any
Restricted Subsidiary, directly or indirectly, to Guarantee or pledge any assets
to secure the payment of any other Indebtedness of the Company unless either
such Restricted Subsidiary (x) is a Subsidiary Guarantor or (y) simultaneously
executes and delivers a supplemental indenture to the Senior Note Indenture
providing for the Guarantee of the payment of the Senior Notes by such
Restricted Subsidiary, which Guarantee shall be senior to or pari passu with
such Restricted Subsidiary's Guarantee of or pledge to secure such other
Indebtedness. Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary of the Senior Notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged upon any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company's stock in, or all or substantially all the assets of, such
Restricted Subsidiary, which sale, exchange or transfer is made in compliance
with the applicable provisions of the Senior Note Indenture. The form of such
Guarantee will be attached as an exhibit to the Senior Note Indenture.
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than a Permitted Business, except to such extent as
would not be material to the Company and its Restricted Subsidiaries taken as a
whole.
54
<PAGE> 55
Additional Guarantees
The Senior Note Indenture provides that (i) if the Company or any of its
Restricted Subsidiaries shall, after the date of the Senior Note Indenture,
transfer or cause to be transferred, including by way of any Investment, in one
or a series of transactions (whether or not related), any assets, businesses,
divisions, real property or equipment having an aggregate fair market value (as
determined in good faith by the Board of Directors) in excess of $1.0 million to
any Restricted Subsidiary that is not a Subsidiary Guarantor or a Foreign
Subsidiary, (ii) if the Company or any of its Restricted Subsidiaries shall
acquire another Restricted Subsidiary other than a Foreign Subsidiary having
total assets with a fair market value (as determined in good faith by the Board
of Directors) in excess of $1.0 million, or (iii) if any Restricted Subsidiary
other than a Foreign Subsidiary shall incur Acquired Debt in excess of $1.0
million, then the Company shall, at the time of such transfer, acquisition or
incurrence, (i) cause such transferee, acquired Restricted Subsidiary or
Restricted Subsidiary incurring Acquired Debt (if not then a Subsidiary
Guarantor) to execute a Senior Note Guarantee of the Obligations of the Company
under the Senior Notes in the form set forth in the Indenture and (ii) deliver
to the Trustee an Opinion of Counsel, in form reasonably satisfactory to the
Senior Note Trustee, that such Senior Note Guarantee is a valid, binding and
enforceable obligation of such transferee, acquired Restricted Subsidiary or
Restricted Subsidiary incurring Acquired Debt, subject to customary exceptions
for bankruptcy, fraudulent conveyance and equitable principles. Notwithstanding
the foregoing, the Company or any of its Restricted Subsidiaries may make a
Restricted Investment in any Wholly-Owned Restricted Subsidiary of the Company
without compliance with this covenant provided that such Restricted Investment
is permitted by the covenant described under the caption, "--Restricted
Payments."
Reports
The Senior Note Indenture provides that, whether or not required by the
rules and regulations of the Commission, so long as any Senior Notes are
outstanding, the Company will furnish to the Holders of Senior Notes (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports. In addition, whether or not required by the rules and regulations
of the Commission, the Company will file a copy of all such information and
reports with the Commission for public availability (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, the Company has
agreed that, for so long as any Senior Notes remain outstanding, it will furnish
to the Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Senior Note Indenture provides that each of the following constitutes
an Event of Default: (i) default for 30 days in the payment when due of interest
on, or Liquidated Damages with respect to, the Senior Notes; (ii) default in
payment when due of the principal of or premium, if any, on the Senior Notes;
(iii) failure by the Company to comply with the provisions described under the
captions "--Repurchase at the Option of Holders--Change of Control," "--Certain
Covenants--Asset Sales," or "--Certain Covenants --Merger, Consolidation, or
Sale of Assets"; (iv) failure by the Company for 30 days after notice from the
Trustee or at least 25% in principal amount of the Senior Notes then outstanding
to comply with the provisions described under the captions "--Restricted
Payments" or "--Incurrence of Indebtedness and Issuance of Preferred Stock"; (v)
failure by the Company for 60 days after notice from the Trustee or at least 25%
in principal amount of the Senior Notes then outstanding to comply with any of
its other agreements in the Senior Note Indenture or the Senior Notes; (vi)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company or any of its Subsidiaries (or the payment of which is
guaranteed by the Company
55
<PAGE> 56
or any of its Subsidiaries) whether such Indebtedness or Guarantee now exists,
or is created after the date of the Senior Note Indenture, which default (a) is
caused by a failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b) results in
the acceleration of such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated, aggregates $15.0
million or more; (vii) failure by the Company or any of its Subsidiaries to pay
final judgments aggregating in excess of $5.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days; and (viii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Senior Note Trustee
or the Holders of at least 25% in principal amount of the then outstanding
Senior Notes may declare all the Senior Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company or any
of its Subsidiaries all outstanding Senior Notes will become due and payable
without further action or notice. Holders of the Senior Notes may not enforce
the Senior Note Indenture or the Senior Notes except as provided in the Senior
Note Indenture. Subject to certain limitations, Holders of a majority in
principal amount of the then outstanding Senior Notes may direct the Trustee in
its exercise of any trust or power. The Trustee may withhold from Holders of the
Senior Notes notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest) if
it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Senior Notes pursuant to
the optional redemption provisions of the Senior Note Indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the Senior Notes. If an Event of
Default occurs prior to April 15, 2002 by reason of any willful action (or
inaction) taken (or not taken) by or on behalf of the Company with the intention
of avoiding the prohibition on redemption of the Senior Notes prior to April 15,
2002, then the premium specified in the Senior Note Indenture shall also become
immediately due and payable to the extent permitted by law upon the acceleration
of the Senior Notes.
The Holders of a majority in aggregate principal amount of the Senior Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the Senior Notes waive any existing Default or Event of Default and its
consequences under the Senior Note Indenture except a continuing Default or
Event of Default in the payment of interest on, or the principal of, the Senior
Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Senior Note Indenture, and the Company is required
upon becoming aware of any Default or Event of Default, to deliver to the
Trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or the Subsidiary Guarantors, as such, shall have any liability for any
obligations of the Company or any Subsidiary Guarantor under the Senior Notes,
the Senior Note Indenture, the Senior Note Guarantees or for any claim based on,
in respect of, or by reason of, such obligations or their creation. Each Holder
of Senior Notes by accepting a Senior Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Senior Notes. Such waiver may not be effective to waive liabilities under
the federal securities laws and it is the view of the Commission that such a
waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Notes and all
obligations of the Subsidiary Guarantors under the Senior
56
<PAGE> 57
Note Guarantees ("Legal Defeasance") except for (i) the rights of Holders of
outstanding Senior Notes to receive payments in respect of the principal of,
premium and Liquidated Damages, if any, and interest on such Senior Notes when
such payments are due from the trust referred to below, (ii) the Company's
obligations with respect to the Senior Notes concerning issuing temporary Senior
Notes, registration of Senior Notes, mutilated, destroyed, lost or stolen Senior
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Senior Note Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Senior Note
Indenture. In addition, the Company may, at its option and at any time, elect to
have the obligations of the Company and the Subsidiary Guarantors released with
respect to certain covenants that are described in the Senior Note Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Senior Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "--Events of Default" will no longer constitute an Event
of Default with respect to the Senior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Senior Note Trustee, in trust, for
the benefit of the Holders of the Senior Notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium and Liquidated
Damages, if any, and interest on the outstanding Senior Notes on the stated
maturity or on the applicable redemption date, as the case may be, and the
Company must specify whether the Senior Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Senior Note Trustee an opinion of counsel in
the United States reasonably acceptable to the Senior Note Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Senior Note
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of the outstanding Senior Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Senior Note Trustee an opinion of counsel in
the United States reasonably acceptable to the Trustee confirming that the
Holders of the outstanding Senior Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Covenant Defeasance and will
be subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or insofar
as Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Indenture) to which the Company or any of its Subsidiaries is a party
or by which the Company or any of its Subsidiaries is bound; (vi) the Company
must have delivered to the Senior Note Trustee an opinion of counsel to the
effect that after the 91st day following the deposit, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company must deliver to the Senior Note Trustee an Officers' Certificate stating
that the deposit was not made by the Company with the intent of preferring the
Holders of Senior Notes over the other creditors of the Company with the intent
of defeating, hindering, delaying or defrauding creditors of the Company or
others; and (viii) the Company must deliver to the Senior Note Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
57
<PAGE> 58
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Senior Notes in accordance with the
Senior Note Indenture. The Registrar and the Senior Note Trustee may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and the Company may require a Holder to pay any taxes and fees
required by law or permitted by the Senior Note Indenture. The Company is not
required to transfer or exchange any Senior Note selected for redemption. Also,
the Company is not required to transfer or exchange any Senior Note for a period
of 15 days before a selection of Senior Notes to be redeemed.
The registered Holder of a Senior Note will be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture,
the Senior Notes or the Senior Note Guarantees may be amended or supplemented
with the consent of the Holders of at least a majority in principal amount of
the Senior Notes then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Senior Notes), and any existing default or compliance with any provision of
the Senior Note Indenture, the Senior Notes or the Senior Note Guarantees may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding Senior Notes (including consents obtained in connection with a
tender offer or exchange offer for Senior Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Notes held by a non-consenting Holder): (i) reduce
the principal amount of Senior Notes whose Holders must consent to an amendment,
supplement or waiver; (ii) reduce the principal of or change the fixed maturity
of any Senior Note or alter the provisions with respect to the redemption of the
Senior Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders"); (iii) reduce the
rate of or change the time for payment of interest on any Senior Note; (iv)
waive a Default or Event of Default in the payment of principal of or premium,
if any, or interest on the Senior Notes (except a rescission of acceleration of
the Senior Notes by the Holders of at least a majority in aggregate principal
amount of the Senior Notes and a waiver of the payment default that resulted
from such acceleration); (v) make any Senior Note payable in money other than
that stated in the Senior Notes; (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of
Senior Notes to receive payments of principal of or premium, if any, or interest
on the Senior Notes; (vii) waive a redemption payment with respect to any Senior
Note (other than a payment required by one of the covenants described above
under the caption "--Repurchase at the Option of Holders") or (viii) make any
change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Notes, the Company, the Subsidiary Guarantors and the Senior Note Trustee may
amend or supplement the Indenture, the Senior Notes or the Senior Note
Guarantees to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Senior Notes in addition to or in place of certificated Senior
Notes, to provide for the assumption of the Company's and the Subsidiary
Guarantors' obligations to Holders of Senior Notes in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders of Senior Notes or that does not adversely affect the
legal rights under the Senior Note Indenture of any such Holder, to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Senior Notes Indenture under the Trust Indenture Act or to allow any
Subsidiary to guarantee the Senior Notes.
CONCERNING THE SENIOR NOTE TRUSTEE
The Senior Note Indenture contains certain limitations on the rights of the
Senior Note Trustee, should it become a creditor of the Company, to obtain
payment of claims in certain cases, or to realize on certain property received
in respect of any such claim as security or otherwise. The Senior Note Trustee
will be permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
58
<PAGE> 59
The Holders of a majority in principal amount of the then outstanding
Senior Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Senior Note Indenture provides that in case
an Event of Default shall occur (which shall not be cured), the Senior Note
Trustee will be required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject to such
provisions, the Senior Note Trustee will be under no obligation to exercise any
of its rights or powers under the Senior Note Indenture at the request of any
Holder of Senior Notes, unless such Holder shall have offered to the Senior Note
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Senior Note
Indenture without charge by writing to AmeriServe, 14841 Dallas Parkway, Dallas,
Texas 75240; Attention: Secretary.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices and other than a Receivables Transaction
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole will be governed by the provisions of the Indenture described
above under the caption "--Repurchase at Option of Holders--Change of Control"
and/or the provisions described above under the caption "--Certain
Covenants--Merger, Consolidation or Sale of Assets" and not by the provisions of
the Asset Sale covenant), and (ii) the issue or sale by the Company or any of
its Restricted Subsidiaries of Equity Interests of any of the Company's
Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a
single transaction or a series of related transactions (a) that have a fair
market value in excess of $3.0 million or (b) for net proceeds in excess of $3.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the Company
to a Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary, (ii)
an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary to the
Company or to another Wholly Owned Restricted Subsidiary, and (iii) a Restricted
Payment that is permitted by the covenant described above under the caption
"--Certain Covenants--Restricted Payments" will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
59
<PAGE> 60
"Borrowing Base" means, as of any date, an amount equal to the sum of (i)
85% of the sum of (a) the face amount of the Receivables of the Company and its
Restricted Subsidiaries and (b) the book value of the Company's undivided
interest in the assets of the AmeriServe Master Trust plus (ii) 65% of the book
value of all inventory of the Company and the Restricted Subsidiaries, all
calculated as of the end of the most recently completed month on a consolidated
basis and in accordance with GAAP.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any lender party to the New Credit
Facility or with any domestic commercial bank having capital and surplus in
excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above, (v) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each
case maturing within six months after the date of acquisition and (vi)
securities quoted by the Nasdaq National Market or listed on a United States,
Canadian or western European national securities exchange.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Principals or their Related Parties (as defined below), (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company, (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than the Principals and their Related
Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3
and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to
have "beneficial ownership" of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only upon
the occurrence of a subsequent condition), directly or indirectly, of more than
50% of the Voting Stock of the Company (measured by voting power rather than
number of shares), (iv) the first day on which a majority of the members of the
Board of Directors of the Company are not Continuing Directors or (v) 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 Person consolidates with, or merges with or
into, the Company, in any such event pursuant to a transaction in which any of
the outstanding Voting Stock of the Company is converted into or exchanged for
cash, securities or other property, other than any such transaction where the
Voting Stock of the Company outstanding immediately prior to such transaction is
converted into or exchanged for Voting Stock (other than Disqualified Stock) of
the surviving or transferee Person constituting a majority of the outstanding
shares of such Voting Stock of such surviving or transferee Person (immediately
after giving effect to such issuance).
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
60
<PAGE> 61
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, plus (v) in connection with
any acquisition by the Company, projected quantifiable improvements in operating
results (on an annualized basis) due to cost reductions calculated in accordance
with Article 11 of Regulation S-X of the Securities Act and evidenced by (A) in
the case of cost reductions of less than $10.0 million, an Officers' Certificate
delivered to the Trustee and (B) in the case of cost reductions of $10.0 million
or more, a resolution of the Board of Directors set forth in an Officers'
Certificate delivered to the Trustee, minus (vi) non-cash items increasing such
Consolidated Net Income for such period. Notwithstanding the foregoing, the
provision for taxes on the income or profits of, and the depreciation and
amortization and other non-cash charges of, a Subsidiary of the referent Person
shall be added to Consolidated Net Income to compute Consolidated Cash Flow only
to the extent that a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Subsidiary without prior
governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Subsidiary or its stockholders,
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iv) the cumulative effect of a change in accounting principles shall
be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be
excluded, whether or not distributed to the Company or one of its Restricted
Subsidiaries for purposes of the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock" and shall be
included for purposes of the covenant described under the caption "Restricted
Payments" only to the extent of the amount of dividends or distributions paid in
cash to the Company or one of its Restricted Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of
61
<PAGE> 62
such business) subsequent to the date of the Indenture in the book value of any
asset owned by such Person or a consolidated Subsidiary of such Person, (y) all
investments as of such date in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Agent" means the Bank of America, in its capacity as Administrative
Agent for the lenders party to the New Credit Facility, or any successor thereto
or any person otherwise appointed.
"Credit Facility" means that certain Credit Facility, dated as of July 11,
1997, by and among the Company and Bank of America, providing for up to $150.0
million of revolving credit borrowings, including any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, and in each case as amended, modified, renewed, refunded, replaced or
refinanced from time to time.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the New Notes mature; provided, however,
that any Capital Stock that would not qualify as Disqualified Stock but for
change of control provisions shall not constitute Disqualified Stock if the
provisions are not more favorable to the holders of such Capital Stock than the
provisions described under "--Change of Control" applicable to the Holders of
the New Notes.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), (ii) the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period, (iii) any
interest expense on Indebtedness of another Person that is Guaranteed by such
Person or one of its Restricted Subsidiaries or secured by a Lien on assets of
such Person or one of its Restricted Subsidiaries (whether or not such Guarantee
or Lien is called upon) and (iv) the product of (a) all dividend payments,
whether or not in cash, on any series of preferred stock of such Person or any
of its Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of the Company, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current combined federal, state and local statutory tax rate of such Person,
expressed as a decimal, in each case, on a consolidated basis and in accordance
with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company or
any of its
62
<PAGE> 63
Restricted Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness
(other than revolving credit borrowings) or issues preferred stock subsequent to
the commencement of the period for which the Fixed Charge Coverage Ratio is
being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Restricted Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period and Consolidated
Cash Flow for such reference period shall be calculated without giving effect to
clause (iii) of the proviso set forth in the definition of Consolidated Net
Income, (ii) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the referent Person or any of its Restricted
Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or currency rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or bankers' acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness that does not require current payments
of interest, and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"Insolvency or Liquidation Proceedings" means (i) any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding, relative to the Company or to the creditors
of the Company, as such, or to the assets of the Company, or (ii) any
liquidation, dissolution, reorganization or winding up of the Company, whether
voluntary or involuntary, and involving insolvency or
63
<PAGE> 64
bankruptcy, or (iii) any assignment for the benefit of creditors or any other
marshalling of assets and liabilities of the Company.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness (other than the Senior Notes
being offered hereby) of the Company or any of its Restricted Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (iii) as to which the
lenders have been notified in writing that they will not have any recourse to
the stock or assets of the Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
64
<PAGE> 65
"Permitted Business" means any of the businesses and any other businesses
related to the businesses engaged in by the Company and its respective
Restricted Subsidiaries on the date of the Indenture.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company that is engaged in a Permitted
Business; (b) any Investment in Cash Equivalents; (c) any Investment by the
Company or any Restricted Subsidiary of the Company in a Person, if as a result
of such Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary
of the Company that is engaged in a Permitted Business or (ii) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Wholly Owned Restricted Subsidiary of the Company that is engaged in a Permitted
Business; (d) any Restricted Investment made as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--Repurchase at
the Option of Holders--Asset Sales"; (e) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock) of
the Company; (f) loans and advances made after the date of the Indenture to
Holberg Industries, Inc. not to exceed $10.0 million at any time outstanding;
(g) loans and advances made after the date of the Indenture to NEHC not to
exceed $10.0 million at any time outstanding; and (h) other Investments made
after the date of the Indenture in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (h) that are at the time outstanding,
not to exceed $10.0 million.
"Permitted Liens" means (i) Liens securing Indebtedness under the Credit
Facility that was permitted by the terms of the Indenture to be incurred or
other Indebtedness allowed to be incurred under clause (ii) of the covenant
described above under the caption "Incurrence of Indebtedness and Issuance of
Preferred Stock"; (ii) Liens in favor of the Company; (iii) Liens on property of
a Person existing at the time such Person is merged into or consolidated with
the Company or any Restricted Subsidiary of the Company, provided that such
Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing at
the time of acquisition thereof by the Company or any Restricted Subsidiary of
the Company, provided that such Liens were in existence prior to the
contemplation of such acquisition; (v) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vi)
Liens existing on the date of the Indenture; (vii) Liens for taxes, assessments
or governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor;
(viii) Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do not
exceed $5.0 million at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Restricted Subsidiary, and (ix) Liens on assets of Unrestricted Subsidiaries
that (A) secure Non-Recourse Debt of Unrestricted Subsidiaries or (B) are
incurred in connection with a Receivables Transaction.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) except for Indebtedness used to extend, refinance, renew,
replace, defease or refund the Credit Facility, the principal amount (or
accreted value, if applicable) of such Permitted Refinancing Indebtedness does
not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
65
<PAGE> 66
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Senior Notes, such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and is subordinated in right of
payment to, the Senior Notes on terms at least as favorable to the Holders of
Senior Notes as those contained in the documentation governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and (iv)
such Indebtedness is incurred either by the Company or by the Restricted
Subsidiary who is the obligor on the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Principals" means Holberg Industries, Inc., John V. Holten, Orkla, ASA,
Nebco Evans Distributors, Inc., NEHC, DLJ Merchant Banking, L.P., DLJ
International Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant Banking
Funding, Inc., DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking
Partners II-A, L.P., DLJ Offshore Partners II, C.V., DLJ Diversified Partners,
L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ
Millennium Partners-A, L.P., DLJMB Funding II, Inc., DLJ First ESC LLC, DLJ EAB
Partners, L.P. and UK Investment Plan 1997 Partners.
"Public Equity Offering" means a public offering of Equity Interests (other
than Disqualified Stock) of (i) the Company; or (ii) NEHC to the extent the net
proceeds thereof are contributed to the Company as a capital contribution, that,
in each case, results in the net proceeds to the Company of at least $25.0
million.
"Receivables" means, with respect to any Person or entity, all of the
following property and interests in property of such Person or entity, whether
now existing or existing in the future or hereafter acquired or arising: (i)
accounts, (ii) accounts receivable incurred in the ordinary course of business,
including, without limitation, all rights to payment created by or arising from
sales of goods, leases of goods or the rendition of services, no matter how
evidenced, whether or not earned by performance, (iii) all rights to any goods
or merchandise represented by any of the foregoing after creation of the
foregoing, including, without limitation, returned or repossessed goods, (iv)
all reserves and credit balances with respect to any such accounts receivable or
account debtors, (v) all letters of credit, security or guarantees for any of
the foregoing, (vi) all insurance policies or reports relating to any of the
foregoing, (vii) all collection or deposit accounts relating to any of the
foregoing, (viii) all proceeds of the foregoing and (ix) all books and records
relating to any of the foregoing.
"Receivables Subsidiary" means an Unrestricted Subsidiary exclusively
engaged in Receivables Transactions and activities related thereto; provided,
however, that (i) at no time shall the Company and its Subsidiaries have more
than one Receivables Subsidiary and (ii) all Indebtedness or other borrowings of
such Unrestricted Subsidiary shall be Non-Recourse Debt.
"Receivables Transaction" means (i) the sale or other disposition to a
third party of Receivables or an interest therein, or (ii) the sale or other
disposition of Receivables or an interest therein to a Receivables Subsidiary
followed by a financing transaction in connection with such sale or disposition
of such Receivables (whether such financing transaction is effected by such
Receivables Subsidiary or by a third party to whom such Receivables Subsidiary
sells such Receivables or interests therein); provided that in each of the
foregoing, the Company or its Subsidiaries receive at least 80% of the aggregate
principal amount of any Receivables financed in such transaction.
"Regulation S" means Regulation S promulgated under the Securities Act.
"Regulation S Global Notes" means the Regulation S Temporary Global Notes
or the Regulation S Permanent Global Notes as applicable.
"Regulation S Permanent Global Notes" means the permanent global notes that
are deposited with and registered in the name of the Depository or its nominee,
representing a series of Notes sold in reliance on Regulation S.
"Regulation S Temporary Global Notes" means the temporary global notes that
are deposited with and registered in the name of the Depositary or its nominee,
representing a series of Notes sold in reliance on Regulation S.
66
<PAGE> 67
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (B) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
"Reorganization Securities" means securities distributed to the Holders of
the Senior Notes in an Insolvency or Liquidation Proceeding pursuant to a plan
of reorganization consented to by each class of the Senior Debt, but only if all
of the terms and conditions of such securities (including, without limitation,
term, tenor, interest, amortization, subordination, standstills, covenants and
defaults) are at least as favorable (and provide the same relative benefits) to
the holders of Senior Debt and to the holders of any security distributed in
such Insolvency or Liquidation Proceeding on account of any such Senior Debt as
the terms and conditions of the New Notes and the Indenture are, and provide to
the holders of Senior Debt.
"Representative" means the Trustee, agent or representative for any Senior
Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Rule 144A" means Rule 144A promulgated under the Securities Act.
"Rule 144A Global Note" means a permanent global note that is deposited
with and registered in the name of the Depository or its nominee, representing a
series of Notes sold in reliance on Rule 144A.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantors" means all direct and indirect Restricted
Subsidiaries of the Company.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of the Company; (c) is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (x) to subscribe for additional Equity Interests or (y) to maintain
or preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; (d) has not guaranteed or otherwise
directly or indirectly provided credit support for any Indebtedness of the
Company or any of its Restricted Subsidiaries; and (e) has at least one director
on its board of directors that is not a director or executive officer of the
Company or any of its Restricted Subsidiaries and has at least one executive
officer that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described
67
<PAGE> 68
above under the caption "Certain Covenants--Restricted Payments." If, at any
time, any Unrestricted Subsidiary would fail to meet the foregoing requirements
as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of the Company as of
such date (and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "Incurrence of Indebtedness
and Issuance of Preferred Stock," the Company shall be in default of such
covenant). The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall be permitted only if (i) such Indebtedness
is permitted under the covenant described under the caption "Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," and (ii)
no Default or Event of Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
68
<PAGE> 69
SENIOR SUBORDINATED NOTES
GENERAL
The Senior Subordinated Notes were issued pursuant to the Senior
Subordinated Note Indenture among the Company, the direct or indirect domestic
Restricted Subsidiaries of the Company (together, the "Subsidiary Guarantors"),
and Senior Subordinated Note Trustee. The terms of the Senior Subordinated Notes
include those stated in the Senior Subordinated Note Indenture and those made
part of the Senior Subordinated Note Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Senior
Subordinated Notes are subject to all such terms, and Holders of Senior
Subordinated Notes are referred to the Senior Subordinated Note Indenture and
the Trust Indenture Act for a statement thereof. The following summary of the
material provisions of the Senior Subordinated Note Indenture does not purport
to be complete and is qualified in its entirety by reference to the Senior
Subordinated Note Indenture, including the definitions therein of certain terms
used below. Copies of the Senior Subordinated Note Indenture are available as
set forth below under "-- Additional Information." The definitions of certain
terms used in the following summary are set forth below under "-- Certain
Definitions."
The Senior Subordinated Notes are general unsecured obligations of the
Company, subordinated in right of payment to all existing and future Senior Debt
of the Company, including Indebtedness pursuant to the Credit Facility. The
Company's obligations under the Senior Subordinated Notes are fully and
unconditionally guaranteed (the "Senior Subordinated Note Guarantees") on a
senior subordinated basis by, and are joint and several obligations of, the
Subsidiary Guarantors. See "-- Senior Subordinated Note Guarantees." As of
December 27, 1997 on a pro forma basis giving effect to the ProSource
Acquisition, the Company would have had approximately $379.2 million of Senior
Debt. The Senior Subordinated Note Indenture permits the incurrence of
additional Senior Debt, pari passu Indebtedness and subordinated Indebtedness in
the future.
The operations of the Company are conducted in part through its
Subsidiaries, and the Company may, therefore, be dependent upon the cash flow of
its Subsidiaries to meet its debt obligations, including its obligations under
the Senior Subordinated Notes. All of the existing domestic Restricted
Subsidiaries of the Company are, and all future domestic Restricted Subsidiaries
are expected to be, Subsidiary Guarantors. As of the date of the Senior
Subordinated Note Indenture, all of the Company's Subsidiaries, except for the
Receivables Subsidiary, are Restricted Subsidiaries. However, under certain
circumstances, the Company will be able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be
subject to many of the restrictive covenants set forth in the Senior
Subordinated Note Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Senior Subordinated Notes are limited in aggregate principal amount to
$500.0 million and will mature on July 15, 2007. Interest on the Senior
Subordinated Notes accrues at the rate of 10 1/8% per annum and is payable
semi-annually in arrears on July 15 and January 15 of each year, commencing on
January 15, 1998, to Holders of record on the immediately preceding July 1 and
January 1. Interest on the Senior Subordinated Notes accrues from the most
recent date to which interest has been paid or, if no interest has been paid,
from July 11, 1997. Interest is computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium and Liquidated Damages, if
any, and interest on the Senior Subordinated Notes are payable at the office or
agency of the Company maintained for such purpose within the City and State of
New York or, at the option of the Company, payment of interest and liquidated
damages, if any, may be made by check mailed to the Holders of the Senior
Subordinated Notes at their respective addresses set forth in the register of
Holders of Senior Subordinated Notes; provided that all payments of principal,
premium and Liquidated Damages, if any, and interest with respect to Senior
Subordinated Notes the Holders of which have given wire transfer instructions to
the Company are required to be made by wire transfer of immediately available
funds to the accounts specified by the Holders thereof. Until otherwise
designated by the Company, the Company's office or agency in New York is the
office of the Senior Subordinated Note Trustee maintained for such purpose. The
Senior Subordinated Notes are issued in denominations of $1,000 and integral
multiples thereof.
69
<PAGE> 70
SUBORDINATION
The payment of principal of, premium and liquidated damages, if any, and
interest on the Senior Subordinated Notes is subordinated in right of payment,
as set forth in the Senior Subordinated Note Indenture, to the prior payment in
full of all Senior Debt, whether outstanding on the date of the Senior
Subordinated Note Indenture or thereafter created, incurred or assumed and all
permissible renewals, extensions, refundings or refinancings thereof.
The Senior Subordinated Note Indenture provides that, upon any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, to creditors in any Insolvency or Liquidation Proceeding
with respect to the Company all amounts due or to become due under or with
respect to all Senior Debt will first be paid in full in cash before any payment
is made on account of the Senior Subordinated Notes, except that the Holders of
Senior Subordinated Notes may receive Reorganization Securities. Upon any such
Insolvency or Liquidation Proceeding, any payment or distribution of assets of
the Company of any kind or character, whether in cash, property or securities
(other than Reorganization Securities), to which the Holders of the Senior
Subordinated Notes or the Senior Subordinated Note Trustee would be entitled
will be paid by the Company or by any receiver, trustee in bankruptcy,
liquidating trustee, agent or other person making such payment or distribution,
or by the Holders of the Senior Subordinated Notes or by the Senior Subordinated
Note Trustee if received by them, directly to the holders of Senior Debt (pro
rata to such holders on the basis of the amounts of Senior Debt held by such
holders) or their Representative or Representatives, as their interests may
appear, for application to the payment of the Senior Debt remaining unpaid until
all such Senior Debt has been paid in full in cash, after giving effect to any
concurrent payment, distribution or provision therefor to or for the holders of
Senior Debt.
The Senior Subordinated Note Indenture provides that (a) in the event of
and during the continuation of any default in the payment of principal of,
interest or premium, if any, on any Senior Debt, or any Obligation owing from
time to time under or in respect of Senior Debt, or in the event that any event
of default (other than a payment default) with respect to any Senior Debt will
have occurred and be continuing and will have resulted in such Senior Debt
becoming or being declared due and payable prior to the date on which it would
otherwise have become due and payable, or (b) if any event of default other than
as described in clause (a) above with respect to any Designated Senior Debt will
have occurred and be continuing permitting the holders of such Designated Senior
Debt (or their Representative or Representatives) to declare such Designated
Senior Debt due and payable prior to the date on which it would otherwise have
become due and payable, then no payment will be made by or on behalf of the
Company on account of the Senior Subordinated Notes (other than payments in the
form of Reorganization Securities) (x) in case of any payment or nonpayment
default specified in (a), unless and until such default will have been cured or
waived in writing in accordance with the instruments governing such Senior Debt
or such acceleration will have been rescinded or annulled, or (y) in case of any
nonpayment event of default specified in (b), during the period (a "Payment
Blockage Period") commencing on the date the Company or the Senior Subordinated
Note Trustee receives written notice (a "Payment Notice") of such event of
default (which notice will be binding on the Senior Subordinated Note Trustee
and the Holders of Senior Subordinated Notes as to the occurrence of such a
payment default or nonpayment event of default) from the Credit Agent (or other
holders of Designated Senior Debt or their Representative or Representatives)
and ending on the earliest of (A) 179 days after such date, (B) the date, if
any, on which such Designated Senior Debt to which such default relates is paid
in full in cash or such default is cured or waived in writing in accordance with
the instruments governing such Designated Senior Debt by the holders of such
Designated Senior Debt and (C) the date on which the Senior Subordinated Note
Trustee receives written notice from the Credit Agent (or other holders of
Designated Senior Debt or their Representative or Representatives), as the case
may be, terminating the Payment Blockage Period. During any consecutive 360-day
period, the aggregate of all Payment Blockage Periods shall not exceed 179 days
and there shall be a period of at least 181 consecutive days in each consecutive
360-day period when no Payment Blockage Period is in effect. No event of default
which existed or was continuing with respect to the Senior Debt for which notice
commencing a Payment Blockage Period was given on the date such Payment Blockage
Period commenced shall be or be made the basis for the commencement of any
subsequent Payment Blockage Period unless such event of default is cured or
waived for a period of not less than 90 consecutive days.
70
<PAGE> 71
As a result of the subordination provisions described above, in the event
of the Company's liquidation, dissolution, bankruptcy, reorganization,
insolvency, receivership or similar proceeding or in an assignment for the
benefit of the creditors or a marshalling of the assets and liabilities of the
Company, Holders of Senior Subordinated Notes may recover less ratably than
creditors of the Company who are holders of Senior Debt. See "Risk
Factors -- Subordination." The Senior Subordinated Note Indenture limits,
subject to certain financial tests, the amount of additional Indebtedness,
including Senior Debt, that the Company and its Restricted Subsidiaries can
incur. See " -- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock."
SENIOR SUBORDINATED NOTE GUARANTEES
The Company's payment obligations under the Senior Subordinated Notes are
fully and unconditionally guaranteed by the Subsidiary Guarantors on a joint and
several basis. The Senior Subordinated Note Guarantees are subordinated to the
prior payment in full of all Senior Debt of each Subsidiary Guarantor (including
such Subsidiary Guarantor's guarantee of the Credit Facility, if any) to the
same extent that the Senior Subordinated Notes are subordinated to Senior Debt
of the Company. The obligations of any Subsidiary Guarantor under its Senior
Subordinated Note Guarantee are limited so as not to constitute a fraudulent
conveyance under applicable law.
The Senior Subordinated Note Indenture provides that no Subsidiary
Guarantor may consolidate with or merge with or into (whether or not such
Subsidiary Guarantor is the surviving Person), another corporation, Person or
entity whether or not affiliated with such Subsidiary Guarantor unless, subject
to the provisions of the following paragraph, (i) the Person formed by or
surviving any such consolidation or merger (if other than such Subsidiary
Guarantor) assumes all the obligations of such Subsidiary Guarantor pursuant to
a supplemental indenture in form and substance reasonably satisfactory to the
Senior Subordinated Note Trustee, under the Senior Subordinated Notes and the
Senior Subordinated Note Indenture; (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists; (iii) such Subsidiary
Guarantor, or any Person formed by or surviving any such consolidation or
merger, would have Consolidated Net Worth (immediately after giving effect to
such transaction) equal to or greater than the Consolidated Net Worth of such
Subsidiary Guarantor immediately preceding the transaction; and (iv) the Company
would be permitted by virtue of its pro forma Fixed Charge Coverage Ratio,
immediately after giving effect to such transaction, to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described below under the caption " -- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock." The
requirements of clauses (iii) and (iv) of this paragraph will not apply in the
case of a consolidation with or merger with or into (a) the Company or another
Subsidiary Guarantor or (b) any other Person if the acquisition of all of the
Equity Interests in such Person would have complied with the provisions of the
covenants described below under the captions " -- Certain
Covenants -- Restricted Payments" and " -- Incurrence of Indebtedness and
Issuance of Preferred Stock."
The Senior Subordinated Note Indenture provides that (a) in the event of a
sale or other disposition of all of the assets of any Subsidiary Guarantor, by
way of merger, consolidation or otherwise, or a sale or other disposition of all
of the capital stock of any Subsidiary Guarantor, or (b) in the event that the
Company designates a Subsidiary Guarantor to be an Unrestricted Subsidiary, or
such Subsidiary Guarantor ceases to be a Subsidiary of the Company, then such
Subsidiary Guarantor (in the event of a sale or other disposition, by way of
such a merger, consolidation or otherwise, of all of the capital stock of such
Subsidiary Guarantor or any such designation) or the entity acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Subsidiary Guarantor) will be released and relieved of any obligations
under its Senior Subordinated Note Guarantee; provided that the Net Proceeds of
such sale or other disposition are applied in accordance with the applicable
provisions of the Senior Subordinated Note Indenture. See " -- Repurchase at the
Option of Holders." In the case of a sale, assignment, lease, transfer,
conveyance or other disposition of all or substantially all of the assets of a
Subsidiary Guarantor, upon the assumption provided for in clause (ii) of the
covenant described under the caption " -- Certain Covenants -- Merger,
Consolidation, or Sale of Assets," such Subsidiary Guarantor shall be discharged
from all further liability and obligation under the Senior Subordinated Note
Indenture.
71
<PAGE> 72
OPTIONAL REDEMPTION
The Senior Subordinated Notes are not redeemable at the Company's option
prior to July 15, 2002. Thereafter, the Senior Subordinated Notes will be
subject to redemption at any time at the option of the Company, in whole or in
part, upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on July 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.............................................. 105.063%
2003.............................................. 103.375%
2004.............................................. 101.688%
2005 and thereafter............................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to July 15, 2000, the
Company may redeem up to 33% of the original aggregate principal amount of
Senior Subordinated Notes at a redemption price of 110.125% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon,
if any, to the redemption date, with the net cash proceeds of a Public Equity
Offering; provided that at least 67% of the original aggregate principal amount
of Senior Subordinated Notes remains outstanding immediately after the
occurrence of such redemption; and provided, further, that such redemption shall
occur within 45 days of the date of the closing of such Public Equity Offering.
SELECTION AND NOTICE
If less than all of the Senior Subordinated Notes are to be redeemed at any
time, selection of Senior Subordinated Notes for redemption will be made by the
Senior Subordinated Note Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the Senior Subordinated
Notes are listed, or, if the Senior Subordinated Notes are not so listed, on a
pro rata basis, by lot or by such method as the Senior Subordinated Note Trustee
shall deem fair and appropriate; provided that no Senior Subordinated Notes of
$1,000 or less shall be redeemed in part. Notices of redemption shall be mailed
by first class mail at least 30 but not more than 60 days before the redemption
date to each Holder of Senior Subordinated Notes to be redeemed at its
registered address. Notices of redemption may not be conditional. If any Senior
Subordinated Note is to be redeemed in part only, the notice of redemption that
relates to such Senior Subordinated Note shall state the portion of the
principal amount thereof to be redeemed. A new Senior Subordinated Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Senior Subordinated
Note. Senior Subordinated Notes called for redemption become due on the date
fixed for redemption. On and after the redemption date, interest ceases to
accrue on Senior Subordinated Notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under " -- Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Senior Subordinated Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Senior
Subordinated Notes has the right to require the Company to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's Senior
Subordinated Notes pursuant to the offer described below (the "Change of Control
Offer") at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and Liquidated Damages thereon,
if any, to the date of purchase (the "Change of Control Payment"). Within 30
days following any Change of Control, the Company will mail a notice to each
Holder describing the transaction or transactions that constitute the Change of
Control and offering to repurchase Senior
72
<PAGE> 73
Subordinated Notes on the date specified in such notice, which date shall be no
earlier than 30 days and no later than 60 days from the date such notice is
mailed (the "Change of Control Payment Date"), pursuant to the procedures
required by the Senior Subordinated Note Indenture and described in such notice.
The Company will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of the
Senior Subordinated Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Senior Subordinated Notes or portions thereof
properly tendered pursuant to the Change of Control Offer, (2) deposit with the
Paying Agent an amount equal to the Change of Control Payment in respect of all
Senior Subordinated Notes or portions thereof so tendered and (3) deliver or
cause to be delivered to the Senior Subordinated Note Trustee the Senior
Subordinated Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Senior Subordinated Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly mail to each
Holder of Senior Subordinated Notes so tendered the Change of Control Payment
for such Senior Subordinated Notes, and the Senior Subordinated Note Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each Holder a new Senior Subordinated Note equal in principal amount to any
unpurchased portion of the Senior Subordinated Notes surrendered, if any;
provided that each such new Senior Subordinated Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Senior Subordinated Note
Indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 90 days following a Change of Control, the
Company will either repay all outstanding Senior Debt or obtain the requisite
consents, if any, under all agreements governing outstanding Senior Debt to
permit the repurchase of Senior Subordinated Notes required by this covenant.
The Company will publicly announce the results of the Change of Control Offer
on, or as soon as practicable after, the Change of Control Payment Date.
The Change of Control provisions described above are applicable whether or
not any other provisions of the Senior Subordinated Note Indenture are
applicable. Except as described above with respect to a Change of Control, the
Senior Subordinated Note Indenture does not contain provisions that permit the
Holders of the Senior Subordinated Notes to require that the Company repurchase
or redeem the Senior Subordinated Notes in the event of a takeover,
recapitalization or similar transaction.
The Credit Facility provides that certain change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Debt to which the Company
becomes a party may contain similar restrictions and provisions. In the event a
Change of Control occurs at a time when the Company is prohibited from
purchasing Senior Subordinated Notes, the Company could seek the consent of its
lenders to purchase the Senior Subordinated Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Company does not obtain
such consent or repay such borrowings, the Company will remain prohibited from
purchasing Senior Subordinated Notes. In such case, the Company's failure to
purchase tendered Senior Subordinated Notes would constitute an Event of Default
under the Senior Subordinated Note Indenture which would, in turn, constitute a
default under the Credit Facility. In such circumstances, the subordination
provisions in the Senior Subordinated Note Indenture would likely restrict
payments to the Holders of Senior Subordinated Notes. See "Description of
Indebtedness."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Senior Subordinated Note Indenture applicable to a Change of Control
Offer made by the Company and purchases all Senior Subordinated Notes validly
tendered and not withdrawn under such Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of that phrase under applicable
law. Accordingly, the ability of a Holder of Senior Subordinated Notes to
require the Company to repurchase such Senior Subordinated Notes as a result
73
<PAGE> 74
of a sale, lease, transfer, conveyance or other disposition of less than all of
the assets of the Company and its Subsidiaries taken as a whole to another
Person or group may be uncertain.
Asset Sales
The Senior Subordinated Note Indenture provides that the Company will not,
and will not permit any of its Restricted Subsidiaries to, consummate an Asset
Sale other than transfers of Receivables to a Receivables Subsidiary in
connection with a Receivables Transaction unless (i) the Company (or the
Restricted Subsidiary, as the case may be) receives consideration at the time of
such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Senior Subordinated Note Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 80% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash; provided that the amount of (x) any liabilities (as shown
on the Company's or such Restricted Subsidiary's most recent balance sheet) of
the Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Senior Subordinated
Notes or any guarantee thereof) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the Company or
such Restricted Subsidiary from further liability and (y) any securities, notes
or other obligations received by the Company or any such Restricted Subsidiary
from such transferee that are converted by the Company or such Restricted
Subsidiary into cash within 180 days (to the extent of the cash received), shall
be deemed to be cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to permanently repay
Senior Debt (and to correspondingly reduce commitments with respect thereto in
the case of revolving borrowings), or (b) to the acquisition of a controlling
interest in another business, the making of a capital expenditure or the
acquisition of other long-term assets, in each case, in a Permitted Business.
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce the revolving Indebtedness under the Credit Facility or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Senior Subordinated Note Indenture. Any Net Proceeds from Asset Sales that are
not applied or invested as provided in the first sentence of this paragraph will
be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $15.0 million, the Company will be required to make an offer to
all Holders of Senior Subordinated Notes (an "Asset Sale Offer") to purchase the
maximum principal amount of Senior Subordinated Notes that may be purchased out
of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of
the principal amount thereof plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the date of purchase, in accordance with the
procedures set forth in the Senior Subordinated Note Indenture. To the extent
that the aggregate amount of Senior Subordinated Notes tendered pursuant to an
Asset Sale Offer is less than the Excess Proceeds, the Company may use any
remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount of Senior Subordinated Notes surrendered by Holders thereof
exceeds the amount of Excess Proceeds, the Senior Subordinated Note Trustee
shall select the Senior Subordinated Notes to be purchased on a pro rata basis.
Upon completion of such offer to purchase, the amount of Excess Proceeds shall
be reset at zero.
CERTAIN COVENANTS
Restricted Payments
The Senior Subordinated Note Indenture provides that from and after the
date of the Senior Subordinated Note Indenture the Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly: (i)
declare or pay any dividend or make any other payment or distribution on account
of the Company's or any of its Restricted Subsidiaries' Equity Interests
(including, without limitation, any payment in connection with any merger or
consolidation involving the Company) or to the direct or indirect holders of the
Company's or any of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company); (ii) purchase, redeem
or otherwise acquire or retire for value (including without limitation, in
connection with any merger or consolidation involving the Company) any Equity
Interests of the Company or
74
<PAGE> 75
any direct or indirect parent of the Company; (iii) make any payment on or with
respect to, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is pari passu with or subordinated to the Senior
Subordinated Notes (other than the Notes), except a payment of interest or
principal at Stated Maturity; or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of and
after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under caption "-- Incurrence of Indebtedness
and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after
the date of the Senior Subordinated Note Indenture (excluding Restricted
Payments permitted by clause (ii) of the next succeeding paragraph), is
less than the sum of (i) 50% of the Consolidated Net Income of the Company
for the period (taken as one accounting period) from the beginning of the
first fiscal quarter commencing after the date of the Senior Subordinated
Note Indenture to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, less 100% of such deficit), plus (ii) 100% of the
aggregate net cash proceeds received by the Company from the issue or sale
since the date of the Senior Subordinated Note Indenture of Equity
Interests of the Company (other than Disqualified Stock) or of Disqualified
Stock or debt securities of the Company that have been converted into such
Equity Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Company and other
than Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock), plus (iii) to the extent that any
Restricted Investment that was made after the date of the Senior
Subordinated Note Indenture is sold for cash or otherwise liquidated or
repaid for cash, the lesser of (A) the cash return of capital with respect
to such Restricted Investment (less the cost of disposition, if any) and
(B) the initial amount of such Restricted Investment, plus (iv) if any
Unrestricted Subsidiary (A) is redesignated as a Restricted Subsidiary, the
fair market value of such redesignated Subsidiary (as determined in good
faith by the Board of Directors) as of the date of its redesignation or (B)
pays any cash dividends or cash distributions to the Company or any of its
Restricted Subsidiaries, 50% of any such cash dividends or cash
distributions made after the date of the Senior Subordinated Note
Indenture.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the Senior
Subordinated Note Indenture; (ii) the redemption, repurchase, retirement,
defeasance or other acquisition of any pari passu or subordinated Indebtedness
or Equity Interests of the Company in exchange for, or out of the net cash
proceeds of the substantially concurrent sale or issuance (other than to a
Restricted Subsidiary of the Company) of, other Equity Interests of the Company
(other than any Disqualified Stock); provided that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (iii) the defeasance, redemption, repurchase or other
acquisition of pari passu or subordinated Indebtedness with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the
payment of any dividend by a Restricted Subsidiary of the Company to the holders
of its Equity Interests on a pro rata basis; (v) the declaration or payment of
dividends to NEHC for expenses incurred by NEHC or Holberg in its capacity as a
holding company that are attributable to the operations of the Company and its
Restricted Subsidiaries, including, without limitation, (a) customary salary,
bonus and other benefits payable to officers and employees of NEHC or Holberg,
(b) fees and expenses paid to members of the Board of Directors of NEHC or
Holberg, (c) general corporate overhead expenses of NEHC or Holberg, (d)
foreign, federal, state
75
<PAGE> 76
or local tax liabilities paid by NEHC or Holberg, (e) management, consulting or
advisory fees paid to Holberg not to exceed $4.0 million in any fiscal year, and
(f) the repurchase, redemption or other acquisition or retirement for value of
any Equity Interests of NEHC or Holberg held by any member of NEHC's or the
Company's (or any of their Restricted Subsidiaries') management pursuant to any
management equity subscription agreement or stock option agreement in effect as
of the date of the Senior Subordinated Note Indenture; provided, however, the
aggregate amount paid pursuant to the foregoing clauses (a) through (f) does not
exceed $7.0 million in any fiscal year; (vi) Investments in any Person (other
than the Company or a Wholly-Owned Restricted Subsidiary) engaged in a Permitted
Business in an amount not to exceed $5.0 million; (vii) other Investments in
Unrestricted Subsidiaries having an aggregate fair market value, taken together
with all other Investments made pursuant to this clause (vii) that are at that
time outstanding, not to exceed $2.0 million; (viii) Permitted Investments; (ix)
payments to NEHC or Holberg pursuant to the tax sharing agreement among Holberg
and other members of the affiliated corporations of which Holberg is the common
parent; or (x) other Restricted Payments in an aggregate amount not to exceed
$10.0 million.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default; provided
that in no event shall the business currently operated by any Subsidiary
Guarantor be transferred to or held by an Unrestricted Subsidiary. For purposes
of making such determination, all outstanding Investments by the Company and its
Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary
so designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments are
deemed to constitute Investments in an amount equal to the fair market value of
such Investments at the time of such designation (as determined in good faith by
the Board of Directors). Such designation is only permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined in good faith by the Board of
Directors whose resolution with respect thereto shall be delivered to the Senior
Subordinated Note Trustee; such determination will be based upon an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
national standing if such fair market value exceeds $10.0 million. Not later
than the date of making any Restricted Payment, the Company shall deliver to the
Senior Subordinated Note Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "-- Restricted Payments" were computed,
together with a copy of any fairness opinion or appraisal required by the Senior
Subordinated Note Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Senior Subordinated Note Indenture provides that the Company will not,
and will not permit any of its Subsidiaries to, directly or indirectly, create,
incur, issue, assume, guarantee or otherwise become directly or indirectly
liable, contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Subsidiaries to issue any
shares of preferred stock; provided, however, that the Company may incur
Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if
the Fixed Charge Coverage Ratio for the Company's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least 2.0 to 1,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of such
four-quarter period.
76
<PAGE> 77
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of term Indebtedness under the
Credit Facility; provided that the aggregate principal amount of all term
Indebtedness outstanding under the Credit Facility after giving effect to
such incurrence does not exceed the aggregate amount of term Indebtedness
borrowed under the Credit Facility on July 11, 1997 less the aggregate
amount of all repayments, optional or mandatory, of the principal of any
term Indebtedness under the Credit Facility (other than repayments that are
immediately reborrowed) that have been made since July 11, 1997; provided
that the foregoing proviso shall not limit the principal amount of
Permitted Refinancing Indebtedness that may be incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this clause (i);
(ii) the incurrence by the Company of revolving Indebtedness and
letters of credit pursuant to the Credit Facility; provided that the
aggregate principal amount of all revolving Indebtedness (with letters of
credit being deemed to have a principal amount equal to the maximum
potential liability of the Company thereunder) outstanding under the Credit
Facility after giving effect to such incurrence does not exceed $150.0
million; provided that the foregoing proviso shall not limit the principal
amount of Permitted Refinancing Indebtedness that may be incurred to
refinance or replace any Indebtedness incurred pursuant to this clause
(ii);
(iii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness;
(iv) the incurrence by the Company and the Subsidiary Guarantors of
Indebtedness represented by the Senior Subordinated Notes and the Senior
Subordinated Note Guarantees, respectively;
(v) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary (whether through the
direct purchase of assets or the Capital Stock of any Person owning such
Assets), in an aggregate principal amount not to exceed $125.0 million;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness in connection with the acquisition of assets
or a new Restricted Subsidiary; provided that such Indebtedness was
incurred by the prior owner of such assets or such Restricted Subsidiary
prior to such acquisition by the Company or one of its Subsidiaries and was
not incurred in connection with, or in contemplation of, such acquisition
by the Company or one of its Subsidiaries; provided further that the
principal amount (or accreted value, as applicable) of such Indebtedness,
together with any other outstanding Indebtedness incurred pursuant to this
clause (vi), does not exceed $5.0 million;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace Indebtedness
that was permitted by the Senior Subordinated Note Indenture to be
incurred;
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Wholly-Owned Restricted Subsidiaries; provided, however, that
(i) if the Company is the obligor on such Indebtedness and the payee is not
a Subsidiary Guarantor, such Indebtedness is expressly subordinated to the
prior payment in full in cash of all Obligations with respect to the Senior
Subordinated Notes and (ii)(A) any subsequent issuance or transfer of
Equity Interests that results in any such Indebtedness being held by a
Person other than the Company or a Wholly Owned Restricted Subsidiary and
(B) any sale or other transfer of any such Indebtedness to a Person that is
not either the Company or a Wholly Owned Restricted Subsidiary shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by
the Company or such Restricted Subsidiary, as the case may be;
(ix) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging currency risk or interest rate risk with respect to any
77
<PAGE> 78
floating rate Indebtedness that is permitted by the terms of this Senior
Subordinated Note Indenture to be outstanding;
(x) the guarantee by the Company or any of its Restricted Subsidiaries
of Indebtedness of the Company or a Restricted Subsidiary of the Company
that was permitted to be incurred by another provision of this covenant;
(xi) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company;
(xii) Asset Sales in the form of Receivables Transactions;
(xiii) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation to letters of credit in respect to workers' compensation claims
or self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; provided, however, that
upon the drawing of such letters of credit or the incurrence of such
Indebtedness, such obligations are reimbursed within 30 days following such
drawing or incurrence;
(xiv) Indebtedness arising from agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, asset or Subsidiary, other
than guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or Subsidiary for the purpose of financing
such acquisition; provided that the maximum aggregate liability of all such
Indebtedness shall at no time exceed 50% of the gross proceeds actually
received by the Company or a Restricted Subsidiary in connection with such
disposition;
(xv) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business;
(xvi) guarantees incurred in the ordinary course of business in an
aggregate principal amount not to exceed $5.0 million at any time
outstanding; and
(xvii) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness, including Attributable Debt
incurred after the date of the Senior Subordinated Note Indenture, in an
aggregate principal amount (or accreted value, as applicable) at any time
outstanding, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any other Indebtedness incurred pursuant to
this clause (xvii), not to exceed $25.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xvii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Accrual of interest and the accretion of accreted
value will not be deemed to be an incurrence of Indebtedness for purposes of
this covenant.
Liens
The Senior Subordinated Note Indenture provides that the Company will not,
and will not permit any of its Restricted Subsidiaries to, create, incur, assume
or otherwise cause or suffer to exist or become effective any Lien of any kind
securing trade payables or Indebtedness that does not constitute Senior Debt
(other than Permitted Liens) upon any of their property or assets, now owned or
hereafter acquired.
78
<PAGE> 79
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Senior Subordinated Note Indenture provides that the Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a)
pay dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay any
indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii)
make loans or advances to the Company or any of its Restricted Subsidiaries or
(iii) transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness as in effect on July 11, 1997,
(b) the Credit Facility as in effect as of July 11, 1997, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are no more restrictive in the aggregate (as
determined by the Credit Agent in good faith) with respect to such dividend and
other payment restrictions than those contained in the Credit Facility as in
effect on July 11, 1997, (c) the Senior Subordinated Note Indenture and the
Senior Subordinated Notes, (d) any applicable law, rule, regulation or order,
(e) any instrument governing Indebtedness or Capital Stock of a Person acquired
by the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Senior Subordinated Note Indenture to be incurred,
(f) by reason of customary non-assignment provisions in leases entered into in
the ordinary course of business and consistent with past practices, (g) purchase
money obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired, (h) Permitted Refinancing Indebtedness, provided that the
material restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced, (i) contracts for the
sale of assets, including without limitation customary restrictions with respect
to a Subsidiary pursuant to an agreement that has been entered into for the sale
or disposition of all or substantially all of the Capital Stock or assets of
such Subsidiary, and (j) restrictions on cash or other deposits or net worth
imposed by customers under contracts entered into in the ordinary course of
business.
Merger, Consolidation, or Sale of Assets
The Senior Subordinated Note Indenture provides that the Company may not
consolidate or merge with or into (whether or not the Company is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company is
the surviving corporation or the entity or the Person formed by or surviving any
such consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Senior Subordinated Notes and the Senior Subordinated Note
Indenture pursuant to a supplemental indenture in a form reasonably satisfactory
to the Senior Subordinated Note Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly-Owned Restricted Subsidiary of
the Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made will, at the time of such transaction and after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio
79
<PAGE> 80
test set forth in the first paragraph of the covenant described above under the
caption " -- Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Senior Subordinated Note Indenture provides that the Company will not,
and will not permit any of its Restricted Subsidiaries to, make any payment to,
or sell, lease, transfer or otherwise dispose of any of its properties or assets
to, or purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction") involving consideration in excess of $3.0 million unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company or
the relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Restricted Subsidiary with an
unrelated Person and (ii) the Company delivers to the Senior Subordinated Note
Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $7.5
million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
either aggregate consideration in excess of $15.0 million or an aggregate
consideration in excess of $10.0 million where there are no disinterested
members of the Board of Directors, an opinion as to the fairness to the Holders
of such Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing; provided
that the following shall not be deemed Affiliate Transactions: (q) any
employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Restricted Subsidiary, (r) transactions between
or among the Company and/or its Restricted Subsidiaries, (s) Permitted
Investments and Restricted Payments that are permitted by the provisions of the
Senior Subordinated Note Indenture described above under the caption
" -- Restricted Payments," (t) customary loans, advances, fees and compensation
paid to, and indemnity provided on behalf of, officers, directors, employees or
consultants of the Company or any of its Restricted Subsidiaries, (u) annual
management fees paid to Holberg not to exceed $5.0 million in any one year, (v)
transactions pursuant to any contract or agreement in effect on the date of the
Senior Subordinated Note Indenture as the same may be amended, modified or
replaced from time to time so long as any such amendment, modification or
replacement is no less favorable to the Company and its Restricted Subsidiaries
than the contract or agreement as in effect on the Issue Date or is approved by
a majority of the disinterested directors of NEHC, (w) transactions between the
Company or its Restricted Subsidiaries on the one hand, and Holberg on the other
hand, involving the provision of financial or advisory services by Holberg;
provided that fees payable to Holberg do not exceed the usual and customary fees
for similar services, (x) transactions between the Company or its Restricted
Subsidiaries on the one hand, and Donaldson, Lufkin & Jenrette Securities
Corporation or its Affiliates ("DLJ") on the other hand, involving the provision
of financial, advisory, placement or underwriting services by DLJ; provided that
fees payable to DLJ do not exceed the usual and customary fees of DLJ for
similar services, (y) the insurance arrangements between NEHC and its
Subsidiaries and an Affiliate of Holberg that are not less favorable to the
Company or any of its Subsidiaries than those that are in effect on the date
hereof provided such arrangements are conducted in the ordinary course of
business consistent with past practices, and (z) payments under the tax sharing
agreement among Holberg and other members of the affiliated group of
corporations of which it is the common parent.
Anti-Layering
The Senior Subordinated Note Indenture provides that (i) the Company will
not incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is both (a) subordinate or junior in right of payment to any
Senior Debt and (b) senior in any respect in right of payment to the Senior
Subordinated Notes and (ii) no Subsidiary Guarantor will incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is both
(a) subordinate or junior in right of payment to its Senior Debt and (b) senior
in right of payment to its Note Guarantee.
80
<PAGE> 81
Sale and Leaseback Transactions
The Senior Subordinated Note Indenture provides that the Company will not,
and will not permit any of its Restricted Subsidiaries to, enter into any sale
and leaseback transaction; provided that the Company may enter into a sale and
leaseback transaction if (i) the Company could have (a) incurred Indebtedness in
an amount equal to the Attributable Debt relating to such sale and leaseback
transaction pursuant to the covenant described above under the caption
" -- Incurrence of Indebtedness and Issuance of Preferred Stock" and (b)
incurred a Lien to secure such Indebtedness pursuant to the covenant described
above under the caption " -- Liens," (ii) the gross cash proceeds of such sale
and leaseback transaction are at least equal to the fair market value (as
determined in good faith by the Board of Directors and set forth in an Officers'
Certificate delivered to the Senior Subordinated Note Trustee) of the property
that is the subject of such sale and leaseback transaction and (iii) the
transfer of assets in such sale and leaseback transaction is permitted by, and
the Company applies the proceeds of such transaction in compliance with, the
covenant described above under the caption " -- Repurchase at the Option of
Holders -- Asset Sales."
Limitation on Issuances and Sales of Capital Stock of Wholly-Owned Restricted
Subsidiaries
The Senior Subordinated Note Indenture provides that the Company (i) will
not, and will not permit any Wholly-Owned Restricted Subsidiary of the Company
to, transfer, convey, sell, lease or otherwise dispose of any Capital Stock of
any Wholly-Owned Subsidiary of the Company to any Person (other than the Company
or a Wholly-Owned Restricted Subsidiary of the Company), unless (a) such
transfer, conveyance, sale, lease or other disposition is of all the Capital
Stock of such Wholly-Owned Restricted Subsidiary and (b) the cash Net Proceeds
from such transfer, conveyance, sale, lease or other disposition are applied in
accordance with the covenant described above under the caption " -- Asset
Sales," and (ii) will not permit any Wholly-Owned Restricted Subsidiary of the
Company to issue any of its Equity Interests (other than, if necessary, shares
of its Capital Stock constituting directors' qualifying shares) to any Person
other than to the Company or a Wholly-Owned Restricted Subsidiary of the
Company.
Limitations on Issuances of Guarantees of Indebtedness
The Senior Subordinated Note Indenture provides that the Company will not
permit any Restricted Subsidiary, directly or indirectly, to Guarantee or pledge
any assets to secure the payment of any other Indebtedness of the Company unless
either such Restricted Subsidiary (x) is a Subsidiary Guarantor or (y)
simultaneously executes and delivers a supplemental indenture to the Senior
Subordinated Note Indenture providing for the Guarantee of the payment of the
Senior Subordinated Notes by such Restricted Subsidiary, which Guarantee shall
be senior to or pari passu with such Restricted Subsidiary's Guarantee of or
pledge to secure such other Indebtedness. Notwithstanding the foregoing, any
such Guarantee by a Restricted Subsidiary of the Senior Subordinated Notes shall
provide by its terms that it shall be automatically and unconditionally released
and discharged upon any sale, exchange or transfer, to any Person not an
Affiliate of the Company, of all of the Company's stock in, or all or
substantially all the assets of, such Restricted Subsidiary, which sale,
exchange or transfer is made in compliance with the applicable provisions of the
Senior Subordinated Note Indenture. The form of such Guarantee is attached as an
exhibit to the Senior Subordinated Note Indenture.
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than a Permitted Business, except to such extent as
would not be material to the Company and its Restricted Subsidiaries taken as a
whole.
Additional Guarantees
The Senior Subordinated Note Indenture provides that (i) if the Company or
any of its Restricted Subsidiaries shall, after the date of the Senior
Subordinated Note Indenture, transfer or cause to be transferred, including by
way of any Investment, in one or a series of transactions (whether or not
related),
81
<PAGE> 82
any assets, businesses, divisions, real property or equipment having an
aggregate fair market value (as determined in good faith by the Board of
Directors) in excess of $1.0 million to any Restricted Subsidiary that is not a
Subsidiary Guarantor or a Foreign Subsidiary, (ii) if the Company or any of its
Restricted Subsidiaries shall acquire another Restricted Subsidiary other than a
Foreign Subsidiary having total assets with a fair market value (as determined
in good faith by the Board of Directors) in excess of $1.0 million, or (iii) if
any Restricted Subsidiary other than a Foreign Subsidiary shall incur Acquired
Debt in excess of $1.0 million, then the Company shall, at the time of such
transfer, acquisition or incurrence, (i) cause such transferee, acquired
Restricted Subsidiary or Restricted Subsidiary incurring Acquired Debt (if not
then a Subsidiary Guarantor) to execute a Senior Subordinated Note Guarantee of
the Obligations of the Company under the Senior Subordinated Notes in the form
set forth in the Senior Subordinated Note Indenture and (ii) deliver to the
Senior Subordinated Note Trustee an Opinion of Counsel, in form reasonably
satisfactory to the Senior Subordinated Note Trustee, that such Note Guarantee
is a valid, binding and enforceable obligation of such transferee, acquired
Restricted Subsidiary or Restricted Subsidiary incurring Acquired Debt, subject
to customary exceptions for bankruptcy, fraudulent conveyance and equitable
principles. Notwithstanding the foregoing, the Company or any of its Restricted
Subsidiaries may make a Restricted Investment in any Wholly-Owned Restricted
Subsidiary of the Company without compliance with this covenant provided that
such Restricted Investment is permitted by the covenant described under the
caption, " -- Restricted Payments."
Reports
The Senior Subordinated Note Indenture provides that, whether or not
required by the rules and regulations of the Commission, so long as any Senior
Subordinated Notes are outstanding, the Company will furnish to the Holders of
Senior Subordinated Notes (i) all quarterly and annual financial information
that would be required to be contained in a filing with the Commission on Forms
10-Q and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if the
Company were required to file such reports. In addition, whether or not required
by the rules and regulations of the Commission, the Company will file a copy of
all such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request. In
addition, the Company has agreed that, for so long as any Senior Subordinated
Notes remain outstanding, it will furnish to the Holders and to securities
analysts and prospective investors, upon their request, the information required
to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Senior Subordinated Note Indenture provides that each of the following
constitutes an Event of Default: (i) default for 30 days in the payment when due
of interest on, or Liquidated Damages with respect to, the Senior Subordinated
Notes (whether or not prohibited by the subordination provisions of the Senior
Subordinated Note Indenture); (ii) default in payment when due of the principal
of or premium, if any, on the Senior Subordinated Notes (whether or not
prohibited by the subordination provisions of the Senior Subordinated Note
Indenture); (iii) failure by the Company to comply with the provisions described
under the captions " -- Repurchase at the Option of Holders -- Change of
Control," " -- Certain Covenants -- Asset Sales," or " -- Certain
Covenants -- Merger, Consolidation, or Sale of Assets"; (iv) failure by the
Company for 30 days after notice from the Senior Subordinated Note Trustee or at
least 25% in principal amount of the Senior Subordinated Notes then outstanding
to comply with the provisions described under the captions " -- Restricted
Payments" or "-- Incurrence of Indebtedness and Issuance of Preferred Stock";
(v) failure by the Company for 60 days after notice from the Senior Subordinated
Note Trustee or at least 25% in principal amount of the Senior Subordinated
Notes then outstanding to comply with any of its other agreements in the Senior
Subordinated Note Indenture or the Senior Subordinated Notes; (vi) default under
any mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any Indebtedness for money borrowed by
the Company or any of its Subsidiaries (or the payment of
82
<PAGE> 83
which is guaranteed by the Company or any of its Subsidiaries) whether such
Indebtedness or Guarantee now exists, or is created after the date of the Senior
Subordinated Note Indenture, which default (a) is caused by a failure to pay
principal of or premium, if any, or interest on such Indebtedness prior to the
expiration of the grace period provided in such Indebtedness on the date of such
default (a "Payment Default") or (b) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $15.0 million or more; (vii)
failure by the Company or any of its Subsidiaries to pay final judgments
aggregating in excess of $5.0 million, which judgments are not paid, discharged
or stayed for a period of 60 days; and (viii) certain events of bankruptcy or
insolvency with respect to the Company or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Senior Subordinated
Note Trustee or the Holders of at least 25% in principal amount of the then
outstanding Senior Subordinated Notes may declare all the Senior Subordinated
Notes to be due and payable immediately provided, however, that if any
Indebtedness or Obligation is outstanding pursuant to the Credit Facility, upon
a declaration of acceleration by the holders of the Senior Subordinated Notes or
the Senior Subordinated Note Trustee, all principal and interest under the
Senior Subordinated Note Indenture shall be due and payable upon the earlier of
(x) the day which five Business Days after the provision to the Company, the
Credit Agent and the Senior Subordinated Note Trustee of such written notice of
acceleration or (y) the date of acceleration of any Indebtedness under the
Credit Facility; and provided further that in the event of an acceleration based
upon an Event of Default set forth in clause (vi) above, such declaration of
acceleration shall be automatically annulled if the holders of Indebtedness
which is the subject of such failure to pay at maturity or acceleration have
rescinded their declaration of acceleration in respect of such Indebtedness or
such failure to pay at maturity shall have been cured or waived within 30 days
thereof and no other Event of Default has occurred during such 30-day period
which has not been cured, paid or waived. Notwithstanding the foregoing, in the
case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company or any of its Subsidiaries all
outstanding Senior Subordinated Notes will become due and payable without
further action or notice. Holders of the Senior Subordinated Notes may not
enforce the Senior Subordinated Note Indenture or the Senior Subordinated Notes
except as provided in the Senior Subordinated Note Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Senior Subordinated Notes may direct the Senior Subordinated Note Trustee in its
exercise of any trust or power. The Senior Subordinated Note Trustee may
withhold from Holders of the Senior Subordinated Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Senior Subordinated Notes
pursuant to the optional redemption provisions of the Senior Subordinated Note
Indenture, an equivalent premium shall also become and be immediately due and
payable to the extent permitted by law upon the acceleration of the Senior
Subordinated Notes. If an Event of Default occurs prior to July 15, 2002 by
reason of any willful action (or inaction) taken (or not taken) by or on behalf
of the Company with the intention of avoiding the prohibition on redemption of
the Senior Subordinated Notes prior to July 15, 2002, then the premium specified
in the Senior Subordinated Note Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the Senior
Subordinated Notes.
The Holders of a majority in aggregate principal amount of the Senior
Subordinated Notes then outstanding by notice to the Senior Subordinated Note
Trustee may on behalf of the Holders of all of the Senior Subordinated Notes
waive any existing Default or Event of Default and its consequences under the
Senior Subordinated Note Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Senior
Subordinated Notes.
The Company is required to deliver to the Senior Subordinated Note Trustee
annually a statement regarding compliance with the Senior Subordinated Note
Indenture, and the Company is required upon
83
<PAGE> 84
becoming aware of any Default or Event of Default, to deliver to the Senior
Subordinated Note Trustee a statement specifying such Default or Event of
Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or the Subsidiary Guarantors, as such, shall have any liability for any
obligations of the Company or any Subsidiary Guarantor under the Senior
Subordinated Notes, the Senior Subordinated Note Indenture, the Senior
Subordinated Note Guarantees or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Senior
Subordinated Notes by accepting a Senior Subordinated Note waives and releases
all such liability. The waiver and release are part of the consideration for
issuance of the Senior Subordinated Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Subordinated Notes
and all obligations of the Subsidiary Guarantors under the Senior Subordinated
Note Guarantees ("Legal Defeasance") except for (i) the rights of Holders of
outstanding Senior Subordinated Notes to receive payments in respect of the
principal of, premium and Liquidated Damages, if any, and interest on such
Senior Subordinated Notes when such payments are due from the trust referred to
below, (ii) the Company's obligations with respect to the Senior Subordinated
Notes concerning issuing temporary Senior Subordinated Notes, registration of
Senior Subordinated Notes, mutilated, destroyed, lost or stolen Senior
Subordinated Notes and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the Senior Subordinated Note Trustee, and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Senior Subordinated Note Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company and the
Subsidiary Guarantors released with respect to certain covenants that are
described in the Senior Subordinated Note Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Senior Subordinated Notes. In
the event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"-- Events of Default" will no longer constitute an Event of Default with
respect to the Senior Subordinated Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Senior Subordinated Note Trustee,
in trust, for the benefit of the Holders of the Senior Subordinated Notes, cash
in U.S. dollars, non-callable Government Securities, or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium and
Liquidated Damages, if any, and interest on the outstanding Senior Subordinated
Notes on the stated maturity or on the applicable redemption date, as the case
may be, and the Company must specify whether the Senior Subordinated Notes are
being defeased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, the Company shall have delivered to the Senior Subordinated
Note Trustee an opinion of counsel in the United States reasonably acceptable to
the Senior Subordinated Note Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Senior Subordinated Note Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Senior Subordinated Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Senior Subordinated Note Trustee an opinion
of counsel in the United States reasonably acceptable to the Senior Subordinated
Note Trustee confirming that the Holders of the outstanding Senior Subordinated
Notes will not recognize income, gain or loss for
84
<PAGE> 85
federal income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or insofar
as Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Senior Subordinated Note Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Senior Subordinated Note
Trustee an opinion of counsel to the effect that after the 91st day following
the deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (vii) the Company must deliver to the Senior Subordinated Note
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Senior Subordinated Notes
over the other creditors of the Company with the intent of defeating, hindering,
delaying or defrauding creditors of the Company or others; and (viii) the
Company must deliver to the Senior Subordinated Note Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Senior Subordinated Notes in accordance
with the Senior Subordinated Note Indenture. The Registrar and the Senior
Subordinated Note Trustee may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and the Company may require a
Holder to pay any taxes and fees required by law or permitted by the Senior
Subordinated Note Indenture. The Company is not required to transfer or exchange
any Senior Subordinated Note selected for redemption. Also, the Company is not
required to transfer or exchange any Senior Subordinated Note for a period of 15
days before a selection of Senior Subordinated Notes to be redeemed.
The registered Holder of a Senior Subordinated Note will be treated as the
owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Senior
Subordinated Note Indenture, the Senior Subordinated Notes or the Senior
Subordinated Note Guarantees may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the Senior
Subordinated Notes then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Senior Subordinated Notes), and any existing default or compliance with any
provision of the Senior Subordinated Note Indenture, the Senior Subordinated
Notes or the Senior Subordinated Note Guarantees may be waived with the consent
of the Holders of a majority in principal amount of the then outstanding Senior
Subordinated Notes (including consents obtained in connection with a tender
offer or exchange offer for Senior Subordinated Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Subordinated Notes held by a non-consenting Holder):
(i) reduce the principal amount of Senior Subordinated Notes whose Holders must
consent to an amendment, supplement or waiver; (ii) reduce the principal of or
change the fixed maturity of any Note or alter the provisions with respect to
the redemption of the Senior Subordinated Notes (other than provisions relating
to the covenants described above under the caption "-- Repurchase at the Option
of Holders"); (iii) reduce the rate of or change the time for payment of
interest on any Senior Subordinated Note; (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Senior Subordinated Notes (except a rescission of acceleration of the Senior
Subordinated Notes by the Holders of at least a majority in aggregate principal
amount of the Senior Subordinated Notes and a waiver of the payment default that
resulted from such acceleration); (v) make any Senior Subordinated Note payable
in money other than that stated in the Senior Subordinated Notes; (vi) make any
change in the provisions of the Senior Subordinated Note Indenture
85
<PAGE> 86
relating to waivers of past Defaults or the rights of Holders of Senior
Subordinated Notes to receive payments of principal of or premium, if any, or
interest on the Senior Subordinated Notes; (vii) waive a redemption payment with
respect to any Senior Subordinated Note (other than a payment required by one of
the covenants described above under the caption "-- Repurchase at the Option of
Holders") or (viii) make any change in the foregoing amendment and waiver
provisions. In addition, any amendment to the provisions of Article 10 of the
Senior Subordinated Note Indenture (which relate to subordination) will require
the consent of the Holders of at least 75% in aggregate principal amount of the
Senior Subordinated Notes then outstanding if such amendment would adversely
affect the rights of Holders of Senior Subordinated Notes.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Subordinated Notes, the Company, the Subsidiary Guarantors and the Senior
Subordinated Note Trustee may amend or supplement the Senior Subordinated Note
Indenture, the Senior Subordinated Notes or the Senior Subordinated Note
Guarantees to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Senior Subordinated Notes in addition to or in place of
certificated Senior Subordinated Notes, to provide for the assumption of the
Company's and the Subsidiary Guarantors' obligations to Holders of Senior
Subordinated Notes in the case of a merger or consolidation, to make any change
that would provide any additional rights or benefits to the Holders of Senior
Subordinated Notes or that does not adversely affect the legal rights under the
Senior Subordinated Note Indenture of any such Holder, to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Senior Subordinated Note Indenture under the Trust Indenture Act or to
allow any Subsidiary to guarantee the Senior Subordinated Notes.
CONCERNING THE SENIOR SUBORDINATED NOTE TRUSTEE
The Senior Subordinated Note Indenture contains certain limitations on the
rights of the Senior Subordinated Note Trustee, should it become a creditor of
the Company, to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or otherwise.
The Senior Subordinated Note Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding
Senior Subordinated Notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Senior Subordinated Note Trustee, subject to certain exceptions. The Senior
Subordinated Note Indenture provides that in case an Event of Default shall
occur (which shall not be cured), the Senior Subordinated Note Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Senior
Subordinated Note Trustee will be under no obligation to exercise any of its
rights or powers under the Senior Subordinated Note Indenture at the request of
any Holder of Senior Subordinated Notes, unless such Holder shall have offered
to the Senior Subordinated Note Trustee security and indemnity satisfactory to
it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Senior
Subordinated Note Indenture and Registration Rights Agreement without charge by
writing to AmeriServe, 14841 Dallas Parkway, Dallas, Texas 75240; Attention:
Secretary.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other
86
<PAGE> 87
Person merging with or into or becoming a Subsidiary of such specified Person,
and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices and other than a Receivables Transaction
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole will be governed by the provisions of the Indenture described
above under the caption "-- Repurchase at Option of Holders -- Change of
Control" and/or the provisions described above under the caption "-- Certain
Covenants -- Merger, Consolidation or Sale of Assets" and not by the provisions
of the Asset Sale covenant), and (ii) the issue or sale by the Company or any of
its Restricted Subsidiaries of Equity Interests of any of the Company's
Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a
single transaction or a series of related transactions (a) that have a fair
market value in excess of $3.0 million or (b) for net proceeds in excess of $3.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the Company
to a Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary, (ii)
an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary to the
Company or to another Wholly Owned Restricted Subsidiary, and (iii) a Restricted
Payment that is permitted by the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments" will not be deemed to be Asset
Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any lender party to the Credit
Facility or with any domestic commercial bank having capital and surplus in
excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above, (v) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each
case maturing within six months after the date of acquisition and (vi)
securities quoted by the Nasdaq National Market or listed on a United States,
Canadian or western European national securities exchange.
87
<PAGE> 88
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Principals or their Related Parties (as defined below), (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company, (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than the Principals and their Related
Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3
and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to
have "beneficial ownership" of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only upon
the occurrence of a subsequent condition), directly or indirectly, of more than
50% of the Voting Stock of the Company (measured by voting power rather than
number of shares), (iv) the first day on which a majority of the members of the
Board of Directors of the Company are not Continuing Directors or (v) 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 Person consolidates with, or merges with or
into, the Company, in any such event pursuant to a transaction in which any of
the outstanding Voting Stock of the Company is converted into or exchanged for
cash, securities or other property, other than any such transaction where the
Voting Stock of the Company outstanding immediately prior to such transaction is
converted into or exchanged for Voting Stock (other than Disqualified Stock) of
the surviving or transferee Person constituting a majority of the outstanding
shares of such Voting Stock of such surviving or transferee Person (immediately
after giving effect to such issuance).
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, plus (v) in connection with
any acquisition by the Company, projected quantifiable improvements in operating
results (on an annualized basis) due to cost reductions calculated in accordance
with Article 11 of Regulation S-X of the Securities Act and evidenced by (A) in
the case of cost reductions of less than $10.0 million, an Officers' Certificate
delivered to the Trustee and (B) in the case of cost reductions of $10.0 million
or more, a resolution of the Board of Directors set forth in an Officers'
Certificate delivered to the Trustee, minus (vi) non-cash items increasing such
Consolidated Net Income for such period. Notwithstanding the foregoing, the
provision for taxes on the income or profits of, and the depreciation and
amortization and other non-cash charges of, a Subsidiary of the referent Person
shall be added to Consolidated Net Income to compute Consolidated Cash Flow only
to the extent that a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Subsidiary without prior
governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
88
<PAGE> 89
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Subsidiary or its stockholders,
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iv) the cumulative effect of a change in accounting principles shall
be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be
excluded, whether or not distributed to the Company or one of its Restricted
Subsidiaries for purposes of the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock" and shall be
included for purposes of the covenant described under the caption "Restricted
Payments" only to the extent of the amount of dividends or distributions paid in
cash to the Company or one of its Restricted Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and (z)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Agent" means the Bank of America, in its capacity as Administrative
Agent for the lenders party to the Credit Facility, or any successor thereto or
any person otherwise appointed.
"Credit Facility" means that certain Credit Facility, dated as of the date
of the Indenture, by and among the Company and Bank of America, providing for up
to $150.0 million of revolving credit borrowings and $205.0 million of term
credit borrowings, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, modified, renewed, refunded, replaced or refinanced from
time to time.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
Credit Facility and (ii) any other Senior Debt permitted under the Indenture the
principal amount of which is $25.0 million or more and that has been designated
by the Company as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the
89
<PAGE> 90
Holder thereof, in whole or in part, on or prior to the date that is 91 days
after the date on which the New Notes mature; provided, however, that any
Capital Stock that would not qualify as Disqualified Stock but for change of
control provisions shall not constitute Disqualified Stock if the provisions are
not more favorable to the holders of such Capital Stock than the provisions
described under "-- Change of Control" applicable to the Holders of the New
Notes.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Credit Facility) in existence on
the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations) and (ii) the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period, (iii) any
interest expense on Indebtedness of another Person that is Guaranteed by such
Person or one of its Restricted Subsidiaries or secured by a Lien on assets of
such Person or one of its Restricted Subsidiaries (whether or not such Guarantee
or Lien is called upon) and (iv) the product of (a) all dividend payments,
whether or not in cash, on any series of preferred stock of such Person or any
of its Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of the Company, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current combined federal, state and local statutory tax rate of such Person,
expressed as a decimal, in each case, on a consolidated basis and in accordance
with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company or
any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Restricted Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period and Consolidated
Cash Flow for such reference period shall be calculated without giving effect to
clause (iii) of the proviso set forth in the definition of Consolidated Net
Income, (ii) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the referent Person or any of its Restricted
Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
90
<PAGE> 91
"Global Notes" means the Rule 144A Global Note, the Regulation S Temporary
Global Notes and the Regulation S Permanent Global Notes.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or currency rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or bankers' acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness that does not require current payments
of interest, and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"Insolvency or Liquidation Proceedings" means (i) any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding, relative to the Company or to the creditors
of the Company, as such, or to the assets of the Company, or (ii) any
liquidation, dissolution, reorganization or winding up of the Company, whether
voluntary or involuntary, and involving insolvency or bankruptcy, or (iii) any
assignment for the benefit of creditors or any other marshalling of assets and
liabilities of the Company.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "-- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
91
<PAGE> 92
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness (other than the New Notes
being offered hereby) of the Company or any of its Restricted Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (iii) as to which the
lenders have been notified in writing that they will not have any recourse to
the stock or assets of the Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any of the businesses and any other businesses
related to the businesses engaged in by the Company and its respective
Restricted Subsidiaries on the date of the Indenture.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company that is engaged in a Permitted
Business; (b) any Investment in Cash Equivalents; (c) any Investment by the
Company or any Restricted Subsidiary of the Company in a Person, if as a result
of such Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary
of the Company that is engaged in a Permitted Business or (ii) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Wholly Owned Restricted Subsidiary of the Company that is engaged in a Permitted
Business; (d) any Restricted Investment made as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "-- Repurchase at
the Option of Holders -- Asset Sales"; (e) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock) of
the Company; (f) loans and advances made after the date of the Indenture to
Holberg Industries, Inc. not to exceed $10.0 million at any time outstanding;
(g) loans and advances made after the date of the Indenture to NEHC not to
exceed $10.0 million at any time outstanding; and (h) other Investments made
after the date of the Indenture in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (h) that are at the time outstanding,
not to exceed $10.0 million.
"Permitted Liens" means (i) Liens securing Indebtedness under the Credit
Facility that was permitted by the terms of the Indenture to be incurred; (ii)
Liens in favor of the Company; (iii) Liens on property of a Person existing at
the time such Person is merged into or consolidated with the Company or any
Restricted
92
<PAGE> 93
Subsidiary of the Company, provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company; (iv) Liens on property existing at the time of acquisition thereof by
the Company or any Restricted Subsidiary of the Company, provided that such
Liens were in existence prior to the contemplation of such acquisition; (v)
Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (vi) Liens existing on the date of the Indenture;
(vii) Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (viii) Liens incurred in the ordinary course
of business of the Company or any Restricted Subsidiary of the Company with
respect to obligations that do not exceed $5.0 million at any one time
outstanding and that (a) are not incurred in connection with the borrowing of
money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by the Company or such Restricted Subsidiary, and (ix)
Liens on assets of Unrestricted Subsidiaries that (A) secure Non-Recourse Debt
of Unrestricted Subsidiaries or (B) are incurred in connection with a
Receivables Transaction.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) except for Indebtedness used to extend, refinance, renew,
replace, defease or refund the Credit Facility, the principal amount (or
accreted value, if applicable) of such Permitted Refinancing Indebtedness does
not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the New Notes, such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and is subordinated in right of payment
to, the New Notes on terms at least as favorable to the Holders of New Notes as
those contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by the Company or by the Restricted Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Principals" means Holberg Industries, Inc., John V. Holten, Orkla, ASA,
Nebco Evans Distributors, Inc., NEHC, DLJ Merchant Banking, L.P., DLJ
International Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant Banking
Funding, Inc., DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking
Partners II-A, L.P., DLJ Offshore Partners II, C.V., DLJ Diversified Partners,
L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ
Millennium Partners-A, L.P., DLJMB Funding II, Inc., DLJ First ESC LLC, DLJ EAB
Partners, L.P. and UK Investment Plan 1997 Partners.
"Public Equity Offering" means a public offering of Equity Interests (other
than Disqualified Stock) of (i) the Company; or (ii) NEHC to the extent the net
proceeds thereof are contributed to the Company as a capital contribution, that,
in each case, results in the net proceeds to the Company of at least $25.0
million.
"Receivables" means, with respect to any Person or entity, all of the
following property and interests in property of such Person or entity, whether
now existing or existing in the future or hereafter acquired or arising: (i)
accounts, (ii) accounts receivable incurred in the ordinary course of business,
including, without limitation, all rights to payment created by or arising from
sales of goods, leases of goods or the rendition of services, no matter how
evidenced, whether or not earned by performance, (iii) all rights to any goods
or merchandise represented by any of the foregoing after creation of the
foregoing, including, without limitation, returned or repossessed goods, (iv)
all reserves and credit balances with respect to any such accounts receivable or
account debtors, (v) all letters of credit, security or guarantees for any of
the foregoing, (vi) all
93
<PAGE> 94
insurance policies or reports relating to any of the foregoing, (vii) all
collection or deposit accounts relating to any of the foregoing, (viii) all
proceeds of the foregoing and (ix) all books and records relating to any of the
foregoing.
"Receivables Subsidiary" means an Unrestricted Subsidiary exclusively
engaged in Receivables Transactions and activities related thereto; provided,
however, that (i) at no time shall the Company and its Subsidiaries have more
than one Receivables Subsidiary and (ii) all Indebtedness or other borrowings of
such Unrestricted Subsidiary shall be Non-Recourse Debt.
"Receivables Transaction" means (i) the sale or other disposition to a
third party of Receivables or an interest therein, or (ii) the sale or other
disposition of Receivables or an interest therein to a Receivables Subsidiary
followed by a financing transaction in connection with such sale or disposition
of such Receivables (whether such financing transaction is effected by such
Receivables Subsidiary or by a third party to whom such Receivables Subsidiary
sells such Receivables or interests therein); provided that in each of the
foregoing, the Company or its Subsidiaries receive at least 80% of the aggregate
principal amount of any Receivables financed in such transaction.
"Regulation S" means Regulation S promulgated under the Securities Act.
"Regulation S Global Notes" means the Regulation S Temporary Global Notes
or the Regulation S Permanent Global Notes as applicable.
"Regulation S Permanent Global Notes" means the permanent global Notes that
are deposited with and registered in the name of the Depository or its nominee,
representing a series of Notes sold in reliance on Regulation S.
"Regulation S Temporary Global Notes" means the temporary global Notes that
are deposited with and registered in the name of the Depository or its nominee,
representing a series of Notes sold in reliance on Regulation S.
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (B) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
"Reorganization Securities" means securities distributed to the Holders of
the New Notes in an Insolvency or Liquidation Proceeding pursuant to a plan of
reorganization consented to by each class of the Senior Debt, but only if all of
the terms and conditions of such securities (including, without limitation,
term, tenor, interest, amortization, subordination, standstills, covenants and
defaults) are at least as favorable (and provide the same relative benefits) to
the holders of Senior Debt and to the holders of any security distributed in
such Insolvency or Liquidation Proceeding on account of any such Senior Debt as
the terms and conditions of the New Notes and the Indenture are, and provide to
the holders of Senior Debt.
"Representative" means the Trustee, agent or representative for any Senior
Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Rule 144A" means Rule 144A promulgated under the Securities Act.
"Rule 144A Global Note" means a permanent global note that is deposited
with and registered in the name of the Depository or its nominee, representing a
series of Notes sold in reliance on Rule 144A.
"Senior Debt" means (i) all Indebtedness outstanding under the Credit
Facility, including any Guarantees thereof and all Hedging Obligations with
respect thereto, (ii) any other Indebtedness permitted to be incurred by the
Company under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the
94
<PAGE> 95
New Notes and (iii) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Debt will not
include (w) any liability for federal, state, local or other taxes owed or owing
by the Company, (x) any Indebtedness of the Company to any of its Subsidiaries
or other Affiliates, (y) any trade payables or (z) any Indebtedness that is
incurred in violation of the Indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantors" means all direct and indirect Restricted
Subsidiaries of the Senior Subordinated Notes.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of the Company; (c) is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (x) to subscribe for additional Equity Interests or (y) to maintain
or preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; (d) has not guaranteed or otherwise
directly or indirectly provided credit support for any Indebtedness of the
Company or any of its Restricted Subsidiaries; and (e) has at least one director
on its board of directors that is not a director or executive officer of the
Company or any of its Restricted Subsidiaries and has at least one executive
officer that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described above under the caption "Certain
Covenants -- Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred
by a Restricted Subsidiary of the Company as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the covenant
described under the caption "Incurrence of Indebtedness and Issuance of
Preferred Stock," the Company shall be in default of such covenant). The Board
of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall be permitted only if (i) such Indebtedness is permitted under
the covenant described under the caption "Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock," and (ii) no Default or Event of
Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then
95
<PAGE> 96
remaining installment, sinking fund, serial maturity or other required payments
of principal, including payment at final maturity, in respect thereof, by (b)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
BOOK-ENTRY, DELIVERY AND FORM
The Senior Notes and Senior Subordinated Notes are each represented by one
or more fully-registered global notes without interest coupons (each a "Global
Senior Note" or "Global Subordinated Note," as the case may be; collectively,
the "Global Note"). Each Global Note was deposited upon issuance with the
Depository Trust Company (the "DTC") and is registered in the name of DTC or its
nominee (the "Global Note Registered Owner"), in each case for credit to an
account of a direct or indirect participant as described below. Except as set
forth below, each Global Note may be transferred, in whole and not in part, only
to another nominee of the DTC or to a successor of the DTC or its nominee. See
"--Exchange of Book-Entry Notes for Certificated Notes."
The Notes may be presented for registration of transfer and exchange at the
offices of the Registrar.
Depository Procedures
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of Participants. The Participants include
securities brokers and dealers (including the Initial Purchaser), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or Indirect
Participants. The ownership interest and transfer of ownership interest of each
actual purchaser of each security held by or on behalf of DTC are recorded on
the records of the Participants and Indirect Participants.
DTC has also advised the Company that pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchaser with portions of the principal
amount of Global Notes and (ii) ownership of such interests in the Global Notes
will be shown on, and the transfer ownership thereof will be effected only
through, records maintained by DTC (with respect to Participants) or by
Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the Global Notes).
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES DO NOT
HAVE NOTES REGISTERED IN THEIR NAMES, DO NOT RECEIVE PHYSICAL DELIVERY OF NOTES
IN CERTIFICATED FORM AND ARE NOT CONSIDERED THE REGISTERED OWNERS OR HOLDERS
THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal and premium and Liquidated Damages, if
any, and interest on a Global Note registered in the name of DTC or its nominee
are payable by the Trustee to DTC or its nominee in its capacity as the
registered holder under the Indenture. Under the terms of each Indenture, the
Company and the Trustee will treat the persons in whose names the Notes,
including the Global Notes, are registered as the owners thereof for the purpose
of receiving such payments and for any and all other purposes whatsoever.
Consequently, none of the Company, the Trustee nor any agent of the Company or
the Trustee has or will have any responsibility or liability for (i) any aspect
of DTC's records or any Participant's or Indirect Participant's records relating
to or payments made on account of beneficial ownership interests in the Global
96
<PAGE> 97
Notes, or for maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Notes or (ii) any other matter relating to the
actions and practices of DTC or any of its Participants or Indirect
Participants.
DTC has advised the Company that its current practice, upon receipt of any
payment in respect of securities such as the Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in principal amount of beneficial interests in the relevant security
such as the Global Notes as shown on the records of DTC. Payments by
Participants and the Indirect Participants to the beneficial owners of Notes are
governed by standing instructions and customary practices and are not the
responsibility of DTC, the Trustee or the Company. Neither the Company nor the
Trustee is liable for any delay by DTC or its Participants in identifying the
beneficial owners of the Notes, and the Company and the Trustee may conclusively
rely on and are protected in relying on instructions from DTC or its nominee as
the registered owner of the Notes for all purposes.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Participants to
whose account DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of the Notes as to which such
Participant or Participants have given direction. However, if there is an Event
of Default under the Notes, DTC reserves the right to exchange Global Notes for
legended Notes in certificated form, and to distribute such Notes to its
Participants.
The information in this section concerning DTC and its book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among Participants in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Initial
Purchaser or the Trustee will have any responsibility for the performance by
DTC, or its Participants or indirect Participants of its obligations under the
rules and procedures governing their operations.
Exchange of Book-Entry Notes for Certificated Notes
A Global Note is exchangeable for definitive Notes in registered
certificated form if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Note and the Company thereupon
fails to appoint a successor depositary or (y) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the
Notes in certificated form or (iii) there shall have occurred and be continuing
to occur a Default or an Event of Default with respect to the Notes. In
addition, beneficial interests in a Global Note may be exchanged for
certificated Notes upon request but only upon at least 20 days' prior written
notice given to the Trustee by or on behalf of DTC in accordance with customary
procedures. In all cases, certificated Notes delivered in exchange for any
Global Note or beneficial interest therein are registered in the names, and
issued in any approved denominations, requested by or on behalf of the
depositary (in accordance with its customary procedures).
A Note in definitive form will be issued upon the resale, pledge or other
transfer of any Note or interest therein to any person or entity that does not
participate in the Depository. Transfers of certificated Notes may be made only
by presentation of Notes, duly endorsed, to the Trustees for registration of
transfer on the Note Register maintained by the Trustees for such purposes.
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
97
<PAGE> 98
CERTIFICATED NOTES
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Notes. Upon any such issuance,
the Trustee is required to register such Certificated Notes in the name of, and
cause the same to be delivered to, such person or persons (or the nominee of any
thereof). In addition, if (i) the Company notifies the Trustee in writing that
the DTC is no longer willing or able to act as a depositary and the Company is
unable to locate a qualified successor within 90 days or (ii) the Company, at
its option, notifies the Trustee in writing that it elects to cause the issuance
of Notes in the form of Certificated Notes under the Indenture, then, upon
surrender by the Global Note Holder of its Global Note, Notes in such form will
be issued to each person that the Global Note Holder and the DTC identify as
being the beneficial owner of the related Notes.
Neither the Company nor the Trustee is liable for any delay by the Global
Note Holder or the DTC in identifying the beneficial owners of Notes and the
Company and the Trustee may conclusively rely on, and are protected in relying
on, instructions from the Global Note Holder or the DTC for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indentures require that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available next day
funds to the accounts specified by the Global Note Holder. With respect to
Certificated Notes, the Company will make all payments of principal, premium, if
any, interest and Liquidated Damages, if any, by wire transfer of immediately
available funds to the accounts specified by the Holders thereof or, if no such
account is specified, by mailing a check to each such Holder's registered
address. The Company expects secondary trading in the Certificated Notes to be
settled in immediately available funds.
DESCRIPTION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain U.S. federal income tax
considerations relevant to the purchase, ownership and disposition of the Notes
by the holders thereof. This summary does not purport to be a complete analysis
of all the potential federal income tax effects relating to the purchase,
ownership and disposition of the Notes. There can be no assurance that the U.S.
Internal Revenue Service will take a similar view of such consequences. Further,
the discussion does not address all aspects of taxation that may be relevant to
particular purchasers in light of their individual circumstances (including the
effect of any foreign, state or local laws) or to certain types of purchasers
(including dealers in securities, insurance companies, financial institutions,
persons that hold Notes that are a hedge or that are hedged against currency
risks or that are part of a straddle or conversion transaction, persons whose
functional currency is not the U.S. dollar and tax-exempt entities) subject to
special treatment under U.S. federal income tax laws. The discussion below
assumes that the Notes are held as capital assets.
The discussion of the U.S. federal income tax consequences set forth below
is based upon currently existing provisions of the Internal Revenue Code of
1986, as amended (the "Code"), judicial decisions, and administrative
interpretations. Because individual circumstances may differ, each prospective
purchaser of the Notes is strongly urged to consult its own tax advisor with
respect to its particular tax situation and the particular tax effects of any
state, local, non-U.S. or other tax laws and possible changes in the tax laws.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
who or which is for U.S. federal income tax purposes either (i) a citizen or
resident of the U.S., (ii) a corporation, partnership or other entity created or
organized in or under the laws of the U.S. or of any political subdivision
thereof, (iii) an estate or trust the income of which is subject to U.S. federal
income taxation regardless of its source or (iv) a trust if a court within the
U.S. is able to exercise primary supervision over the administration of the
trust and one or more U.S. fiduciaries have the authority to control all
substantial decisions of the trust. The term also includes certain former
citizens of the U.S. whose income and gain on the Notes will be subject to U.S.
taxation. As used herein, the term "U.S. Alien Holder" means a beneficial owner
of a Note that is not a U.S. Holder.
98
<PAGE> 99
PAYMENTS OF INTEREST
Interest paid on a Note will generally be taxable to a U.S. Holder as
ordinary interest income at the time it accrues or is received in accordance
with the U.S. Holder's method of accounting for federal income tax purposes.
MARKET DISCOUNT AND PREMIUM
If a U.S. Holder that acquires a Note has a tax basis in the Note that is
less than its "stated redemption price at maturity," the amount of the
difference will be treated as "market discount" for U.S. federal income tax
purposes, unless such difference is less than a specified de minimis amount.
Under the market discount rules of the Code, a U.S. Holder will be required to
treat any principal payment on, or any gain on the sale, exchange, retirement or
other disposition of, a Note as ordinary income to the extent of any accrued
market discount that has not previously been included in income. Market discount
generally accrues on a straight-line basis over the remaining term of a Note. A
U.S. Holder may not be allowed to deduct immediately all or a portion of the
interest expense on any indebtedness incurred or continued to purchase or to
carry such Note. A U.S. Holder may elect to include market discount in income
currently as it accrues (either on a straight-line basis or, if the United
States Holder so elects, on a constant yield basis), in which case the interest
deferral rule set forth in the preceding sentence will not apply. Such an
election will apply to all bonds acquired by the U.S. Holder on or after the
first day of the first taxable year to which such election applies and may be
revoked only with the consent of the Internal Revenue Service.
If a U.S. Holder purchases a Note for an amount that is greater than the
sum on all amounts payable on the Note after the purchase date, other than
stated interest, such holder will be considered to have purchased such Note with
"amortizable bond premium" equal in amount to such excess, and may elect (in
accordance with applicable Code provisions) to amortize such premium, using a
constant yield method over the remaining term of the Note. The amount amortized
in any year will be treated as a reduction of the U.S. Holder's interest income
from the Note in such year. A U.S. Holder that elects to amortize bond premium
must reduce its tax basis in the Note by the amount of the premium amortized in
any year. An election to amortize bond premium applies to all taxable debt
obligations then owned and thereafter acquired by the U.S. Holder and may be
revoked only with the consent of the Internal Revenue Service.
SALE, EXCHANGE OR RETIREMENT OF NOTES
Upon the sale, exchange or retirement of a Note, a U.S. Holder will
recognize taxable gain or loss equal to the difference between the amount
realized on the sale, exchange or retirement (not including any amount
attributable to accrued but unpaid interest) and such holder's adjusted tax
basis in the Note. A U.S. Holder's adjusted tax basis in a Note will equal the
cost of the Note to such holder, increased by the amount of any market discount
previously included in income by such holder with respect to such Note and
reduced by any amortized bond premium and any principal payment received by such
holder.
Subject to the discussion of market discount above, gain or loss realized
on the sale, exchange or retirement of a Note by a U.S. Holder will be capital
gain or loss, and will be long-term capital gain or loss if at the time of the
sale, exchange or retirement the Note has been held for more than one year. In
the case of individual U.S. Holders, net capital gain is taxed at a maximum rate
of 28% if the U.S. Holder's holding period is more than one year but not more
than 18 months and at a maximum rate of 20% if the U.S. Holder's holding period
is more than 18 months. The distinction between capital gain or loss and
ordinary income or loss is also relevant for purposes of, among other things,
limitations on the deductibility of capital losses.
TAX CONSEQUENCES TO U.S. ALIEN HOLDERS
Under present U.S. federal income and estate tax law, and subject to the
discussion below concerning backup withholding:
(a) payments of principal or interest on the Notes by the Company or
any paying agent to a beneficial owner of a Note that is a U.S. Alien
Holder will not be subject to U.S. federal withholding tax,
99
<PAGE> 100
provided that, in the case of interest, (i) such Holder does not own,
actually or constructively, 10% or more of the total combined voting power
of all classes of stock of the Company entitled to vote, (ii) such Holder
is not, for U.S. federal income tax purposes, a controlled foreign
corporation related, directly or indirectly, to the Company through stock
ownership, (iii) such Holder is not a bank receiving interest described in
Section 881(c)(3)(A) of the Code, and (iv) the certification requirements
under Section 871(h) or Section 881(c) of the Code and Treasury Regulations
thereunder (summarized below) are met;
(b) a U.S. Alien Holder of a Note will not be subject to U.S. federal
income tax on gains realized on the sale, exchange or other disposition of
such Note, unless (i) such Holder is an individual who is present in the
U.S. for 183 days or more in the taxable year of sale, exchange or other
disposition, and certain conditions are met; (ii) such gain is effectively
connected with the conduct by such Holder of a trade or business in the
U.S. and, if certain tax treaties apply, is attributable to a U.S.
permanent establishment maintained by the U.S. Alien Holder or (iii) the
U.S. Alien Holder is subject to tax pursuant to the Code provisions
applicable to certain U.S. expatriates; and
(c) a Note held by an individual who is not a citizen or resident of
the U.S. at the time of his death will not be subject to U.S. federal
estate tax as a result of such individual's death, provided that, at the
time of such individual's death, the individual does not own, actually or
constructively, 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote and payments with respect
to such Note would not have been effectively connected with the conduct by
such individual of a trade or business in the U.S.
Sections 871(h) and 881(c) of the Code and currently effective Treasury
Regulations thereunder require that, in order to obtain the exemption from
withholding tax described in paragraph (a) above, either (i) the beneficial
owner of a Note must certify, under penalties of perjury, to the Company or
paying agent, as the case may be, that such owner is a U.S. Alien Holder and
must provide such owner's name and address, and U.S. taxpayer identification
number ("TIN"), if any, or (ii) a securities clearing organization, bank or
other financial institution that holds customers securities in the ordinary
course of its trade or business (a "Financial Institution") and holds the Note
on behalf of the beneficial owner thereof must certify, under penalties of
perjury, to the Company or paying agent, as the case may be, that such
certificate has been received from the beneficial owner by it or by a Financial
Institution between it and the beneficial owner and must furnish the payor with
a copy thereof. A certificate described in this paragraph is effective only with
respect to payments of interest made to the certifying U.S. Alien Holder after
delivery of the certificate in the calendar year of its delivery and the two
immediately succeeding calendar years. Under temporary U.S. Treasury
Regulations, such requirement will be fulfilled if the beneficial owner of a
Note certifies on Internal Revenue Service Form W-8, under penalties of perjury,
that it is a U.S. Alien Holder and provides its name and address, and any
Financial Institution holding the Note on behalf of the beneficial owner files a
statement with the withholding agent to the effect that it has received such a
statement from the beneficial owner (and furnishes the withholding agent with a
copy thereof).
Treasury Regulations released on October 6, 1997 (the "New Regulations")
and effective for payments made after December 31, 1998 will provide alternative
methods for satisfying the certification requirement described above. The New
Regulations also would require, in the case of Notes held by a foreign
partnership, that (x) the certification be provided by the partners rather than
by the foreign partnership and (y) the partnership provide certain information,
including a United States taxpayer identification number. A look through rule
would apply in the case of tiered partnerships.
If a U.S. Alien Holder of a Note is engaged in a trade or business in the
U.S., and if interest on the Note, or gain realized on the sale, exchange or
other disposition of the Note, is effectively connected with the conduct of such
trade or business and, if certain tax treaties apply, is attributable to a U.S.
permanent establishment maintained by the U.S. Alien Holder, the U.S. Alien
Holder, although exempt from U.S. withholding tax, will generally be subject to
regular U.S. income tax on such interest or gain in the same manner as if it
were a U.S. Holder. In lieu of the certificate described in the preceding
paragraph, such a Holder will be required to provide the Company a properly
executed Internal Revenue Service Form 4224 in
100
<PAGE> 101
order to claim an exemption from withholding tax. In addition, if such U.S.
Alien Holder is a foreign corporation, it may be subject to a branch profits tax
equal to 30% (or such lower rate provided by an applicable treaty) of its
effectively connected earnings and profits for the taxable year, subject to
certain adjustments. For purposes of the branch profits tax, interest on and any
gain recognized on the sale, exchange or other disposition of a Note will be
included in the earnings and profits of such U.S. Alien Holder if such interest
or gain is effectively connected with the conduct by the U.S. Alien Holder of a
trade or business in the U.S. The New Regulations will change some of the
withholding reporting requirements described above, effective for payments made
after December 31, 1998, subject to certain grandfathering provisions.
BACKUP WITHHOLDING
Under current U.S. federal income tax law, a 31% backup withholding tax
requirement applies to certain payments of interest on, and the proceeds of a
sale, exchange or redemption of, the Notes.
Backup withholding will generally not apply with respect to payments made
to certain exempt recipients, such as corporations or other tax-exempt entities.
In the case of a non-corporate U.S. Holder, backup withholding will apply only
if such Holder (i) fails to furnish its TIN, which, for an individual, would be
his Social Security number, (ii) furnishes an incorrect TIN, (iii) is notified
by the Internal Revenue Service that it has failed to properly report payments
of interest and dividends or (iv) under certain circumstances, fails to certify,
under penalties of perjury, that it has furnished a correct TIN and has not been
notified by the Internal Revenue Service that it is subject to backup
withholding for failure to report interest and dividend payments.
In the case of a U.S. Alien Holder, under currently effective Treasury
Regulations, backup withholding will not apply to payments made by the Company
or any paying agent thereof on a Note if such holder has provided the required
certification under penalties of perjury that it is not a U.S. Holder (as
defined above) or has otherwise established an exemption, provided in each case
that the Company or such paying agent, as the case may be, does not have actual
knowledge that the payee is a U.S. Holder.
Under currently effective Treasury Regulations, if payments on a Note are
made to or through a foreign office of a custodian, nominee or other agent
acting on behalf of a beneficial owner of a Note, such custodian, nominee or
other agent acting will not be required to apply backup withholding to such
payments made to such beneficial owner. However, under the New Regulations,
backup withholding may apply to payments made after December 31, 1998 if such
custodian, nominee or other agent has actual knowledge that the payee is a U.S.
Holder.
Under currently effective Treasury Regulations, payments on the sale,
exchange or other disposition of a Note made to or through a foreign office of a
broker generally will not be subject to backup withholding. However, under
proposed Treasury Regulations, backup withholding may apply to payments made
after December 31, 1998 if such broker has actual knowledge that the payee is a
U.S. Holder. In the case of proceeds from a sale of a Note by a U.S. Alien
Holder paid to or through the foreign office of a U.S. broker or a foreign
office of a foreign broker that is (i) a controlled foreign corporation for U.S.
tax purposes or (ii) a person 50% or more of whose gross income for the
three-year period ending with the close of the taxable year preceding the year
of payment (or for the part of that period that the broker has been in
existence) is effectively connected with the conduct of a trade or business
within the U.S., information reporting is required unless the broker has
documentary evidence in its files that the payee is not a U.S. person and
certain other conditions are met, or the payee otherwise establishes an
exemption. Payments to or through the U.S. office of a broker will be subject to
backup withholding and information reporting unless the holder certifies, under
penalties of perjury, that it is not a U.S. Holder and that certain other
conditions are met or otherwise establishes an exemption.
Holders of Notes should consult their tax advisors regarding the
application of backup withholding in their particular situations, the
availability of an exemption therefrom, the procedure for obtaining such an
exemption, if available, and the impact of the New Regulations on payments made
with respect to Notes after December 31, 1998. Any amounts withheld from payment
under the backup withholding rules will be allowed as a credit against a
Holder's U.S. federal income tax liability and may entitle such holder to a
refund, provided that the required information is furnished to the Internal
Revenue Service.
101
<PAGE> 102
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH PROSPECTIVE HOLDER OF NEW NOTES SHOULD CONSULT ITS OWN TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO THE PROSPECTIVE HOLDER OF THE
NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR NON-U.S.
INCOME TAX LAWS AND ANY RECENT OR PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS AND
THE EFFECT OF THE NEW REGULATIONS WITH RESPECT TO PAYMENTS MADE AFTER DECEMBER
31, 1998.
PLAN OF DISTRIBUTION
This Prospectus is to be used by DLJ and BancAmerica (the "Initial
Purchasers") in connection with offers and sales of the Notes in market-making
transactions effected from time to time. The Initial Purchasers may act as a
principal or agent in such transactions, including as agent for the counterparty
when acting as principal or as agent for both counterparties, and may receive
compensation in the form of discounts and commissions, including from both
counterparties when it acts as agent for both. Such sales will be made at
prevailing market prices at the time of sale, at prices related thereto or at
negotiated prices.
DLJMB, an affiliate of DLJ, and certain of its affiliates beneficially own
approximately 30% of the common stock of NEHC. Peter T. Grauer, a principal of
DLJ, is a member of the Board of Directors of NEHC and the Company; Benoit
Jamar, a principal of DLJ, is a member of the Board of Directors of NEHC and the
Company. Further, DLJ Capital Funding, Inc., an affiliate of DLJ, is acting as
documentation agent in connection with the New Credit Facility for which it
received certain customary fees and expenses. In addition, DLJ received a merger
advisory fee of $4.0 million in cash from the Company after consummation of the
Transactions. DLJ has informed the Company that it does not intend to confirm
sales of the Notes to any accounts over which it exercises discretionary
authority without the prior specific written approval of such transactions by
the customer.
The Company has been advised by the Initial Purchasers that, subject to
applicable laws and regulations, the Initial Purchasers currently intend to
continue to make a market in the Notes. However, the Initial Purchasers are not
obligated to do so and any such market-making may be interrupted or discontinued
at any time without notice. In addition, such market-making activity will be
subject to the limits imposed by the Securities Act and the Exchange Act. There
can be no assurance that an active trading market will develop or be sustained.
See "Risk Factors--Trading Market for the Notes."
Bank of America NT&SA, an affiliate of BancAmerica, is an agent and lender
under the Company's Credit Facility and will receive proceeds from the offering
of the Senior Notes in connection with the repayment of term indebtedness under
such facility. Bank of America NT&SA received an arrangement fee in connection
with the Credit Facility and is the syndication agent and an agent with respect
to the Accounts Receivable Program, for which, in each case, it receives certain
customary fees and expenses.
DLJ and BancAmerica have, from time to time, provided investment banking
and other financial advisory services for which they have received customary
compensation, including fees received in connection with the offering of the
Senior Subordinated Notes.
DLJ and BancAmerica have, from time to time, provided investment banking
and other financial advisory services to the Company in the past for which they
have received customary compensation, including fees received in connection with
the offering of the Senior Subordinated Notes, and may provide such services and
financial advisory services to the Company in the future. DLJ acted as
purchasers in connection with the initial sale of the Senior Notes and the
Senior Subordinated Notes and received underwriting discounts in connection
therewith. See "Certain Relationships and Related Party Transactions."
The Initial Purchasers and the Company have entered into Registration
Rights Agreements with respect to the use by the Initial Purchasers of this
Prospectus. Pursuant to such agreements, the Company agreed to bear all
registration expenses incurred under such agreement, and the Company agreed to
indemnify the Initial Purchasers against certain liabilities, including
liabilities under the Securities Act.
102
<PAGE> 103
LEGAL MATTERS
Certain legal matters in connection with the Notes offered hereby were
passed upon for the Company by Wachtell, Lipton, Rosen & Katz, New York, New
York.
EXPERTS
The consolidated financial statements of the Company as of December 28,
1996 and December 27, 1997 and for each of the three years in the period ended
December 27, 1997, appearing in this Prospectus and in the Registration
Statement, and the financial statement schedule for each of the three years in
the period ended December 27, 1997 included in the Registration Statement have
been audited by Ernst & Young LLP ("Ernst & Young"), independent auditors, as
set forth in their reports thereon appearing elsewhere herein and in the
Registration Statement, and are included herein in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
The financial statements of PFS (A Division of PepsiCo, Inc. Held for Sale)
as of December 27, 1995 and December 25, 1996 and for each of the years in the
three-year period ended December 25, 1996 appearing in this Prospectus and in
the Registration Statement have been audited by KPMG Peat Marwick LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and in the Registration Statement and are included herein in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The consolidated statements of operations, stockholders' equity, and cash
flows of Ameriserv Food Company for each of the two years in the period ended
December 30, 1995 appearing in this Prospectus and in the Registration Statement
have been audited by Ernst & Young, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and in the Registration Statement and
are included herein in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
The financial statements of ProSource, Inc. as of December 28, 1996 and
December 27, 1997 and for each of the years in the three-year period ended
December 27, 1997 appearing in this Prospectus and in the Registration Statement
have been audited by KPMG Peat Marwick LLP, independent auditors, as set forth
in their report thereon appearing elsewhere herein, and in the Registration
Statement and are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
103
<PAGE> 104
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
PAGE NO.
---------
<S> <C>
Accounts Receivable Program....... 41
Affiliate Transaction............. 53
AmeriServe Funding................ 41
AmeriServ......................... 2
AmeriServe........................ 2
Applicable Reserve Ratio.......... 42
Asset Sale Offer.................. 48
BancAmerica....................... 1
Bank of America NT&SA............. 41
Banks............................. 1
Base Amount....................... 41
Base Rate......................... 42
Calculation Date.................. 63
Carrying Cost Receivables
Reserve......................... 42
Certain Relationships and Related
Party Transactions.............. 37
Certificate of Incorporation...... 13
Change of Control................. 60
Change of Control Offer........... 46
Change of Control Payment......... 46
Change of Control Payment Date.... 46
Class A Common Stock.............. 37
Class B Common Stock.............. 37
Code.............................. 98
Company........................... 1
Covenant Defeasance............... 57
Credit Facility................... 42
Distribution Agreement............ 4
DLJ............................... 1
DLJMB............................. 37
DLJMBII........................... 39
DLJSC............................. 34
DTC............................... 96
Ernst & Young..................... 103
Evans............................. 13
Excess Proceeds................... 48
Exchange Act...................... 2
Global Note....................... 96
Global Note Registered Owner...... 96
Global Senior Note................ 96
Global Subordinated Note.......... 96
Guarantors........................ 42
Holberg........................... 13
HWPI.............................. 23
IDA............................... 33
Incorporated...................... 37
incur............................. 50
Indentures........................ 3
Indirect Participants............. 96
Initial Purchasers................ 102
Invested Amount................... 41
</TABLE>
<TABLE>
<CAPTION>
PAGE NO.
---------
<S> <C>
Legal Defeasance.................. 57
Lenders........................... 11
Merger Agreement.................. 5
Named Executive Officers.......... 35
NEBCO............................. 13
NEBCO EVANS....................... 13
Nebraska AmeriServe............... 2
NED............................... 23
Net Eligible Receivables.......... 41
New Regulations................... 100
Notes............................. 1
Note Trustees..................... 2
Old NEHC Notes.................... 40
Orkla............................. 37
Participants...................... 96
Payment Blockage Period........... 70
Payment Default................... 56
Payment Notice.................... 70
Permitted Debt.................... 50
PepsiCo........................... 4
PFS............................... 4
PFS Acquisition................... 4
Post.............................. 2
Post Contribution.................
Post Holdings..................... 39
ProSource......................... 5
ProSource Acquisition............. 5
Receivables....................... 41
Restricted Payments............... 48
Revolving Credit Facility......... 42
SEC............................... 2
Securities Act.................... 4
Senior Note Guarantees............ 1
Senior Note Indenture............. 2
Senior Notes...................... 1
Senior Notes Registration
Statement....................... 2
Senior Note Trustee............... 2
Senior Registration Statements.... 2
Senior Subordinated Note
Guarantees...................... 1
Senior Subordinated Note
Indenture....................... 2
Senior Subordinated Notes......... 1
Senior Subordinated Note
Trustee......................... 2
SKU's............................. 27
Subsidiary Guarantors............. 1
TIN............................... 100
Tricon............................ 4
Tricon Subsidiaries............... 4
Trust............................. 41
Trust Indenture Act............... 44
U.S. Alien Holder................. 98
U.S. Holder....................... 98
</TABLE>
104
<PAGE> 105
INDEX TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
AMERISERVE FOOD DISTRIBUTION, INC.
Unaudited Pro Forma Consolidated Balance Sheet as of
December 27, 1997...................................... P-2
Notes to Unaudited Pro Forma Consolidated Balance Sheet as
of December 27, 1997................................... P-3
Unaudited Pro Forma Consolidated Statement of Operations
for the Fiscal Year 1997............................... P-4
Notes to Unaudited Pro Forma Consolidated Statement of
Operations for Fiscal Year 1997........................ P-5
</TABLE>
P-1
<PAGE> 106
AMERISERVE FOOD DISTRIBUTION, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following sets forth (i) the Unaudited Pro Forma Consolidated Balance
Sheet of AmeriServe Food Distribution, Inc. after giving effect to the ProSource
Acquisition, as if such transaction had been consummated on December 27, 1997
and (ii) the Unaudited Pro Forma Consolidated Statement of Operations of
AmeriServe Food Distribution, Inc. after giving effect to the Transactions and
the ProSource Acquisition, as if such transactions had been consummated at the
beginning of fiscal year 1997. The Unaudited Pro Forma Consolidated Financial
Statements of the Company do not purport to present the financial position or
results of operations of the Company had the transactions assumed herein
occurred on the dates indicated, nor are they necessarily indicative of the
results of operations which may be expected to occur in the future.
AMERISERVE FOOD DISTRIBUTION, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 27, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS FOR FOR
HISTORICAL HISTORICAL PROSOURCE PROSOURCE
AMERISERVE PROSOURCE ACQUISITION(1) ACQUISITION
---------- ---------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 231,131 $ 12,501 $(156,900) $ 86,732
Accounts receivable.................................... 43,625 226,332 (226,332) 43,625
Undivided interest in accounts receivable
trust................................................ 154,371 -- 51,332 205,703
Allowance for doubtful accounts........................ (15,566) (4,085) -- (19,651)
Inventories............................................ 150,148 160,621 -- 310,769
Other current assets................................... 23,768 15,624 (7,190) 32,202
---------- -------- --------- ----------
Total current assets................................. 587,477 410,993 (339,090) 659,380
Property and equipment, net.............................. 130,856 59,961 (49,961) 140,856
Other assets:
Intangible assets, net................................. 737,870 39,883 (39,883) 1,006,991
269,121
Other.................................................. 6,118 37,264 (28,802) 14,580
---------- -------- --------- ----------
$1,462,321 $548,101 $(188,615) $1,821,807
========== ======== ========= ==========
LIABILITIES & STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of
long-term debt....................................... $ 5,019 $ -- $ -- $ 5,019
Accounts payable....................................... 345,379 277,953 -- 623,332
Accrued liabilities.................................... 101,219 27,012 -- 128,231
---------- -------- --------- ----------
Total current liabilities............................ 451,617 304,965 -- 756,582
Non-current liabilities.................................. 38,430 4,521 50,000 92,951
Long-term debt:
Existing debt.......................................... -- 174,200 (174,200) --
8 7/8% Senior Notes due 2006........................... 350,000 -- -- 350,000
10 1/8% Senior Subordinated Notes due 2007............. 500,000 -- -- 500,000
Other.................................................. 24,219 -- -- 24,219
---------- -------- --------- ----------
Total long-term debt................................. 874,219 174,200 (174,200) 874,219
---------- -------- --------- ----------
Total liabilities.................................. 1,364,266 483,686 (124,200) 1,723,752
---------- -------- --------- ----------
Common stockholder's equity.............................. 98,055 64,415 (64,415) 98,055
---------- -------- --------- ----------
$1,462,321 $548,101 $(188,615) $1,821,807
========== ======== ========= ==========
</TABLE>
See accompanying notes to unaudited pro forma consolidated balance sheet.
P-2
<PAGE> 107
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 27, 1997
(IN THOUSANDS)
(1) Represents the following estimated adjustments to reflect the ProSource
Acquisition (the final purchase price allocation will be based upon a final
determination of the fair values of the net assets acquired):
<TABLE>
<S> <C>
Cash purchase price of equity............................... $142,700
Repayment of existing ProSource indebtedness................ 174,200
Fees and expenses........................................... 15,000
--------
Total purchase price........................................ $331,900
========
Sources of purchase price:
Excess cash............................................ $156,900
Sale of accounts receivable............................ 175,000
--------
Total sources............................................... 331,900
--------
Purchase price allocated as follows:
Historical net assets of ProSource..................... 64,415
Write-down of property and equipment in duplicate
facilities............................................ (49,961)
Additional liabilities................................. (50,000)
Elimination of deferred income taxes -- current........ (7,190)
Elimination of deferred income taxes -- long term...... (28,802)
Repayment of existing ProSource indebtedness........... 174,200
Elimination of historical intangible assets............ (39,883)
--------
Subtotal.......................................... 62,779
--------
Excess of cost over fair value of net assets acquired....... $269,121
========
</TABLE>
The additional liabilities of $50,000 represent accruals for estimated
costs to be incurred by the Company related to the termination of redundant
administrative and operating employees, lease termination costs in connection
with the closing of facilities which will not be used by the Company and certain
other costs to exit ProSource activities.
P-3
<PAGE> 108
AMERISERVE FOOD DISTRIBUTION, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA ADJUSTMENTS
ADJUSTMENTS PRO FORMA FOR
HISTORICAL HISTORICAL HISTORICAL FOR FOR HISTORICAL PROSOURCE
AMERISERVE PFS POST TRANSACTIONS TRANSACTIONS PROSOURCE ACQUISITION
---------- ---------- ---------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $3,446,191 $1,498,345 $65,467 $ (3,577)(8) $5,006,426 $3,901,165 $ --
Cost of goods sold........... 3,104,012 1,342,659 58,731 (3,387)(8) 4,502,015 3,591,368 --
---------- ---------- ------- -------- ---------- ---------- -------
Gross profit................. 342,179 155,686 6,736 (190) 504,411 309,797 --
---------- ---------- ------- -------- ---------- ---------- -------
Operating expenses:
Distribution, selling and
administrative........... 266,692 112,131 5,752 (5,550)(1) 370,735 290,849 --
(190)(8)
(8,100)(2)
Depreciation............... 17,163 8,814 315 (1,400)(3) 24,892 8,823 (6,800)(9)
Amortization............... 16,765 -- 65 9,426(6) 26,256 2,408 (2,408)(10)
6,728(10)
Impairment, restructuring
and
other unusual charges.... 52,449 -- -- -- 52,449 -- --
---------- ---------- ------- -------- ---------- ---------- -------
Total operating expenses..... 353,069 120,945 6,132 (5,814) 474,332 302,080 (2,480)
---------- ---------- ------- -------- ---------- ---------- -------
Operating income (loss)...... (10,890) 34,741 604 5,624 30,079 7,717 2,480
Interest expense, net........ (46,173) (8,041) (804) (32,313)(4) (87,331) (9,193) 9,193(12)
Loss on sale of accounts
receivable................. (6,757) -- -- (8,993)(5) (15,750) -- (12,250)(11)
---------- ---------- ------- -------- ---------- ---------- -------
Income (loss) before income
taxes...................... (63,820) 26,700 (200) (35,682) (73,002) (1,476) (577)
Provision (credit) for income
taxes...................... 1,030 9,924 -- (10,954)(7) -- (485) 485(13)
---------- ---------- ------- -------- ---------- ---------- -------
Income (loss) before
extraordinary item......... $ (64,850) $ 16,776 $ (200) $(24,728) $ (73,002) $ (991) $(1,062)
========== ========== ======= ======== ========== ========== =======
<CAPTION>
PRO FORMA
FOR
TRANSACTIONS
AND PROSOURCE
ACQUISITION
----------------
<S> <C>
Net sales.................... $8,907,591
Cost of goods sold........... 8,093,383
----------
Gross profit................. 814,208
----------
Operating expenses:
Distribution, selling and
administrative........... 661,584
Depreciation............... 26,915
Amortization............... 32,984
Impairment, restructuring
and
other unusual charges.... 52,449
----------
Total operating expenses..... 773,932
----------
Operating income (loss)...... 40,276
Interest expense, net........ (87,331)
Loss on sale of accounts
receivable................. (28,000)
----------
Income (loss) before income
taxes...................... (75,055)
Provision (credit) for income
taxes...................... --
----------
Income (loss) before
extraordinary item......... $ (75,055)
==========
</TABLE>
See accompanying notes to unaudited pro forma consolidated statement of
operations.
P-4
<PAGE> 109
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(1) Represents net cost reductions in accordance with the terms of the PFS
Asset Purchase Agreement for the following items:
<TABLE>
<CAPTION>
FISCAL
1997
-------
<S> <C>
Reduction in lease expense for existing PFS facilities being
retained by PepsiCo, Inc. ................................ $ 4,100
Net reduction in data processing costs charged by PepsiCo,
Inc. to PFS under the terms of a one year data processing
service contract.......................................... 4,100
Reduction of employee retirement expense due to the
termination of pension and retirement plans of PepsiCo,
Inc., net of amounts to be paid under AmeriServe's
plans..................................................... 1,900
Compensation of certain PFS employees retained by
PepsiCo, Inc. ............................................ 1,000
-------
Net cost savings............................................ 11,100
Less amount included in historical AmeriServe............... 5,550
-------
$ 5,550
=======
</TABLE>
Management Information System (MIS) costs for fiscal 1996 for PFS
aggregated $13,700, which included $5,100 of allocated costs for use of the
PepsiCo, Inc. data processing facilities. The Company plans to integrate
the MIS Systems of both businesses, which will eliminate PFS's reliance on
the PepsiCo, Inc. data processing facilities and result in all of the
Company's distribution centers operating under the same computer systems
and operating policies and practices. Annual MIS cost savings are expected
to be $6,600, which includes $2,500 due to the reduction of MIS personnel
as discussed in Note (2) below.
(2) Represents the net reduction in costs in accordance with the Company's
business plan to integrate PFS:
<TABLE>
<CAPTION>
FISCAL
1997
-------
<S> <C>
Payroll reductions for the elimination of duplicative
administrative personnel.................................. $ 3,800
Reduction in warehouse facilities and operating personnel... 1,800
Reduction of MIS costs...................................... 2,500
-------
Net cost savings............................................ $ 8,100
=======
</TABLE>
In addition, there are $6,000 of anticipated cost savings that have not
been reflected in the pro forma statement of operations because they are
not directly attributable to the acquisition of the PFS business but result
from actions taken by the Company in the third quarter of 1997 to
restructure existing AmeriServe operations. The restructuring charge taken
by the Company in the third quarter of 1997 was $31,200 (composed of
$12,400 related to impairment of assets, $14,800 related to future lease
terminations and employee displacements and $4,000 related to current
integration costs associated with a previous acquisition). The Company has
also identified $28,800 of synergistic cost savings related primarily to
transportation and insurance which also are not included in the pro forma
statement of operations.
(3) Represents reduction of $2,800 annually in depreciation expense (less
$1,400 in historical AmeriServe) as a result of the closure of certain
distribution centers related to the PFS Acquisition.
P-5
<PAGE> 110
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(4) Represents the change in interest expense related to the Transactions:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT FISCAL
OF DEBT 1997
--------- --------
<S> <C> <C>
Recording of pro forma interest:
8 7/8% Senior Notes due 2006.............................. $350,000 $ 31,063
10 1/8% Senior Subordinated Notes due 2007................ 500,000 50,625
Letters of credit......................................... 12,000 300
Capital leases at 9.5%.................................... 29,238 2,777
--------
Cash interest expense..................................... 84,765
Amortization of deferred financing costs.................. 2,566
--------
Total interest expense...................................... 87,331
Less: historical interest................................... (55,018)
--------
Pro forma interest adjustment............................... $ 32,313
========
</TABLE>
(5) Represents the discount of $15,750 annually (less $6,757 in historical
AmeriServe) on the sale of accounts receivable pursuant to the Accounts
Receivable Program ($225,000 at a rate of 7.00%).
(6) Represents the amortization of intangible assets incurred in connection
with the PFS Acquisition of $20,438 annually (less $11,012 in historical
AmeriServe).
(7) Represents adjustments to eliminate income tax expense due to pro forma
interest expense and loss on sale of receivables resulting in a pro forma
loss for the period.
(8) Represents elimination of intercompany sales.
(9) Represents the reduction in depreciation expense resulting from the
writedown of property and equipment in duplicative facilities.
(10) Represents the elimination of historical amortization and the recording of
amortization of goodwill incurred in connection with the ProSource
Acquisition assuming a 40-year amortization period.
(11) Represents the discount of $12,250 on the sale of the accounts receivable
pursuant to the expected financing of the accounts receivable
securitization in connection with the ProSource Acquisition ($175,000 at a
rate of 7.00%).
(12) Represents the elimination of historical ProSource interest resulting from
repayment of indebtedness.
(13) Represents adjustment to eliminate income tax benefit for ProSource which
will not be recognized on a pro forma basis.
P-6
<PAGE> 111
INDEX TO HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMERISERVE FOOD DISTRIBUTION, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-2
Consolidated Balance Sheets as of December 28, 1996 and
December 27, 1997...................................... F-3
Consolidated Statements of Operations for each of the
three fiscal years in the period ended December 27,
1997................................................... F-4
Consolidated Statements of Stockholder's Equity for each
of the three fiscal years in the period ended December
27, 1997............................................... F-5
Consolidated Statements of Cash Flows for each of the
three fiscal years in the period ended December 27,
1997................................................... F-6
Notes to Consolidated Financial Statements................ F-7
PFS
Report of KPMG Peat Marwick LLP, Independent Auditors..... F-20
Balance Sheets as of December 27, 1995 and December 25,
1996, and as of June 11, 1997 (unaudited).............. F-21
Statements of Income for each of the years in the three
year period ended December 25, 1996, and for the six
month periods ended June 12, 1996 and June 11, 1997
(unaudited)............................................ F-22
Statements of Divisional Equity for each of the years in
the three year period ended December 25, 1996, and for
the six month period ended June 11, 1997 (unaudited)... F-23
Statements of Cash Flows for each of the years in the
three year period ended December 25, 1996, and for the
six month periods ended June 12, 1996 and June 11, 1997
(unaudited)............................................ F-24
Notes to Financial Statements............................. F-25
AMERISERV FOOD COMPANY
Report of Ernst & Young LLP, Independent Auditors......... F-30
Consolidated Statements of Operations for each of the two
fiscal years in the period ended December 30, 1995..... F-31
Consolidated Statements of Stockholders' Equity (Deficit)
for each of the two fiscal years in the period ended
December 30, 1995...................................... F-32
Consolidated Statements of Cash Flows for each of the two
fiscal years in the period ended December 30, 1995..... F-33
Notes to Consolidated Financial Statements................ F-34
PROSOURCE, INC.
Independent Auditors' Report.............................. F-40
Consolidated Balance Sheets as of December 28, 1996 and
December 27, 1997...................................... F-41
Consolidated Statements of Operations for each of the
three fiscal years in the period ended December 27,
1997................................................... F-42
Consolidated Statements of Stockholders' Equity for each
of the three fiscal years in the period ended December
27, 1997............................................... F-43
Consolidated Statements of Cash Flows for each of the
three fiscal years in the period ended December 27,
1997................................................... F-44
Notes to Consolidated Financial Statements................ F-45
</TABLE>
F-1
<PAGE> 112
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
AmeriServe Food Distribution, Inc.
We have audited the accompanying consolidated balance sheets of AmeriServe
Food Distribution, Inc. (the Company) as of December 28, 1996 and December 27,
1997, and the related consolidated statements of operations, stockholder's
equity and cash flows for each of the three years in the period ended December
27, 1997. 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 the Company at
December 28, 1996 and December 27, 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 27, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
March 24, 1998
F-2
<PAGE> 113
AMERISERVE FOOD DISTRIBUTION, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,162 $ 231,131
Accounts receivable....................................... 73,531 43,625
Undivided interest in accounts receivable trust........... -- 154,371
Allowance for doubtful accounts........................... (4,896) (15,566)
Inventories............................................... 47,714 150,148
Due from affiliate........................................ -- 2,106
Prepaid expenses and other current assets................. 8,077 21,662
-------- ----------
Total current assets.............................. 126,588 587,477
Property and equipment, net................................. 33,837 130,856
Other assets:
Intangible assets, net.................................... 122,451 737,870
Note receivable from Holberg.............................. 3,516 3,516
Other noncurrent assets................................... 4,711 2,602
-------- ----------
$291,103 $1,462,321
======== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 3,266 $ 5,019
Accounts payable.......................................... 89,440 345,379
Due to affiliate.......................................... 907 --
Accrued liabilities....................................... 14,931 101,219
-------- ----------
Total current liabilities......................... 108,544 451,617
Long-term debt.............................................. 126,639 874,219
Other noncurrent liabilities................................ 13,245 38,430
Commitments
Stockholder's equity:
Senior preferred stock, $1 par value per share; 765 shares
authorized, 600 shares outstanding in 1996............. 30,000 --
Preferred stock, $50,000 par value per share; 150 shares
authorized and outstanding in 1996..................... 7,500 --
Preferred stock, $25,000 par value per share; 400 shares
authorized, 300 shares outstanding in 1996............. 7,500 --
Common stock, $10 par value per share; 2,000 shares
authorized, 600 shares outstanding..................... 6 6
Additional paid-in capital................................ -- 174,603
Accumulated deficit....................................... (2,331) (76,554)
-------- ----------
Total stockholder's equity........................ 42,675 98,055
-------- ----------
$291,103 $1,462,321
======== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 114
AMERISERVE FOOD DISTRIBUTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................................. $400,017 $1,280,598 $3,446,191
Cost of goods sold.................................... 359,046 1,151,749 3,104,012
-------- ---------- ----------
Gross profit.......................................... 40,971 128,849 342,179
Distribution, selling and administrative expenses..... 35,396 109,750 283,855
Amortization of intangible assets..................... 1,299 4,810 16,765
Impairment, restructuring and other unusual charges... -- -- 52,449
-------- ---------- ----------
Operating income (loss)............................... 4,276 14,289 (10,890)
Other income (expense):
Interest expense, net............................... (3,936) (10,999) (46,805)
Loss on sale of accounts receivable................. -- -- (6,757)
Interest income -- affiliates....................... 749 528 632
-------- ---------- ----------
(3,187) (10,471) (52,930)
-------- ---------- ----------
Income (loss) before income taxes and extraordinary
items............................................... 1,089 3,818 (63,820)
Provision for income taxes............................ 583 1,300 1,030
-------- ---------- ----------
Income (loss) before extraordinary items.............. 506 2,518 (64,850)
Extraordinary loss.................................... -- -- (9,373)
-------- ---------- ----------
Net income (loss)..................................... $ 506 $ 2,518 $ (74,223)
======== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 115
AMERISERVE FOOD DISTRIBUTION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED PREFERRED
SENIOR STOCK, STOCK, ADDITIONAL
PREFERRED $50,000 $25,000 COMMON PAID--IN ACCUMULATED
STOCK SERIES SERIES STOCK CAPITAL DEFICIT TOTAL
--------- --------- --------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994..................... $ -- $ 7,500 $ 7,500 $6 $ 4,852 $ (2,653) $ 17,205
Dividends:
Preferred stock....... -- -- -- -- -- (2,494) (2,494)
Common stock.......... -- -- -- -- (6,086) (208) (6,294)
Contribution of
capital............... -- -- -- -- 1,234 -- 1,234
Net income............... -- -- -- -- -- 506 506
-------- ------- ------- -- -------- -------- --------
BALANCE, DECEMBER 30,
1995..................... -- 7,500 7,500 6 -- (4,849) 10,157
Issuance of 600 shares of
senior preferred
stock................. 30,000 -- -- -- -- -- 30,000
Net income............... -- -- -- -- -- 2,518 2,518
-------- ------- ------- -- -------- -------- --------
BALANCE, DECEMBER 28,
1996..................... 30,000 7,500 7,500 6 -- (2,331) 42,675
Contribution of preferred
stock to additional
paid in capital....... (30,000) (7,500) (7,500) -- 45,000 -- --
Contribution of
capital............... -- -- -- -- 130,000 -- 130,000
Loss on exchange of
investment in NEHC
preferred stock for
capital stock of
Post.................. -- -- -- -- (397) -- (397)
Net loss................. -- -- -- -- -- (74,223) (74,223)
-------- ------- ------- -- -------- -------- --------
BALANCE, DECEMBER 27,
1997..................... $ -- $ -- $ -- $6 $174,603 $(76,554) $ 98,055
======== ======= ======= == ======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 116
AMERISERVE FOOD DISTRIBUTION,INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 506 $ 2,518 $ (74,223)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 2,762 10,061 33,928
Impairment of property, equipment and other assets........ -- -- 12,404
Extraordinary loss -- noncash portion..................... -- -- 2,156
Contribution of capital................................... 1,234 -- --
Other..................................................... 179 83 --
Changes in assets and liabilities, net of effect of
businesses acquired:
Accounts receivable..................................... (1,645) (4,924) 154,057
Undivided interest in accounts receivable trust......... -- -- (154,371)
Inventories............................................. (5) (6,497) (11,978)
Prepaid expenses and other current assets............... (3,070) 1,270 (11,217)
Accounts payable........................................ 5,035 6,741 71,139
Accrued liabilities..................................... (393) (5,309) 46,101
Noncurrent liabilities.................................. -- (66) (4,000)
Other................................................... (98) (2,664) (1,150)
---------- --------- -----------
Net cash provided by operating activities................... 4,505 1,213 62,846
---------- --------- -----------
INVESTING ACTIVITIES
Businesses acquired, net of cash acquired................... -- (94,411) (849,519)
Capital expenditures........................................ (2,496) (12,518) (22,921)
Proceeds from disposals of property and equipment........... 22 2,866 --
Amounts received from affiliate............................. 28,969 11,121 18,433
Amounts paid to affiliate................................... (30,659) (9,591) (21,446)
Net increase in deposits with affiliates.................... (315) (2,480) (2,355)
Expenditures for intangible and other assets................ (1,095) -- --
---------- --------- -----------
Net cash used in investing activities....................... (5,574) (105,013) (877,808)
---------- --------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock................... -- 30,000 --
Proceeds from issuance of long-term debt.................... -- -- 1,055,000
Proceeds from sale of accounts receivable................... -- -- 225,000
Proceeds from capital contribution.......................... -- -- 130,000
Debt financing fees incurred................................ -- -- (26,325)
Net increase (decrease) in borrowings under revolving line
of credit................................................. 4,635 120,000 (69,100)
Repayments of long-term debt................................ (4,016) (44,613) (270,644)
---------- --------- -----------
Net cash provided by financing activities................... 619 105,387 1,043,931
---------- --------- -----------
Net increase (decrease) in cash and cash equivalents........ (450) 1,587 228,969
Cash and cash equivalents at beginning of year.............. 1,025 575 2,162
---------- --------- -----------
Cash and cash equivalents at end of year.................... $ 575 $ 2,162 $ 231,131
========== ========= ===========
Supplemental cash flow information:
Cash paid during the year for:
Interest................................................ $ 3,622 $ 9,504 $ 21,436
Income taxes, net of refunds............................ 322 1,256 2,669
Businesses acquired:
Fair value of assets acquired........................... $ -- $ 187,907 $ 1,119,293
Cash paid............................................... -- (94,411) (849,519)
---------- --------- -----------
Liabilities assumed..................................... $ -- $ 93,496 $ 269,774
========== ========= ===========
Supplemental non cash investing and financing activities:
Property and equipment purchased with capital leases
(included in long-term debt)............................ $ -- $ 11,845 $ 20,604
</TABLE>
See accompanying notes.
F-6
<PAGE> 117
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
AmeriServe Food Distribution, Inc. (the Company), is a foodservice
distributor specializing in distribution to chain restaurants. The Company
distributes a wide variety of food items as well as paper goods, cleaning and
other supplies and equipment.
The Company's major customers are franchisers and/or franchisees in the
Pizza Hut, Taco Bell, KFC, Arby's, Burger King, Wendy's and Dairy Queen
restaurant systems. The Company services approximately 25,500 restaurants, the
vast majority of which are in the United States. The Company also operates
foodservice distribution businesses in Canada and Mexico, which are not material
to the consolidated financial statements of the Company.
The Company is a wholly owned subsidiary of Nebco Evans Holding Company
(NEHC), which is ultimately controlled by Holberg Industries, Inc. (Holberg).
Holberg is a privately held diversified service company with subsidiaries
operating within the food distribution and parking services industries in North
America.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Fiscal Year
The Company has a 52- or 53-week fiscal year ending on the last Saturday of
the calendar year. The fiscal years ended December 30, 1995 (fiscal 1995),
December 28, 1996 (fiscal 1996) and December 27, 1997 (fiscal 1997) are 52-week
periods.
Cash and Cash Equivalents
Cash equivalents represent funds temporarily invested (with original
maturities not exceeding three months) as part of the Company's active
management of working capital. Cash and cash equivalents are stated at cost,
which approximates market value.
Inventories
Inventories, which consist of purchased goods held for sale, are stated at
the lower of cost (determined on a first-in, first-out basis) or net realizable
value.
Property and Equipment
Property and equipment are stated at cost, except for assets that have been
impaired. Depreciation is computed over the estimated useful lives of the
assets, using either the straight-line or double-declining balance method.
Amortization of leasehold improvements is recorded over the respective lease
terms or useful lives of the assets, whichever is shorter. Amortization of
leasehold improvements and assets under capital
F-7
<PAGE> 118
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
leases is included in depreciation expense. Useful lives for amortization and
depreciation calculations are as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 5-40 years
Delivery and automotive equipment........................... 3-9 years
Warehouse equipment......................................... 5-12 years
Furniture, fixtures and equipment........................... 5-10 years
</TABLE>
Goodwill and Other Intangible Assets
Costs in excess of the net identifiable assets of businesses acquired are
amortized on a straight-line basis over 40 years. Assembled workforce, customer
lists and other intangible assets acquired in business acquisitions, deferred
financing costs and other intangibles are being amortized using primarily the
straight-line method over their respective estimated useful lives, which
generally range from 3 to 40 years.
Impairment of Long-Lived Assets
Property and equipment, goodwill and other intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the sum of the expected undiscounted
cash flows is less than the carrying value of the related asset or group of
assets, a loss will be recognized for the difference between the fair value and
carrying value of the asset or group of assets. Such analyses necessarily
involve significant judgment.
Computer Software
Costs of computer software developed or obtained for internal use are
capitalized and amortized on a straight-line basis over the estimated useful
life of the software (generally 3-8 years). Business process reengineering costs
associated with implementation of new software are expensed as incurred.
Revenue Recognition
Revenue from the sale of the Company's products is recognized upon shipment
to the customer.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (Statement) No. 109, "Accounting for Income
Taxes," which requires recognition of deferred tax assets or liabilities for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, as well as net operating loss carryforwards. Because of
the Company's prior operating losses in certain of the Company's taxable
entities, a valuation allowance has been established to offset the entire amount
of the net deferred tax assets.
Effective July 1997, the Company is included in the consolidated federal
income tax return of NEHC. Prior to that date, the Company was part of the
Holberg consolidated group for income tax purposes and made
F-8
<PAGE> 119
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax sharing payments to Holberg, under a tax sharing agreement, for those
entities within the Company's subgroup that had taxable income.
Recently Issued Accounting Standards
Accounting standards issued in 1997 included Statement No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and losses)
as part of a full set of financial statements, and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information." Statement
No. 131 establishes standards for reporting information about a company's
operating segments and related disclosures about its products, services,
geographic areas of operations and major customers. Both statements will be
adopted by the Company in 1998. The adoption of these statements will not impact
the Company's results of operations, cash flows or financial position.
Reclassifications
Certain amounts previously presented in the financial statements of prior
years have been reclassified to conform to the current year presentation.
2. ACQUISITIONS
On January 25, 1996, the Company acquired the common and preferred stock of
AmeriServ Food Company (AmeriServ), a foodservice distributor specializing in
distribution of food products and supplies to chain restaurants. AmeriServ
reported net sales of $939.1 million for its fiscal year ended December 30,
1995. The total cash outlay for the acquisition, including all direct costs, was
$92.9 million. Of this amount, $44 million related to the retirement of all of
AmeriServ's existing bank debt and accrued interest, which occurred concurrently
with the closing of the purchase transaction. The transaction was financed
through the issuance of $30 million of preferred stock to NEHC, as well as
borrowings under a new credit agreement.
The acquisition has been accounted for under the purchase method;
accordingly, its results are included in the consolidated financial statements
from the acquisition date. The excess of the purchase price over the net assets
acquired was $85 million and has been recorded as goodwill, which is being
amortized on a straight-line basis over 40 years.
The following unaudited pro forma results of operations for the year ended
December 30, 1995 assume the acquisition of AmeriServ occurred at the beginning
of the fiscal year (in thousands):
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Net sales................................................ $1,224,200
Net loss................................................. (7,134)
</TABLE>
In connection with the acquisition of AmeriServ, the Company acquired a
minority interest in the Harry H. Post Company (Post), also a foodservice
distributor to chain restaurants. In November 1996, the Company sold its
interest in Post to NEHC in exchange for $2.5 million in NEHC preferred stock.
Through certain transactions in 1996 and 1997, NEHC acquired the remaining
outstanding common stock of Post. In July 1997, NEHC transferred its investment
in Post to the Company in exchange for the NEHC preferred stock. The
transactions with NEHC had no impact on the consolidated statements of
operations. Post generated net sales of $119.4 million for its fiscal year ended
December 28, 1996. The Post operations are included in the consolidated results
of the Company effective with the beginning of the third quarter of 1997.
On July 11, 1997, the Company acquired the U.S. and Canadian operations of
PFS, a Division of PepsiCo, Inc. (PFS), in an asset purchase transaction for
approximately $842 million in cash, including direct costs. PFS posted net sales
of $3.4 billion for the fiscal year ended December 25, 1996. Financing of the
F-9
<PAGE> 120
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition included an equity contribution of $130 million by NEHC and other
transactions as described in Notes 6 and 7. PFS is engaged in the distribution
of food products, supplies and equipment to franchised and company-owned
restaurants in the Pizza Hut, Taco Bell and KFC systems, which were spun-off by
PepsiCo, Inc. on October 6, 1997 and are now operating as TRICON Global
Restaurants, Inc. (Tricon).
The effective date of the acquisition was June 11, 1997, the end of PFS'
second quarter. The acquisition has been accounted for under the purchase
method; accordingly, its results are included in the consolidated financial
statements from the effective date of the acquisition. The purchase price was
allocated based on the estimated fair values of identifiable intangible and
tangible assets acquired and liabilities assumed at the acquisition date, as
follows (in millions):
<TABLE>
<S> <C>
Accounts receivable......................................... $ 322.3
Inventories................................................. 83.1
Property and equipment...................................... 71.5
Goodwill.................................................... 562.7
Identifiable intangible assets.............................. 36.9
Other assets................................................ 1.4
Accounts payable............................................ (168.6)
Accrued liabilities......................................... (38.8)
Restructuring reserves...................................... (23.0)
Other noncurrent liabilities................................ (5.9)
-------
$ 841.6
=======
</TABLE>
The restructuring reserves of $23 million were included in the purchase
price allocation above in connection with the business plan to consolidate the
operations of PFS and the Company. The reserves consist principally of accruals
for costs related to the displacement of employees ($6.4 million) and lease
termination costs associated with the closures of duplicative PFS warehouses
($15.7 million). There were no material charges against the restructuring
reserves as of December 27, 1997. See Note 3 for additional discussion.
The following unaudited pro forma results of operations for fiscal 1996 and
1997 assume the acquisition of PFS and related transactions occurred at the
beginning of each period presented (in thousands):
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Net sales........................................... $4,874,980 $5,006,426
Loss before extraordinary items..................... (52,881) (73,002)
Net loss............................................ (62,254) (82,375)
</TABLE>
This pro forma information does not purport to be indicative of the results
that actually would have been obtained if the combined operations had been
conducted during the periods presented and is not intended to be a projection of
future results.
On October 29, 1997, the Company acquired the stock of a food distribution
business in Mexico for approximately $8 million in cash. The business
distributes food products and supplies to franchised and company-owned
restaurants, primarily in Mexico, in Tricon's Pizza Hut and KFC systems. The
acquisition has been accounted for under the purchase method. The operating
results of the business are not material to the consolidated results of the
Company.
F-10
<PAGE> 121
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. IMPAIRMENT, RESTRUCTURING AND OTHER UNUSUAL CHARGES
Included in "Impairment, restructuring and other unusual charges" in the
accompanying consolidated statements of operations for fiscal 1997 are the
following (in millions):
<TABLE>
<S> <C>
Impairment of property, equipment and other assets.......... $12.4
Accrued restructuring expense, principally exit costs for
future lease terminations and employee severance.......... 13.4
One-time indirect costs incurred in connection with the PFS
acquisition, principally bridge financing fees and costs
to implement the Accounts Receivable Program (Note 7)..... 13.6
Costs incurred in integrating acquisitions, and other
unusual items............................................. 13.0
-----
$52.4
=====
</TABLE>
The noncash impairment charge and the accrued restructuring expense reflect
actions to be taken with respect to the Company's existing facilities as a
result of the PFS acquisition. During the third quarter of 1997, management
performed an extensive review of the existing and recently acquired PFS
operations with the objective of developing a business plan for the
restructuring and consolidation of the organizations. The business plan, which
was approved by the Company's Board of Directors late in the third quarter,
identified a number of actions designed to improve the efficiency and
effectiveness of the combined entity's warehouse and transportation network and
operations support infrastructure.
These actions, which are expected to be completed by mid-1999, include
construction of new strategically located warehouse facilities, closures of
certain existing warehouse facilities and expansions of others, dispositions of
property and equipment, conversion of computer systems, reductions in workforce
and relocation of the Company's headquarters from Brookfield, Wisconsin to
Dallas, Texas.
There were no material charges against the restructuring accrual as of
December 27, 1997.
The costs incurred in fiscal 1997 in integrating the AmeriServ and PFS
acquisitions included start-up costs of new warehouse facilities and employee
relocation and other expenses to realign the operations support infrastructure.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Land............................................... $ 1,479 $ 2,584
Buildings and improvements......................... 10,036 33,477
Delivery and automotive equipment.................. 15,929 86,879
Warehouse equipment................................ 4,617 11,359
Furniture, fixtures and equipment.................. 11,842 17,393
Construction in progress........................... 2,412 5,538
-------- --------
46,315 157,230
Less accumulated depreciation and amortization..... 12,478 26,374
-------- --------
$ 33,837 $130,856
======== ========
</TABLE>
F-11
<PAGE> 122
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Goodwill, less accumulated amortization of $5,332
and $15,849...................................... $100,201 $661,570
Assembled workforce, customer lists, deferred
financing costs and other intangibles, less
accumulated amortization of $8,370 and $9,861.... 22,250 76,300
-------- --------
$122,451 $737,870
======== ========
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
8 7/8% Senior Notes due 2006....................... $ -- $350,000
10 1/8% Senior Subordinated Notes due 2007......... -- 500,000
Revolving credit facility under Credit Agreement... 69,100 --
Term loans under Credit Agreement.................. 45,000 --
Other notes payable................................ 6,034 --
-------- --------
120,134 850,000
Capital lease obligations (see Note 13)............ 9,771 29,238
-------- --------
129,905 879,238
Less current portion (capital lease obligations
only in 1997).................................... 3,266 5,019
-------- --------
$126,639 $874,219
======== ========
</TABLE>
The weighted average interest rate on the amounts outstanding under Credit
Agreement at December 28, 1996 was 7.99%.
In January 1996, in connection with the AmeriServ acquisition (see Note 2),
the Company refinanced its borrowings under a new Credit Agreement. The credit
facility provided for term loans of $45 million (amended to $50 million in March
1997) and up to $85 million under a revolving credit facility (amended to $100
million in March 1997). Interest rates on these borrowings were indexed to
certain key variable rates.
In connection with the PFS acquisition, on July 11, 1997, the Company
issued $500 million principal amount of 10 1/8% Senior Subordinated Notes due
July 15, 2007 in a private placement not requiring registration under the
Securities Act of 1933, as amended, and entered into a new credit facility
providing for term loans totaling $205 million and a revolving credit facility
of up to $150 million that expires on June 30, 2003. A portion of the proceeds
was used to repay all outstanding borrowings of $133.8 million (including
accrued interest) under the previous Credit Agreement. On October 15, 1997, the
Company issued $350 million principal amount of 8 7/8% Senior Notes due October
15, 2006 in a private placement not requiring registration under the Securities
Act of 1933, as amended, and used a portion of the proceeds to repay the $205
million principal amount of term loans and the accrued interest thereon of $1.3
million.
In connection with the early extinguishment of debt on July 11 and October
15, 1997, the Company recorded an extraordinary loss of $9.4 million, which
represents the unamortized balance of deferred financing
F-12
<PAGE> 123
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs associated with the repaid indebtedness. Because of the Company's net
operating loss carryforward position, the charge was recorded without tax
benefit.
Effective December 12, 1997, the Company completed offers to exchange all
the outstanding Senior Subordinated Notes due 2007 and the Senior Notes due 2006
with new notes with substantially identical terms that are registered under the
Securities Act of 1933, as amended.
Interest on the Senior Subordinated Notes and the Senior Notes
(collectively, the Notes) is payable semiannually. The Notes are fully,
unconditionally, jointly and severally guaranteed by the Company's operating
subsidiaries. The Notes contain covenants that limit the Company from incurring
additional indebtedness and issuing preferred stock, restrict dividend payments,
limit transactions with affiliates and certain other transactions. The Senior
Subordinated Notes are subordinated to all existing and future senior
indebtedness of the Company but rank equally in right of payment with any future
senior subordinated indebtedness of the Company.
As of March 15, 1998, there have been no borrowings under the $150 million
revolving credit facility; however, available borrowings are reduced for letters
of credit outstanding ($13.5 million at that date). A commitment fee of .25% to
.50% per annum is payable on the unused portion of the revolving credit
facility. The covenants contained in the revolving credit facility restrict the
payment of dividends, capital expenditures and certain other transactions and
require the Company to maintain leverage, fixed charge and interest coverage
ratios.
In early 1996, the Company entered into interest rate swap agreements to
modify interest on a portion of the outstanding borrowings under the Credit
Agreement. Under these agreements, the Company received variable rates and paid
fixed rates. Details of these swap agreements at December 28, 1996 and December
27, 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Notional amount.................................... $60 million $60 million
Weighted average receive rate...................... 5.63% 5.80%
Weighted average pay rate.......................... 5.52% 5.52%
</TABLE>
The swap agreements were terminated in February 1998 with a net
insignificant gain.
7. ACCOUNTS RECEIVABLE PROGRAM
In July 1997, the Company entered into a five-year Accounts Receivable
Program (the Program)to provide additional financing capacity. Under the
Program, the Company established a consolidated wholly owned subsidiary,
AmeriServe Funding Corporation (Funding), which is a special purpose
bankruptcy-remote entity that acquires, on a daily basis, substantially all of
the trade receivables generated by the Company and its subsidiaries. The
purchases by Funding are financed through the sale of the receivables to
AmeriServe Master Trust (the Trust) and the issuance of a series of certificates
by the Trust representing undivided interests in the assets of the Trust. As of
December 27, 1997, the Company had transferred $379.4 million of accounts
receivable to Funding in exchange for $225 million in cash, and an undivided
interest in the Trust of $154.4 million.
In accordance with the provisions of Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
the transactions have been recorded as a sale of receivables to a qualified
special purpose entity. The ongoing cost associated with the Program, which
represents the return to investors in the certificates, is reported in the
accompanying consolidated statements of operations as "Loss on sale of accounts
receivable." The interest rate on the certificates at December 27, 1997 was
6.94%. The Company has accounted for its investment in Funding as a
held-to-maturity security in accordance with Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
F-13
<PAGE> 124
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In a transaction expected to be completed in April 1998, the current series
of certificates issued by the Trust will be restructured, resulting in
additional capital to the Company under the program of approximately $50
million.
The accompanying consolidated balance sheets reflect an allowance for
doubtful accounts at December 27, 1997 that relates, in large part, to the
accounts receivable representing the undivided interest in the Trust. The
Company's accounts receivable generally are unsecured.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying consolidated balance
sheets for cash and cash equivalents, accounts receivable, investment in
accounts receivable trust, accounts payable and accrued liabilities approximate
fair value because of their short-term maturities. The carrying amounts reported
for long-term debt at December 28, 1996 approximate fair value because the
instruments carry variable rates of interest. The carrying amounts and fair
values of long-term debt at December 27, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
8 7/8% Senior Notes.................................... $350,000 $350,000
10 1/8% Senior Subordinated Notes...................... 500,000 515,000
</TABLE>
Related party financial instruments are recorded at cost.
9. GUARANTOR SUBSIDIARIES
The Company's operating subsidiaries fully, unconditionally, jointly and
severally guarantee the Senior Subordinated Notes and the Senior Notes discussed
in Note 6.
The guarantor subsidiaries are direct or indirect wholly owned subsidiaries
of the Company. The Company and the guarantor subsidiaries conduct substantially
all of the operations of the Company and its subsidiaries on a consolidated
basis. Separate financial statements of the guarantor subsidiaries are not
separately presented because, in the opinion of management, such financial
statements are not material to investors.
The only significant subsidiary of the Company that is not a guarantor
subsidiary is Funding, which is a wholly owned special purpose bankruptcy-remote
subsidiary. Funding has no operating revenues or expenses, and its only asset is
an undivided interest in an accounts receivable trust (the Trust -- see Note 7).
Funding's interest in the Trust is junior to the claims of the holders of
certificates issued by the Trust. Accordingly, as creditors of the Company, the
claims of the holders of the Senior Subordinated Notes and Senior Notes against
the accounts receivable held in the Trust are similarly junior to the claims of
holders of the certificates issued by the Trust.
On the first day of fiscal 1998, two of the Company's operating
subsidiaries, AmeriServ and Post, were effectively merged with and into the
Company. Accordingly, the following summarized combined financial
F-14
<PAGE> 125
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
information (in accordance with Rule 1-02(bb) of Regulation S-X) at December 27,
1997 and for the year then ended is for the guarantor subsidiaries of the
Company remaining after the mergers (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 7,901
Current liabilities......................................... 5,666
Noncurrent assets........................................... 52,085
Noncurrent liabilities...................................... 13,530
Net sales................................................... $135,640
Operating income............................................ 1,288
Net income.................................................. 1,027
</TABLE>
10. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................. $437 $1,104 $ 515
State............................... 98 196 299
Foreign............................. -- -- 95
---- ------ ------
535 1,300 909
Deferred (foreign in 1997).......... 48 -- 121
---- ------ ------
$583 $1,300 $1,030
==== ====== ======
</TABLE>
The provision for income taxes differs from the amount computed by applying
the federal statutory rate of 34% to income (loss) before income taxes and
extraordinary loss, as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Provision (benefit) at statutory
rate................................ $370 $1,298 $(21,699)
State income taxes, net of federal tax
benefit............................. 66 130 197
Foreign income taxes, net of federal
tax benefit......................... -- -- 143
Nondeductible goodwill................ 167 758 891
Equity in earnings of unconsolidated
subsidiary.......................... -- (644) --
Increase in valuation allowance....... -- -- 20,250
Other................................. (20) (242) 1,248
---- ------ --------
Provision for income taxes............ $583 $1,300 $ 1,030
==== ====== ========
</TABLE>
F-15
<PAGE> 126
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's deferred income tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Deferred income tax liabilities:
Intangible assets other than nondeductible
goodwill...................................... $ 7,974 $ 43,980
Deferred income tax assets:
Allowances and reserves.......................... 3,155 14,658
Property and equipment........................... 1,701 4,758
Accrued liabilities.............................. 9,045 33,026
Federal net operating loss carryforwards......... 10,566 34,954
-------- --------
24,467 87,396
Valuation allowance for deferred tax assets...... (16,493) (43,416)
-------- --------
Total deferred tax assets................ 7,974 43,980
-------- --------
Net deferred tax asset............................. $ -- $ --
======== ========
</TABLE>
As of December 27, 1997, and, giving effect to the merger into the Company
of Post and AmeriServ, the Company has net operating loss carryforwards of
approximately $90 million. The Company has not yet determined whether it
incurred a change in control on July 11, 1997 under Section 382 of the Internal
Revenue Code. Under that Section, after a change of control, the amount of such
net operating loss carryforwards that may be used annually during the permitted
carryforward period is limited.
The net operating loss carryforwards will expire between 2006 and 2012.
Because of uncertainty as to whether any benefit will be realized from the use
of such losses and other deferred tax assets, a valuation reserve has been
provided to offset any deferred tax assets in excess of deferred tax
liabilities. As of the date of its acquisition by the Company, AmeriServ had net
operating losses and other deferred tax benefits (the Acquired Tax Attributes)
of $49 million that were entirely offset by a valuation reserve. Goodwill will
be reduced to the extent of any tax benefit realized from the Acquired Tax
Attributes.
11. EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have sponsored 401(k) retirement savings
plans covering substantially all employees. The Company has matched the
contributions of participating employees in accordance with the provisions of
the plans. In August 1997, the various plans were merged into a single plan that
was enhanced as of January 1, 1998.
Under the enhanced plan, eligible employees may contribute up to 18% of
eligible compensation, subject to limits imposed by law. The Company matches 50%
of the first 4% of compensation contributed by employees and 25% of additional
amounts contributed up to 6%. The Company will make additional contributions for
eligible employees of 0.8% to 2.0% of eligible compensation, depending on years
of service. Company contributions have certain vesting schedules, with all such
contributions vesting after 5 years of service. The Company may also elect to
make a discretionary contribution that would be allocated to employees based on
a predetermined formula.
Company contributions expensed under the plans approximated $109,000,
$515,000 and $961,000 in fiscal 1995, 1996 and 1997, respectively.
F-16
<PAGE> 127
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED-PARTY TRANSACTIONS
With respect to related party assets and liabilities presented in the
accompanying consolidated balance sheets, the current amounts due from/to
affiliate represent interest-bearing advances to Holberg which are made in the
normal course of business as part of the cash management strategy of Holberg;
the note receivable from Holberg bears interest at 5% and is due January 1,
2007.
Prior to 1996, the Company participated in a self-insured casualty
(including workers' compensation and auto liability) and group health risk
program with an affiliate of Holberg, which determined the insurance expense to
be allocated to the Company. In fiscal 1995, the affiliate paid $1,128,000 of
casualty insurance and $378,000 of health insurance expenses of the Company.
These payments have been charged to operations and are reflected as contributed
capital in the accompanying consolidated financial statements. In connection
with the insurance program, the Company has deposits with an affiliate for
insurance collateral purposes of $2,480,000 and $4,835,000 at December 28, 1996
and December 27, 1997, respectively. These amounts are included in prepaid
expenses and other current assets in the accompanying consolidated balance
sheets.
Interest income from Holberg and an affiliate of approximately $749,000,
$528,000 and $632,000 in fiscal 1995, 1996 and 1997, respectively, represents
interest on the advances and note receivable from Holberg and interest on the
insurance deposits with an affiliate, less debt guarantee fees to Holberg of
$180,000 in 1995.
In 1997, distribution, selling and administrative expenses include
$4,000,000 in management fees to Holberg.
In 1995, the Company entered into an agreement to lease a warehouse and
office facility in Omaha, Nebraska from an affiliate of NEHC for a fixed term of
13 years. Annual rent is $500,000 for the first 5-year period of the lease, and
includes fixed escalation provisions for the 8 years thereafter. In connection
with the lease, the Company paid the affiliate a security deposit of $750,000,
which is included in other noncurrent assets in the accompanying consolidated
balance sheets.
The Company leases a warehouse and office facility in Waukesha, Wisconsin
from an affiliated partnership owned by certain former shareholders of an
acquired company for approximately $810,000 per year through May 31, 2008.
13. LEASE COMMITMENTS
The Company has noncancelable commitments under both capital and long-term
operating leases, primarily for office and warehouse facilities and
transportation and office equipment. Many leases provide for rent escalations,
purchase and renewal options, contingent rentals based on miles driven and
payment of executory costs by the Company. Rent expense was approximately
$5,709,000, $13,757,000 and $17,140,000 (including contingent rentals) in fiscal
1995, 1996 and 1997, respectively.
Property and equipment include the following amounts under capital leases
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Delivery and automotive equipment.................. $ 8,358 $28,778
Warehouse equipment................................ -- 2,227
Furniture, fixtures and equipment.................. 3,487 3,312
------- -------
11,845 34,317
Less accumulated amortization...................... 1,741 5,767
------- -------
Property and equipment under capital leases, net... $10,104 $28,550
======= =======
</TABLE>
F-17
<PAGE> 128
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of aggregate future minimum lease payments
(excluding contingent rentals) required under terms of the aforementioned leases
at December 27, 1997 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR ENDING LEASES LEASES
------------------ ------- ---------
<S> <C> <C>
1998.................................................... $ 8,173 $ 14,920
1999.................................................... 7,514 15,157
2000.................................................... 6,381 13,950
2001.................................................... 5,572 13,733
2002.................................................... 4,823 12,824
Thereafter.............................................. 8,222 77,610
------- --------
Total................................................... 40,685 $148,194
========
Less amount representing interest....................... 11,447
-------
Present value of net minimum lease commitments.......... $29,238
=======
</TABLE>
14. CONCENTRATION OF CREDIT RISK
On a pro forma basis, assuming the inclusion of PFS and Post for the full
year, Tricon accounted for approximately 40% of the Company's 1997 sales. No
other customer accounted for more than 10% of 1997 pro forma sales. Tricon is
the franchiser of, and through its subsidiaries operates restaurants within, the
Pizza Hut, Taco Bell and KFC systems. One customer, a franchiser, accounted for
approximately 11% of 1996 reported net sales.
In connection with the PFS acquisition, the Company was assigned and
assumed a sales and distribution agreement dated May 1997 between PFS and the
Pizza Hut, Taco Bell and KFC businesses. The agreement provides that the Company
is the exclusive distributor of a substantial majority of products purchased by
the domestic Tricon-owned restaurants for a five-year period beginning July 12,
1997, subject to certain service performance standards. The agreement also
covers restaurants sold to certain franchisees within the five-year period.
Including sales to franchiser-owned and franchised restaurants, the
Company's sales to the following restaurant concepts as an approximate
percentage of total pro forma sales were (including PFS for all of 1997 and Post
for all of 1996 and 1997):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Pizza Hut................................................... -- 28%
Taco Bell................................................... -- 28%
KFC......................................................... 9% 13%
Wendy's..................................................... 35% 11%
Burger King................................................. 17% 5%
</TABLE>
15. STOCKHOLDER'S EQUITY
At December 27, 1997, the authorized capital of the Company consisted of
2,000 shares of common stock at a par value of $10; 765 shares of senior
nonconvertible, nonvoting preferred stock with a liquidation preference of
$50,000 per share and cumulative dividends at a rate of $6,250 per share; 150
shares of Series $50,000 par value nonconvertible, nonvoting preferred stock
with a liquidation preference of $50,000 per share and cumulative dividends at a
rate of $5,500 per share; and 400 shares of Series $25,000 par value
nonconvertible, nonvoting preferred stock with a liquidation preference of
$25,000 per share and cumulative dividends at a rate of $2,375 per share.
F-18
<PAGE> 129
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 30, 1997, the authorized capital was modified to consist
entirely of 10,000 shares of common stock at a par value of $.01 (600 shares
outstanding) and 10,000 shares of preferred stock at a par value of $.01.
16. SUBSEQUENT EVENT
On January 29, 1998, the Company entered into a definitive merger agreement
pursuant to which the Company will acquire all of the approximately 9.4 million
outstanding shares of ProSource, Inc. (ProSource) for $15.00 per share in cash.
The Company will also refinance the existing indebtedness of ProSource of
approximately $174 million. The transaction is expected to close in the second
quarter of 1998. ProSource, which reported sales of $3.9 billion for its fiscal
year ended December 27, 1997, is in the foodservice distribution business,
specializing in quick-service and casual dining chain restaurants. ProSource
services approximately 12,700 restaurants, principally in the United States, in
such chains as Burger King, Red Lobster, Olive Garden, TGI Friday's, Long John
Silver's, Chili's, Sonic, Chick-fil-A, Wendy's and TCBY.
F-19
<PAGE> 130
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Management of PFS
(A Division of PepsiCo, Inc. Held for Sale):
We have audited the accompanying balance sheets of PFS (A Division of
PepsiCo, Inc. Held for Sale) as of December 27, 1995 and December 25, 1996, and
the related statements of income, divisional equity, and cash flows for each of
the years in the three-year period ended December 25, 1996. These financial
statements are the responsibility of the management of PFS. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PFS as of December 27, 1995
and December 25, 1996, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 25, 1996, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Dallas, Texas
April 18, 1997
F-20
<PAGE> 131
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 25, JUNE 11,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
--------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 203 $ 1,625 $ 32
Receivables:
Franchisees and licensees, net of allowance for
doubtful accounts of $11,941 in 1995 and $7,733 in
1996............................................... 115,004 117,729 132,679
Affiliates............................................ 206,658 162,485 191,006
Inventories........................................... 101,767 94,418 86,068
Prepaid expenses and other current assets............. 1,877 4,690 5,915
Deferred income taxes (note 7)........................ 10,105 10,629 9,975
-------- -------- --------
Total current assets.......................... 435,614 391,576 425,675
Property and equipment, net (notes 3 and 6)........... 80,351 87,017 82,460
Other assets.......................................... 323 328 320
-------- -------- --------
$516,288 $478,921 $508,455
======== ======== ========
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable -- trade............................. $196,695 $170,611 $200,026
Accrued liabilities (note 7).......................... 79,512 79,728 71,395
Advances from Parent and affiliates, net (note 4)..... 122,957 108,257 125,282
-------- -------- --------
Total current liabilities..................... 399,164 358,596 396,703
Other liabilities and deferred credits (notes 6 and
9).................................................... 23,449 22,400 20,568
Deferred income taxes (note 7).......................... 5,096 4,520 3,545
Divisional equity (note 4).............................. 88,579 93,405 87,639
Commitments (note 6)
-------- -------- --------
$516,288 $478,921 $508,455
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE> 132
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED TWENTY-FOUR WEEKS ENDED
------------------------------------------ ------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 25, JUNE 12, JUNE 11,
1994 1995 1996 1996 1997
------------ ------------ ------------ ---------- ----------
(53 WEEKS) (52 WEEKS) (52 WEEKS) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales:
Affiliates (note 4).......... $2,378,963 $2,463,464 $2,292,423 $1,058,666 $ 957,528
Franchisees and licensees.... 905,874 999,988 1,136,201 497,003 544,425
---------- ---------- ---------- ---------- ----------
3,284,837 3,463,452 3,428,624 1,555,669 1,501,953
Less discounts and
allowances................ 5,000 4,508 6,538 3,194 3,608
---------- ---------- ---------- ---------- ----------
Net sales............ 3,279,837 3,458,944 3,422,086 1,552,475 1,498,345
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales and
operating................. 3,155,422 3,331,866 3,297,381 1,498,587 1,443,274
General and administrative
(notes 4, 6 and 8)........ 37,515 47,606 44,962 21,564 20,330
---------- ---------- ---------- ---------- ----------
3,192,937 3,379,472 3,342,343 1,520,151 1,463,604
---------- ---------- ---------- ---------- ----------
Income from
operations......... 86,900 79,472 79,743 32,324 34,741
Interest expense to Parent
(note 4)..................... 12,934 17,613 15,566 7,102 8,041
---------- ---------- ---------- ---------- ----------
Income before income
taxes.............. 73,966 61,859 64,177 25,222 26,700
Provision for income taxes
(note 7)..................... 28,874 23,844 24,597 9,928 9,924
---------- ---------- ---------- ---------- ----------
Net income........... $ 45,092 $ 38,015 $ 39,580 $ 15,294 $ 16,776
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE> 133
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
STATEMENTS OF DIVISIONAL EQUITY
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Divisional equity at December 29, 1993...................... $100,146
Transfers to Advances from Parent and affiliates, net (note
4)........................................................ (59,531)
Net income.................................................. 45,092
--------
Divisional equity at December 28, 1994...................... 85,707
Transfers to Advances from Parent and affiliates, net (note
4)........................................................ (35,143)
Net income.................................................. 38,015
--------
Divisional equity at December 27, 1995...................... 88,579
Transfers to Advances from Parent and affiliates, net (note
4)........................................................ (34,754)
Net income.................................................. 39,580
--------
Divisional equity at December 25, 1996...................... 93,405
Transfers to Advances from Parent and affiliates, net (note
4)(unaudited)............................................. (22,542)
Net income (unaudited)...................................... 16,776
--------
Divisional equity at June 11, 1997 (unaudited).............. $ 87,639
========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 134
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS
YEARS ENDED ENDED
------------------------------------------ -------------------
DECEMBER 28, DECEMBER 27, DECEMBER 25, JUNE 12, JUNE 11,
1994 1995 1996 1996 1997
------------ ------------ ------------ -------- --------
(53 WEEKS) (52 WEEKS) (52 WEEKS) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows -- operating activities:
Net income.............................. $ 45,092 $ 38,015 $ 39,580 $ 15,294 $ 16,776
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 17,053 18,764 19,830 8,819 8,814
Loss on sale of property and
equipment.......................... 1,788 2,324 1,065 72 (209)
Deferred income taxes................ (6,800) (3,075) (1,100) (274) (321)
Change in assets and liabilities:
Receivables........................ (22,614) (22,051) 41,448 (6,769) (43,471)
Inventories........................ 4,839 (5,046) 7,349 8,429 8,350
Accounts payable................... 9,524 (2,347) (26,084) (8,519) 29,415
Accrued liabilities................ 13,105 (4,672) 216 (11,278) (8,333)
Other.............................. 2,730 7,668 (3,867) (4,877) (3,049)
-------- -------- -------- -------- --------
Net cash provided by operating
activities.................... 64,717 29,580 78,437 897 7,972
-------- -------- -------- -------- --------
Cash flows -- investing activities:
Additions to property and equipment..... (21,310) (25,245) (28,771) (14,214) (12,291)
Transfers of property and equipment to
affiliates........................... -- -- -- -- 7,338
Proceeds from sale of property and
equipment............................ 1,047 857 1,210 1,032 905
-------- -------- -------- -------- --------
Net cash used for investing
activities.................... (20,263) (24,388) (27,561) (13,182) (4,048)
-------- -------- -------- -------- --------
Cash flows -- financing
activities -- (repayment of)/additions
to advances from Parent and affiliates,
net..................................... (44,360) (5,163) (49,454) 12,661 (5,517)
-------- -------- -------- -------- --------
Net increase (decrease) in cash......... 94 29 1,422 376 (1,593)
Cash at beginning of period............. 80 174 203 203 1,625
-------- -------- -------- -------- --------
Cash at end of period................... $ 174 $ 203 $ 1,625 $ 579 $ 32
======== ======== ======== ======== ========
</TABLE>
During 1994, 1995, and 1996 PFS made the following transfers to Parent
through the intercompany account:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
State income tax.............................. $ 4,135 $ 3,808 $ 3,475
======= ======= =======
Federal income tax............................ $18,876 $19,887 $18,800
======= ======= =======
Interest on advances.......................... $12,994 $17,613 $15,566
======= ======= =======
Divisional equity reclassifications........... $59,531 $35,143 $34,754
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 135
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 27, 1995 AND DECEMBER 25, 1996
(IN THOUSANDS)
(1) GENERAL AND BASIS OF PRESENTATION
PFS (A Division of PepsiCo, Inc. Held for Sale) ("PFS") operates as a
division of PepsiCo, Inc. ("Parent") and has no separate legal status or
existence. In January 1997, the Parent announced its intent to spin off its
restaurant business. Concurrent with this announcement, the Parent also
announced that it would explore the possible sale of PFS. The accompanying
financial statements present the business of PFS which is being held for sale.
Accordingly, they include only the assets, liabilities and results of operations
of the PFS business to be sold. The principal nature of this business is to
provide food, equipment, and supply items primarily to Taco Bell, Pizza Hut and
KFC restaurants, which restaurants are either owned or franchised by the Parent
in both the United States and Canada. The Division also has other transactions
with the Parent and affiliates of the Parent ("Affiliates") (notes 4, 5, 7, 8
and 9). PFS' fiscal year ends on the last Wednesday in December and, as a
result, a fifty-third week is added every five or six years. The fiscal year
ended December 28, 1994 consisted of 53 weeks.
The financial statements of the Company as of June 11, 1997 and for the
periods ended June 12, 1996 and June 11, 1997 are unaudited, but in the opinion
of management reflect all adjustments (consisting only of normal recurring
accruals) which are necessary for a fair statement of the results of the interim
periods presented. Results for interim periods are not necessarily indicative of
the results to be expected for a full year or for periods which have been
previously reported.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Inventories
Inventories are valued at the lower of cost, as determined by the first-in,
first-out ("FIFO") method, or net realizable value.
(b) Income Taxes
PFS is included in the consolidated federal income tax return of the
Parent. For financial reporting purposes, federal income taxes are computed on a
separate return basis. State income taxes are computed at a composite rate (6.3%
in 1994 and 5.8% in 1995 and 1996) based upon actual taxes incurred by the
Parent on behalf of the Division.
PFS accounts for income taxes using the asset and liability method. Under
the asset and liability method of accounting for income taxes, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(c) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization are calculated on a straight-line basis over the
estimated useful lives of the assets, generally 3 to 10 years.
F-25
<PAGE> 136
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(d) Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 27, 1995 and December 25, 1996 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Land................................................... $ 756 $ 756
Transportation equipment............................... 81,741 87,039
Warehouse and office equipment......................... 33,654 38,916
Buildings and leasehold improvements .................. 38,490 46,651
Construction in progress............................... 2,656 2,937
Leased computer and material handling equipment........ 5,712 5,750
-------- --------
163,009 182,049
Less accumulated depreciation and amortization......... 82,658 95,032
-------- --------
$ 80,351 $ 87,017
======== ========
</TABLE>
(4) RELATED PARTY TRANSACTIONS
The Parent provides certain corporate general and administrative services
to PFS, including legal, treasury and benefits administration, among others. The
Company estimates the costs of these services to be approximately $1,100 based
on management's assessment of the relative benefit received from the Parent for
each of the years 1994, 1995 and 1996. The Company believes this method is
reasonable and inclusion of such costs would not have a material impact on the
accompanying financial statements.
Transactions with the Parent include utilization of cash management
services under which net cash balances of PFS are transferred to or provided by
the Parent daily. In addition, the Parent provides payments under its incentive
compensation plans to certain key employees of PFS.
In 1994, 1995 and 1996, respectively, approximately 29%, 28% and 27% of the
gross sales of PFS were to restaurants owned by Pizza Hut, Inc., 31%, 31% and
28% of gross sales were to restaurants owned by Taco Bell Corp., and 13%, 11%
and 12% of gross sales were to restaurants owned by KFC Corporation.
PFS and the Parent have agreed to reclassify amounts between advances and
divisional equity in order to maintain a preestablished debt to equity ratio, as
defined, as part of the agreements between PFS and Pizza Hut, Inc. and its
franchisees.
Advances from Parent and Affiliates bear interest at the prime rate (8.25%
at December 25, 1996) and are not subject to stated repayment terms.
Accordingly, such advances are classified as current liabilities in the
accompanying balance sheets. The carrying amount of Advances from the Parent and
Affiliates at December 27, 1995 and December 25, 1996 approximates the fair
value since the borrowings bear interest at current market rates.
F-26
<PAGE> 137
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) PROFIT LIMITATION
"Gross profit" and "net pretax profit" on certain sales of PFS to Pizza Hut
restaurants, as defined in the agreements with Pizza Hut, Inc. and its
franchisees, are limited to amounts not to exceed 14% and 2.5% of sales,
respectively. Such limitations apply only to sales of food, paper products, and
similar restaurant supplies and exclude other nonfood items such as furnishings,
interior and exterior decor items, and equipment. As a result of the profit
limitation, sales are reported net of $3,039, $4,449 and $5,249 in 1994, 1995
and 1996, respectively, for distributions to Pizza Hut, Inc. and its
franchisees.
(6) LEASE COMMITMENTS
PFS occupies warehouse and office facilities under noncancellable operating
lease agreements expiring at various dates through 2006. Most of the leases
contain renewal options for periods ranging from one to five years, with rentals
generally equal to those stated for the initial term of the lease.
PFS also rents transportation equipment under operating leases which
provide for both short-term and long-term rentals.
Rental expense for the years ended December 28, 1994, December 27, 1995 and
December 25, 1996 is summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Transportation equipment:
Fixed rentals............................... $ 336 $ 409 $ 442
Variable rentals............................ 2,173 1,776 1,059
Warehouse and office space.................... 8,110 8,531 10,252
Equipment..................................... 3,993 2,773 2,947
------- ------- -------
$14,612 $13,489 $14,700
======= ======= =======
</TABLE>
The future minimum rental commitments as of December 25, 1996 for all
noncancellable operating transportation, warehouse, office, and other equipment
leases are as follows:
<TABLE>
<S> <C>
1997............................................... $10,783
1998............................................... 9,493
1999............................................... 8,110
2000............................................... 6,986
2001............................................... 7,020
Thereafter......................................... 17,027
-------
$59,419
=======
</TABLE>
F-27
<PAGE> 138
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PFS leases computer equipment and material handling equipment under capital
lease arrangements. The minimum lease payments as of December 25, 1996 for the
remainder of the lease periods are as follows:
<TABLE>
<S> <C>
1997.................................................. $692
1998.................................................. 118
----
Total minimum lease payments.......................... 810
Less amount representing interest..................... 22
----
Present value of net minimum lease payments........... 788
Less current obligations.............................. 673
----
Long-term obligations................................. $115
====
</TABLE>
Included in property and equipment as of December 25, 1996 are assets
recorded under capital leases as follows:
<TABLE>
<S> <C>
Computer and material handling equipment............ $5,750
Less accumulated amortization....................... 5,114
------
$ 636
======
</TABLE>
(7) INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal..................................... $29,875 $24,227 $23,127
State....................................... 5,799 2,692 2,570
Deferred:
Federal..................................... (5,780) (2,639) (846)
State....................................... (1,020) (436) (254)
------- ------- -------
$28,874 $23,844 $24,597
======= ======= =======
</TABLE>
The differences between the statutory and effective federal income tax
rates are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate.................................. 35% 35% 35%
State income tax, net of federal benefit................ 4 4 4
-- -- --
Effective rate........................................ 39% 39% 39%
== == ==
</TABLE>
Federal income taxes currently payable to the Parent of $35,714 at December
27, 1995 and $36,441 at December 25, 1996 are included in accrued liabilities in
the accompanying balance sheets.
The primary components of deferred taxes result from accelerated
depreciation methods, bad debt provisions and the deferral of certain expenses
related to postretirement benefits for tax purposes.
(8) RETIREMENT PLANS
PFS participates in two defined benefit noncontributory pension plans for
salaried and nonsalaried employees (the "Plans") which are administered directly
or indirectly by the Parent. Substantially all
F-28
<PAGE> 139
PFS
(A DIVISION OF PEPSICO, INC. HELD FOR SALE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
employees of the Division are covered by these Plans. PFS's participation is
accounted for as a multiemployer plan.
Generally, benefits for salaried and nonsalaried employees are based on
years of service and the employees' highest consecutive five-year average annual
earnings. The Parent funds the Plans in amounts not less than the minimum
statutory funding requirements nor more than the maximum amount which can be
deducted for federal income tax purposes by the Parent. The Plans' assets
consist principally of equity securities, government and corporate debt
securities, and other fixed income obligations. Capital stock of the Parent
accounted for approximately 24% and 22% of the total market value of the
domestic Parent sponsored Plans' assets for 1995 and 1996.
PFS was allocated pension expense of $1,211, $1,174 and $2,374 in 1994,
1995 and 1996, respectively.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
PFS participates in a postretirement benefit plan administered by the
Parent. The plan provides postretirement health care and life insurance benefits
to eligible retired U.S. employees. Employees who have 10 years of service and
attain age 55 while in service with the Division are eligible to participate in
the postretirement benefit plan. The plan in effect through 1994 was largely
noncontributory and was not funded. PFS accrues the cost of postretirement
benefits over the years employees provide services to the date of their full
eligibility for such benefits.
Postretirement benefit expense amounted to $919, $481 and $1,047 in 1994,
1995 and 1996, respectively. The liability for postretirement benefits of $8,967
at December 25, 1995 and $9,962 at December 27, 1996 is included in other
liabilities and deferred credits in the accompanying balance sheets.
Effective in 1994, certain features of the plan were amended to expand
retiree cost-sharing provisions and limit the Division's share of future
increases in health care costs.
F-29
<PAGE> 140
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
AmeriServ Food Company
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of AmeriServ Food Company (the Company) for
the years ended December 31, 1994 and December 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of the Company for the years ended December 31, 1994 and December 30, 1995, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
March 22, 1996
F-30
<PAGE> 141
AMERISERV FOOD COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................... $873,309 $939,096
Operating expenses:
Cost of sales, including delivery and warehouse
expenses............................................... 841,408 907,597
Selling, general, and administrative...................... 19,314 20,209
Depreciation.............................................. 2,778 2,768
Amortization of goodwill and covenants not to compete..... 888 677
Losses of divested operations............................. 313 --
-------- --------
Total operating expenses.................................... 864,701 931,251
-------- --------
Income from operations...................................... 8,608 7,845
Other expense:
Interest expense.......................................... 6,442 7,465
Interest expense, related parties......................... 226 216
Amortization of financing costs........................... 236 302
Other expense, net........................................ 28 1,472
-------- --------
Income (loss) before minority interest...................... 1,676 (1,610)
Minority interest........................................... 4 (2)
-------- --------
Income (loss) before income taxes........................... 1,680 (1,612)
Income tax provision........................................ 108 270
-------- --------
Income (loss) before extraordinary items.................... 1,572 (1,882)
Extraordinary gain on early extinguishment of debt.......... 312 --
-------- --------
Net income (loss)........................................... $ 1,884 $ (1,882)
======== ========
</TABLE>
See accompanying notes.
F-31
<PAGE> 142
AMERISERV FOOD COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON ADDITIONAL
STOCK PAID-IN ACCUMULATED
PAR VALUE CAPITAL DEFICIT TOTAL
--------- ---------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at January 1, 1994...................... $ 25 $ 8,742 $(17,032) $(8,265)
Contribution of dividend promissory notes and
accrued interest to equity................. -- 5,678 -- 5,678
Accretion of redemption value of Series A
Redeemable Preferred Stock................. -- -- (1,125) (1,125)
Net income.................................... -- -- 1,884 1,884
---- ------- -------- -------
Balance at December 31, 1994.................... 25 14,420 (16,273) (1,828)
One for ten reverse stock split............... (22) 22 -- --
Accretion of redemption value of Series A
Redeemable Preferred Stock................. -- -- (675) (675)
Net loss...................................... -- -- (1,882) (1,882)
---- ------- -------- -------
Balance at December 30, 1995.................... $ 3 $14,442 $(18,830) $(4,385)
==== ======= ======== =======
</TABLE>
See accompanying notes.
F-32
<PAGE> 143
AMERISERV FOOD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 1,884 $ (1,882)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation.............................................. 2,778 2,768
Amortization of goodwill and covenants not to compete..... 888 677
Amortization of financing costs........................... 236 302
Other non-cash expenses................................... -- 1,079
Deferred income tax provision............................. (347) 45
Provision for doubtful accounts........................... 410 181
Minority interest......................................... (4) 2
Extraordinary gain........................................ (312) --
Changes in operating assets and liabilities:
Accounts and other receivables......................... (3,116) (664)
Inventories............................................ (5,929) (2,880)
Prepaid expenses and other............................. (1,272) (730)
Accounts payable....................................... 10,143 7,228
Accrued liabilities.................................... 67 (844)
--------- ---------
Net cash provided by operating activities................... 5,426 5,282
--------- ---------
INVESTING ACTIVITIES
Acquisitions of businesses.................................. (1,625) --
Capital expenditures for property, plant, and equipment..... (1,263) (3,030)
Proceeds from sale of property, plant, and equipment........ 71 112
Other....................................................... 190 (229)
--------- ---------
Net cash used in investing activities....................... (2,627) (3,147)
--------- ---------
FINANCING ACTIVITIES
Borrowings under line of credit agreements.................. 929,724 960,744
Repayments under line of credit agreements.................. (933,505) (958,785)
Proceeds from long-term debt................................ 5,896 --
Repayments of long-term debt................................ (6,855) (3,617)
Maturity of certificates of deposit......................... 1,620 --
Proceeds from issuance of Series A Redeemable Preferred
Stock..................................................... 2,000 --
Other....................................................... (1,335) (490)
--------- ---------
Net cash used in financing activities....................... (2,455) (2,148)
--------- ---------
Net increase (decrease) in cash............................. 344 (13)
Cash at beginning of year................................... 502 846
--------- ---------
Cash at end of year......................................... $ 846 $ 833
========= =========
Supplemental disclosure of cash flow information -- Cash
paid for interest......................................... $ 6,526 $ 7,097
</TABLE>
See accompanying notes.
F-33
<PAGE> 144
AMERISERV FOOD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1994 AND DECEMBER 30, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Disposition
AmeriServ Food Company (the Company or AmeriServ) was formed in September
1989 and was majority owned by J. Lewis Partners, L.P. (Lewis Partners). On
January 26, 1996, all of the Company's outstanding stock (common and preferred)
was acquired by AmeriServe Food Distribution, Inc. (formerly NEBCO EVANS
Distribution, Inc.) (NEBCO). In conjunction with the acquisition, the Company's
revolving line of credit, its term notes payable to five co-lenders, and its
note to Signal Capital Corporation were paid off. The Company continues to
operate as a wholly-owned subsidiary of NEBCO with NEBCO providing any working
capital needed for the Company's operations.
The consolidated financial statements of the Company include the accounts
of the Company and the following subsidiaries:
<TABLE>
<CAPTION>
SUBSIDIARY OWNERSHIP
- ---------- ---------
<S> <C>
Post Holding Company and subsidiary (Post)........ 50%
Delta Transportation, Ltd. (Delta)................ 100%
</TABLE>
The Company was formed through a series of acquisitions. Interstate
Distributors, Inc. (IDI), and The Sonneveldt Company (Sonneveldt) represent
holding companies formed for the purpose of acquiring the respective operating
subsidiaries. Lewis Partners acquired a 70% ownership interest in Sonneveldt and
an 81% ownership interest in IDI on December 19, 1988, and August 1, 1989,
respectively. In 1989, Lewis Partners transferred its ownership interests in
these two entities to the Company in exchange for shares of the Company's common
stock. Concurrent with the transfer of Lewis Partners' ownership interests in
the subsidiaries to the Company, the Company acquired the remaining 30% minority
interest in Sonneveldt by exchanging shares of the Company's common stock for
the minority interest holders' shares of Sonneveldt. The Company acquired Post
Holding Company (Post) in 1989, First Choice Food Distributors, Inc. (FCF), in
1990, Alpha Distributors, Ltd., Delta Transportation, Ltd., and Omega
Distributions Services, Ltd. (collectively Alpha), and Food Service Systems
(FSS) in 1991. The Company merged FSS into IDI in December 1992.
On January 11, 1994, the Company completed a series of transactions
including a private equity offering, a corporate restructuring, and a
refinancing of the majority of the Company's debt. As a part of these
transactions, the Company purchased the 19% minority interest in IDI, and
simultaneously merged all of its subsidiaries into AmeriServ, except Post and
Delta Transportation, Ltd. (Delta), which were not merged for regulatory
reasons.
Nature of Operations
The Company, through its divisions and subsidiaries, is a system
foodservice distributor specializing in distribution to chain restaurants. The
Company distributes a wide variety of items, including fresh and frozen meat and
poultry, frozen foods, canned and dry goods, fresh and pre-processed produce,
beverages, dairy products, paper goods, cleaning and other supplies and small
equipment.
At December 30, 1995, the Company served approximately 4,300 restaurant
locations within 38 different restaurant chains (or "concepts") in 38 states,
Mexico and the Caribbean from 14 distribution centers in the United States.
F-34
<PAGE> 145
AMERISERV FOOD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Upon consolidation, all intercompany accounts,
transactions, and profits have been eliminated.
Fiscal Year
The Company's fiscal year is the 52- or 53-week period ending on the
Saturday closest to December 31. The fiscal years ended December 31, 1994
(fiscal 1994) and December 30, 1995 (fiscal 1995) are 52-week periods.
Inventories
Merchandise inventories are valued at the lower of cost (first-in,
first-out method) or market.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the assets, using either the straight-line or
double-declining balance method. Amortization of leasehold improvements is
recorded over the respective lease terms or useful lives, whichever are shorter;
and assets recorded under capital leases are amortized over the respective lease
terms. Amortization of capital leases is included in depreciation expense.
Useful lives for amortization and depreciation calculations are as follows:
<TABLE>
<S> <C>
Buildings and improvements..................... 5 - 40 years
Delivery and automotive equipment.............. 5 - 9 years
Warehouse equipment............................ 5 - 12 years
Furniture, fixtures, and equipment............. 5 - 10 years
</TABLE>
Other Assets
Goodwill represents the excess of the purchase prices over the fair values
of net assets of acquired businesses and is amortized over 40 years using the
straight-line method. On January 11, 1994, the Company purchased the remaining
minority interest in IDI resulting in additional goodwill of $1,160. The
carrying value of goodwill is reviewed if the facts and circumstances suggest it
may be impaired. If this review indicates that goodwill may not be recoverable,
as determined based on the estimated future undiscounted cash flows of the
entity acquired over the remaining amortization period, the Company's carrying
value of the goodwill is reduced by the estimated shortfall.
The costs of covenants not to compete, incurred in connection with
acquisitions, are being amortized over the lives of the respective covenants
(three to five years) using the straight-line method. Deferred financing costs
are being amortized over the terms of the respective agreements, generally three
to five years, using the straight-line method, which does not differ
significantly from the interest method.
Federal Income Taxes
The Company and its subsidiaries (excluding Post) file a consolidated
federal income tax return. Under federal tax regulations, Post is required to
file a separate consolidated federal income tax return.
F-35
<PAGE> 146
AMERISERV FOOD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Losses of Divested Operations
In fiscal 1994, the Company incurred losses of $313, consisting of costs
incurred to close the two remaining FSS distribution facilities. The majority of
these expenses were related to operating, legal, severance, and shut-down costs
associated with the decision to close these facilities. The closing and
divesting of these operations was deemed necessary due to continued operating
losses with respect to these two facilities.
Other Expenses, Net
In fiscal 1995, other expense, net, of $1,472 in the consolidated statement
of operations, included expenses of $827 related to an attempted public offering
of the Company's common stock, and an accrual of $600 representing payments due
under contract to two former owners of a company acquired by AmeriServ in 1988.
As the two former owners are no longer involved in the business, these amounts
have been written off.
2. LEASES
The Company leases warehouse facilities and certain transportation
equipment under operating leases expiring at various dates through 1999. Minimum
annual rental commitments under noncancelable operating leases are as follows at
December 30, 1995:
<TABLE>
<S> <C>
1996............................................. $ 8,233
1997............................................. 7,509
1998............................................. 6,604
1999............................................. 5,134
2000............................................. 3,700
Thereafter....................................... 5,887
-------
$37,067
=======
</TABLE>
Rent expense for fiscal 1994 and 1995 was approximately $9,363 and $11,243,
respectively. Under certain truck leases, various subsidiaries of the Company
are obligated to pay contingent rentals based on miles driven each period.
The Madison, Wisconsin, warehouse facility lease grants the Company an
option to purchase the warehouse facility at any time during the initial or
extended lease terms for $6,000. Additionally, the lease grants the lessors a
put option to require the Company to purchase the warehouse facility for $6,000
should the Company either default on future monthly rental payments or fail to
exercise, or not be entitled under the terms of the lease to exercise, any of
its options to extend the initial 10-year term of the lease.
The Company leases operating facilities and certain delivery and warehouse
equipment under capital lease agreements. The leases are for various terms
through 2002, with interest payable at rates ranging from 10 to 12.75%. The
facilities are leased from a partnership, which is partially owned by
stockholders of the Company. Payments representing principal on the facility
leases totaled $133 and $150 in fiscal 1994 and 1995, respectively. The Company
is required to pay real estate and other occupancy costs under the leases.
3. STOCK COMPENSATION PLAN
In 1991, the Company adopted a Stock Compensation Plan (the Plan), which
became effective on December 31, 1991. The Plan covers the issuance of incentive
and nonqualified stock options and restricted stock grants to directors and key
employees of the Company and its subsidiaries. The Plan is administered by a
committee (the Committee) appointed by the Company's Board of Directors. The
Committee generally has the authority to fix the terms and numbers of options to
be granted and to determine the employees or other parties who will receive the
options and the grants. The number of shares that may be issued under the Plan
F-36
<PAGE> 147
AMERISERV FOOD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shall not exceed 56. Incentive stock options granted by the Committee shall
expire on the date determined by the Committee, but in no event shall any
incentive stock option expire later than 10 years after the grant date. The
exercise price per share for shares issued pursuant to the exercise of incentive
stock options shall not be less than the fair market value of common stock at
the time of the grant of the option. All options granted will expire between
January 1, 2002, and January 11, 2004.
Common share stock options outstanding at December 31, 1994, and December
30, 1995, are as follows adjusted for a 1 for 10 reverse stock split effective
September 1, 1995 (in thousands except per share data):
<TABLE>
<CAPTION>
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
--------- --------------- -----------
<S> <C> <C> <C>
Outstanding at December 31, 1994................ 23 $53.33 -- $93.33 23
Outstanding at December 30, 1995................ 24 $53.33 -- $93.33 24
</TABLE>
4. INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Current:
Federal................................................... $ 72 $ --
State..................................................... 383 289
---- ----
Total current............................................... 455 289
Deferred
Federal................................................... (347) (19)
---- ----
Total deferred.............................................. (347) (19)
---- ----
$108 $270
==== ====
</TABLE>
A reconciliation of the Company's income tax provision calculated at
federal statutory rates to the provision for income taxes reported is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Federal statutory tax rate (34%) applied to income
(loss) before taxes....................................... $571 $(548)
Net operating losses not benefited.......................... -- 267
Benefit of net operating loss carryovers.................... (827) --
AMT credit not benefited.................................... 72 --
State income taxes.......................................... 383 289
Tax return settlements...................................... (347) --
Amortization of goodwill.................................... 124 124
Meals and entertainment..................................... 97 119
Other....................................................... 35 19
---- -----
$108 $ 270
==== =====
</TABLE>
At December 30, 1995, the Company has consolidated net operating loss
carryforwards of $8,707 for federal income tax purposes that expire in years
2004 through 2009. Additionally, at December 30, 1995, Post
F-37
<PAGE> 148
AMERISERV FOOD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has net operating loss carryforwards of $1,360, which are available to offset
Post's separate taxable income. The Company establishes a valuation allowance
for its deferred tax assets until, based on available evidence, it is more
likely than not that a portion or all of the deferred tax assets will be
realized.
Section 382 of the 1986 Internal Revenue Code provides for limitations on
the utilization of net operating loss carryovers subsequent to certain ownership
changes. If the Company experiences an ownership change, as defined under
Section 382, the availability of its net operating loss carryovers may be
limited.
5. OTHER RELATED PARTY TRANSACTIONS
The Company and its subsidiaries incurred monitoring and acquisition fees
of $415 to Lewis Partners for management advisory, investment banking, and
acquisition services during both fiscal 1994 and 1995.
6. CAPITAL STOCK
Effective November 10, 1994, the Board of Directors approved a
three-for-four reverse stock split and effective September 1, 1995, the Board of
Directors approved a one-for-ten reverse stock split. All references to stock
related data has been restated to reflect the effect of the splits.
The Board of Directors of the Company is authorized, without action by the
stockholders, to divide authorized preferred stock into one or more series and
to fix, for each series, the number of shares, powers, designations,
preferences, relative rights, qualifications, limitations, and restrictions. The
Company is authorized to issue 500 shares of Preferred Stock with a par value of
$0.01. The Company issued 45 shares of $.01 par value non-voting preferred
shares designated as Series A Redeemable Preferred Stock for $4,500. The
Preferred Stock is convertible into shares of common stock at a rate of 2.5
shares of common for each share of Series A Redeemable Preferred Stock. The
holders of shares of Series A Redeemable Preferred Stock are entitled to receive
dividends as declared by the Board of Directors from time to time. The Series A
Redeemable Preferred Stock is redeemable in whole at any time or from time to
time in part, at the option of the Company, at a redemption price of $125.00 per
share, with such redemption price increasing by 12% per year commencing on
January 1, 1995, and being increased by a per share amount equal to any then
declared but unpaid dividends. The redemption of the Series A Redeemable
Preferred Stock is mandatory on December 31, 2003, or earlier in the event of an
initial public offering, sale of the Company or merger, consolidation, or other
form of business combination in which the Company is not the surviving entity.
In the event of any form of liquidation of the Company, the holders of the
Series A Redeemable Preferred Stock hold preference over all other forms of
capital stock at an amount equal to $100.00 per share with the amount increasing
by 12% per year compounded annually. Commencing on January 1, 1995, this amount
is further increased by a per share amount equal to any then declared but unpaid
dividends.
Under the terms of an agreement with two of the Company's stockholders, the
Company must obtain an affirmative vote by at least one of the directors, if
any, nominated by each of the two stockholders and Lewis Partners, prior to the
consummation of any of the following events: (i) the issuance by the Company or
any subsidiary of any shares of its capital stock or other equity securities or
options, rights, or warrants; (ii) a transfer, as defined, by the Company of any
of the shares of capital stock of Post currently owned by it; (iii) the approval
of any amendments to the Certificate of Incorporation of the Company or its
subsidiaries; (iv) the merger, consolidation, liquidation, or dissolution of the
Company or any of its subsidiaries or the sale or other disposition of all, or
substantially all, of the assets of the Company or its subsidiaries; (v) the
declaration or payment of any dividend on or distribution to holders of the
common equity stock of the Company or any subsidiary that is not wholly owned by
the Company; or (vi) the amendment, modification, supplementation, or
termination of various agreements currently in effect or hereinafter to be
executed by the stockholders.
F-38
<PAGE> 149
AMERISERV FOOD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the acquisition of Sonneveldt and the related financing
obtained, a warrant was issued to Signal Capital Corporation to purchase 25% of
the common stock of the Company's former subsidiary for an aggregate exercise
price of $0.25. The warrant was exercisable upon issuance. As a part of the
refinancing and restructuring completed January 11, 1994 (Note 9), the warrant
was purchased by the Company for $100.
7. CONCENTRATIONS OF CREDIT RISK
The Company and its subsidiaries perform periodic credit evaluations of its
customers' financial conditions and generally do not require collateral.
Franchiser-owned and franchisee-owned stores of three national limited-menu
concepts accounted for approximately 40%, 10%, and 10% in 1994 and 40%, 11%, and
10% in fiscal 1995 of the Company's consolidated revenues. One customer
represented approximately 15% and 14% of consolidated revenues for fiscal 1994
and 1995, respectively.
8. EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have two benefit plans, the AmeriServ
401(k) Savings Plan and The Sonneveldt Company 401(k) Plan. The AmeriServ 401(k)
Plan covers all hourly and salaried employees of AmeriServ and its subsidiaries,
except those covered in The Sonneveldt Plan. The Sonneveldt Company 401(k) Plan
covers all hourly warehouse and transportation employees of a former subsidiary,
The Sonneveldt Company. Under the plans, participants may elect to defer up to
15% of compensation, and the Company matches a portion of the participant's
salary deferral, up to plan-specified maximums. The Company's contributions to
the plans totaled $389 and $323 in fiscal 1994 and 1995, respectively.
9. REFINANCING
On January 11, 1994, the Company entered into a series of transactions that
resulted in capital contributions of $10,178, the refinancing of a majority of
the Company's debt, and the restructuring of the Company's corporate
organization.
The Company issued 45 shares of Series A Redeemable Preferred Stock for
$4,500 (Note 6). The consideration for these shares was a combination of cash
and the contribution of the Company's $2,500 promissory note payable to Lewis
Partners. Additionally, the stockholders of the Company, as a group, contributed
the $5,000 balance of the dividend promissory notes, together with accrued
interest of $678 thereon, to the Company in the form of additional paid-in
capital.
In fiscal 1994, the Company recognized a $313 extraordinary gain as a
result of the refinancing of its revolving credit notes payable and certain term
notes payable. The Company purchased the warrants in a subsidiary from one
lender for less than book value, generating a $275 gain, prepaid a note
obtaining a $263 discount in exchange for early extinguishment, and repaid
several issues of debt before the due date resulting in $225 in prepayment
penalties.
The corporate structure of the Company was also simplified with the merger
of all the Company's subsidiaries, except Post and Delta, into the Company. The
mergers were also consummated on January 11, 1994.
F-39
<PAGE> 150
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ProSource, Inc.:
We have audited the accompanying consolidated balance sheets of ProSource,
Inc. and subsidiaries as of December 28, 1996 and December 27, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 27, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ProSource,
Inc. and subsidiaries as of December 28, 1996 and December 27, 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 27, 1997, in conformity with generally accepted
accounting principles.
As discussed in Note 13 to the consolidated financial statements, the
Company changed its method of capitalization of business process reengineering
activities in the fourth quarter of 1997.
KPMG PEAT MARWICK LLP
Miami, Florida
February 20, 1998
F-40
<PAGE> 151
PROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1996 AND DECEMBER 27, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,763 $ 12,501
Accounts receivable, net of allowance for doubtful
accounts of $2,334 and $4,085 respectively............. 219,340 222,247
Inventories............................................... 144,040 160,621
Deferred income taxes, net................................ 10,914 7,190
Prepaid expenses and other current assets................. 7,373 8,434
-------- --------
Total current assets.............................. 384,430 410,993
Property and equipment, net................................. 49,637 59,961
Intangible assets, net...................................... 41,436 39,883
Deferred income taxes, net.................................. 16,100 28,802
Other assets................................................ 12,121 8,462
-------- --------
Total assets...................................... $503,724 $548,101
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $254,907 $277,953
Accrued liabilities....................................... 42,475 27,012
Current portion of long-term debt......................... 1,500 --
-------- --------
Total current liabilities......................... 298,882 304,965
Long-term debt, less current portion........................ 111,084 174,200
Other noncurrent liabilities................................ 15,243 4,521
-------- --------
Total liabilities................................. 425,209 483,686
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; Authorized 10,000,000
shares; none issued.................................... -- --
Class A common stock, $.01 par value; Authorized
50,000,000 shares; issued and outstanding 3,400,000
shares and 3,496,499 shares, respectively.............. 34 35
Class B common stock, $.01 par value; Authorized
10,000,000 shares; issued and outstanding 5,963,856
shares and 5,856,756 shares, respectively.............. 60 58
Additional paid-in capital................................ 105,256 104,934
Accumulated deficit....................................... (26,901) (40,580)
Accumulated foreign-currency translation adjustments...... 66 (32)
-------- --------
Total stockholders' equity........................ 78,515 64,415
-------- --------
Total liabilities and stockholders' equity........ $503,724 $548,101
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE> 152
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 30, 1995,
DECEMBER 28, 1996 AND DECEMBER 27, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.............................................. $3,461,837 $4,125,054 $3,901,165
Cost of sales.......................................... 3,193,270 3,806,811 3,591,368
---------- ---------- ----------
Gross profit...................................... 268,567 318,243 309,797
Operating expenses, including management fees to Onex
of $808, $729 and $0, respectively................... 255,216 301,295 302,080
Loss on impairment of long-lived assets................ -- 15,733 --
Restructuring and contract-termination charges......... 711 28,466 --
---------- ---------- ----------
Income (loss) from operations..................... 12,640 (27,251) 7,717
Interest expense, including interest to Onex of $1,738,
$1,888 and $0, respectively.......................... (14,678) (14,824) (11,745)
Interest income........................................ 1,339 1,694 2,552
---------- ---------- ----------
Loss before income taxes, extraordinary items and
cumulative effect of a change in accounting
principle....................................... (699) (40,381) (1,476)
Income tax benefit (provision)......................... (85) 15,410 485
---------- ---------- ----------
Loss before extraordinary items and cumulative
effect of a change in accounting principle...... (784) (24,971) (991)
Extraordinary (loss) gain on early retirement of debt,
net of income tax benefit (provision) of $502, $(397)
and $4,073, respectively............................. (772) 610 (6,262)
Cumulative effect of a change in accounting principle,
net of income tax benefit of $3,293.................. -- -- (6,426)
---------- ---------- ----------
Net loss.......................................... $ (1,556) $ (24,361) $ (13,679)
========== ========== ==========
Net loss per common share (basic and diluted):
Loss before extraordinary items and cumulative effect
of a change in accounting principle.................. $ (0.18) $ (4.30) $ (0.11)
Extraordinary items, net............................... (0.17) 0.10 (0.67)
Cumulative effect of a change in accounting principle,
net.................................................. -- -- (0.69)
---------- ---------- ----------
Net loss per common share......................... $ (0.35) $ (4.20) $ (1.47)
========== ========== ==========
Weighted average number of shares...................... 4,489,906 5,804,319 9,331,845
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE> 153
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 30, 1995,
DECEMBER 28, 1996 AND DECEMBER 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
FOREIGN-
COMMON STOCK ADDITIONAL CURRENCY
----------------- PAID-IN ACCUMULATED TRANSLATION
CLASS A CLASS B CAPITAL DEFICIT ADJUSTMENTS TOTAL
------- ------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 25, 1994.......... $-- $23 $ 23,504 $ (984) $ -- $ 22,543
Issuance of 2,858,500 Class B
shares......................... -- 29 28,556 -- -- 28,585
Acquisition and retirement of
23,000 Class B shares.......... -- -- (222) -- -- (222)
Net loss.......................... -- -- -- (1,556) -- (1,556)
Foreign-currency translation
adjustments.................... -- -- -- -- 71 71
--- --- -------- -------- ---- --------
Balance, December 30, 1995.......... -- 52 51,838 (2,540) 71 49,421
Issuance of 3,400,000 Class A
shares, net.................... 34 -- 43,193 -- -- 43,227
Amendment to 1995 Option Plan..... -- -- 1,224 -- -- 1,224
Issuance of 285,714 Class B shares
to Onex........................ -- 3 3,997 -- -- 4,000
Conversion of subordinated notes
payable to Onex into 459,242
Class B shares................. -- 5 4,594 -- -- 4,599
Issuance of 61,500 Class B
shares......................... -- -- 615 -- -- 615
Acquisition and retirement of
20,000 Class B shares.......... -- -- (205) -- -- (205)
Net loss.......................... -- -- -- (24,361) -- (24,361)
Foreign-currency translation
adjustments.................... -- -- -- -- (5) (5)
--- --- -------- -------- ---- --------
Balance, December 28, 1996.......... 34 60 105,256 (26,901) 66 78,515
Issuance of 33,799 Class A shares
under the Employee Stock
Purchase Plan.................. -- -- 204 -- -- 204
Acquisition and retirement of
44,400 Class B shares.......... -- (1) (554) -- -- (555)
Conversion of 62,700 Class B
shares into 62,700 Class A
shares......................... 1 (1) -- -- -- --
Compensation expense accrued under
the 1997 Directors Stock Option
Plan........................... -- -- 28 -- -- 28
Net loss.......................... -- -- -- (13,679) -- (13,679)
Foreign-currency translation
adjustments.................... -- -- -- -- (98) (98)
--- --- -------- -------- ---- --------
Balance, December 27, 1997.......... $35 $58 $104,934 $(40,580) $(32) $ 64,415
=== === ======== ======== ==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE> 154
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1995,
DECEMBER 28, 1996 AND DECEMBER 27, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (1,556) $(24,361) $ (13,679)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 12,693 10,937 11,231
Bad debt expense........................................ 1,845 1,682 2,275
Loss (gain) on early retirement of debt................. 1,274 (1,007) 10,335
Cumulative effect of a change in accounting principle... -- -- 9,719
Deferred income tax benefit............................. (1,749) (14,085) (8,978)
Loss on impairment of long-lived assets................. -- 15,733 --
Noncash contract-termination charges.................... -- 5,224 --
Gain on sales of property and equipment................. (184) (154) (655)
Changes in operating assets and liabilities, net of
effects of companies acquired..........................
(Increase) decrease in accounts receivable............ (13,441) 9,067 (5,182)
(Increase) decrease in inventories.................... 7,706 (3,608) (16,581)
Increase in prepaid expenses and other assets......... (1,208) (13,854) (3,949)
Increase in accounts payable.......................... 43,518 12,262 23,046
(Decrease) increase in accrued and other noncurrent
liabilities.......................................... 1,099 23,450 (25,952)
--------- -------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES........................................ 49,997 21,286 (18,370)
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (5,683) (19,987) (29,997)
Proceeds from sales of property and equipment............. 362 154 1,786
Payment for purchase of net assets acquired............... (170,279) -- --
--------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES.............. (175,600) (19,833) (28,211)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt to Onex...................... (2,085) (15,000) --
Repayments of long-term debt to others.................... (78,938) (30,269) (112,584)
Borrowings on long-term debt from Onex.................... 18,750 -- --
Borrowings on long-term debt from others, net............. 160,616 -- 174,200
Fees incurred in conjunction with long-term debt.......... -- -- (4,644)
Proceeds from issuance of common stock to Onex............ 26,500 7,000 --
Proceeds from issuance of common stock to others.......... 2,085 37,464 --
Payments to acquire and retire treasury stock............. (222) (205) (555)
--------- -------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES........................................ 126,706 (1,010) 56,417
--------- -------- ---------
Effect of exchange-rate changes on cash..................... 71 (5) (98)
--------- -------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......... 1,174 438 9,738
Cash and cash equivalents at beginning of year.............. 1,151 2,325 2,763
--------- -------- ---------
Cash and cash equivalents at end of year.................... $ 2,325 $ 2,763 $ 12,501
========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:............................
Interest to Onex........................................ $ 41 $ 2,927 $ --
========= ======== =========
Interest to others...................................... $ 12,291 $ 16,435 $ 10,938
========= ======== =========
Income taxes, net of refunds............................ $ 993 $ -- $ --
========= ======== =========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In October 1997, the Company issued 33,799 Class A common shares to employees
under the 1997 Employee Stock Purchase Plan at $6.035 per share in exchange for
accrued compensation totaling $204.
During 1997, the Company recognized $28 of compensation expense associated with
the 1997 Directors Stock Option Plan.
See accompanying notes to consolidated financial statements.
F-44
<PAGE> 155
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND DECEMBER 27, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) The Business
ProSource, Inc. (the "Company") provides foodservice distribution services
to chain restaurants in North America and provides purchasing and logistics
services to the foodservice market. The Company's 3,400 associates serve
approximately 12,700 restaurants, consisting primarily of Burger King, Red
Lobster, Long John Silver's, Olive Garden, TGIFriday's, Chick-fil-A, Chili's,
Sonic, TCBY and Wendy's restaurant concepts, from 34 distribution centers and
its Corporate Support Center in Coral Gables, Florida.
The Company operates through ProSource Services Corporation ("PSC"), a
wholly owned subsidiary, and PSC's four main wholly-owned operating
subsidiaries, ProSource Distribution Services Limited ("ProSource Canada"),
BroMar Services, Inc. ("BroMar"), ProSource Receivables Corporation ("PRC"), and
PSD Transportation Services, Inc. ("PSD"). PSC commenced operations in July
1992. PRC and PSD commenced operations during fiscal 1997. The consolidated
financial statements include the results of the operations of PSC, PRC and PSD
from their inception and the results of operations of ProSource Canada and
BroMar, which were formed or acquired by the Company in connection with the
acquisition of the National Accounts Division ("NAD") of The Martin-Brower
Company ("Martin-Brower"), since the date of acquisition. The Company is a
subsidiary of Onex Corporation (collectively with its affiliates, "Onex"), a
company traded on the Toronto and Montreal stock exchanges.
The Company operates on a 52- to 53-week accounting year, ending on the
last Saturday of each calendar year.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Operations of the companies and businesses acquired have
been included in the accompanying consolidated financial statements from their
respective dates of acquisition. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Cash and Cash Equivalents
Cash on hand and in banks and short-term securities with maturities of
three months or less when purchased are considered cash and cash equivalents.
(e) Inventories
Inventories, consisting primarily of food items, are stated at the lower of
cost or net realizable value. Cost is determined using the weighted-average-cost
method and the first-in, first-out method. Cost of inventory using the
weighted-average-cost method represents 32%, 32% and 34% of inventories in 1995,
1996, and 1997, respectively.
F-45
<PAGE> 156
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the related assets. Amortization of leasehold
improvements is computed using the straight-line method over the shorter of the
lease term or estimated useful lives of the related assets.
Costs of normal maintenance and repairs are charged to expense when
incurred. Replacements or betterments of properties are capitalized. When assets
are retired or otherwise disposed of, their cost and the applicable accumulated
depreciation and amortization are removed from the accounts, and the resulting
gain or loss is reflected in the consolidated statements of operations.
(g) Intangible Assets
Intangible assets are amortized using the straight-line method over the
following periods:
<TABLE>
<S> <C>
Goodwill........................................... 40 years
Noncompete agreements.............................. 5 years
Customer lists..................................... 12 years
</TABLE>
Goodwill represents the excess of cost over fair value of net assets
acquired. The Company periodically evaluates the recoverability of recorded
costs for goodwill based upon estimations of future undiscounted related
operating income from the acquired companies. Should the Company determine it
probable that future estimated undiscounted related operating income from any of
its acquired companies will be less than the carrying amount of the associated
goodwill, an impairment of goodwill would be recognized, and goodwill would be
reduced to the amount estimated to be recoverable. The Company believes that no
material impairment existed at December 28, 1996 and December 27, 1997.
(h) Deferred Debt-Issuance Costs
Included in other assets are deferred debt-issuance costs which are
amortized over the term of the related debt.
(i) Self-Insurance
The Company self-insures up to certain retention limits under its workers'
compensation (except for a period during 1996-1997), auto liability and medical
and dental insurance programs. Costs in excess of retention limits are insured
under various contracts with insurance carriers. Estimated costs for claims for
which the Company is responsible are determined based on historical claims
experience, adjusted for current trends. The liability related to workers'
compensation is discounted to net present value using a risk-free treasury rate
for maturities that match the expected settlement periods. At December 28, 1996
and December 27, 1997, the estimated accrued liabilities related to workers'
compensation were approximately $4.4 million and $3.3 million, respectively, net
of a discount of approximately $1.6 million and $1.0 million, respectively.
(j) Net Loss Per Common Share
In February 1997, Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" was issued. SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform with the requirements of
SFAS No. 128.
F-46
<PAGE> 157
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shares and options issued within one year prior to the filing of the
Registration Statement relating to the initial public offering (see note 10)
have been treated as outstanding for all periods presented, even where the
impact of the incremental shares is antidilutive.
(k) Income Taxes
The Company and its wholly-owned domestic subsidiaries file consolidated
federal and state tax returns in the United States. Separate foreign tax returns
are filed for the Company's Canadian subsidiary. The Company follows the asset
and liability method of accounting for income taxes prescribed by SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities. The effect on deferred taxes of a change in
tax rates is recognized in income in the year that includes the enactment date.
(l) Translation of Foreign Currency
The accounts of ProSource Canada are translated into U.S. dollars in
accordance with SFAS No. 52, "Foreign Currency Translation." Consequently, all
balance sheet accounts are translated at the current exchange rate. Income and
expense accounts are translated at the average exchange rates in effect during
the year. Adjustments resulting from the translation are included in accumulated
foreign-currency translation adjustments as a component of stockholders' equity.
(m) Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and display of comprehensive income and its components. In June
1997, the FASB also issued Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about a company's operating segments and related
disclosures about its products, services, geographic areas of operations and
major customers. Both statements will be adopted by the Company in 1998.
Management believes the adoption of these statements will not materially impact
the Company's results of operations, cash flows or financial position.
(n) Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate fair value because of their short-term maturities. The
carrying amounts reported for long-term debt approximate fair value because they
are variable-rate instruments that reprice monthly.
(o) Reclassifications
Certain amounts previously presented in the financial statements of prior
years have been reclassified to conform to the current year presentation.
2. BUSINESS COMBINATIONS
On March 31, 1995, the Company completed the acquisition of substantially
all of the assets and the assumption of certain liabilities of NAD from
Martin-Brower. The total cost of the acquisition of $170 million was funded
through a borrowing of $116 million under the Company's previous revolving
credit facility, a $9 million note payable to Martin-Brower (net of a discount
to reflect a constant interest rate), $18.5 million
F-47
<PAGE> 158
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in notes payable to Onex, and the issuance of 2,650,000 shares of the Company's
Class B common stock, valued at approximately $26.5 million. The acquisition has
been accounted for under the purchase method of accounting. The accompanying
consolidated financial statements include the assets acquired of approximately
$232 million, consisting primarily of accounts receivable and inventories, and
liabilities assumed of approximately $87 million, consisting primarily of trade
accounts payable, based on their estimated fair values at the acquisition date.
As a result of this transaction, the Company recorded goodwill of approximately
$25 million. In addition, the Company incurred an extraordinary charge relating
to the write-off of approximately $0.8 million of unamortized deferred-debt
issuance costs on debt repaid at the acquisition date.
On March 30, 1996, the Company revised its estimates of certain costs
related to the acquisition by $12 million. The effect of the revision increased
acquisition-related liabilities by $12 million, deferred tax assets by
approximately $4.4 million and goodwill by approximately $7.6 million.
3. RESTRUCTURING, TERMINATION CHARGES AND IMPAIRMENT OF LONG-LIVED ASSETS
In conjunction with the NAD acquisition, the Company incurred restructuring
costs of approximately $0.7 million in 1995 primarily relating to costs incurred
to consolidate and integrate certain functions and operations. In 1996, as a
result of a study to analyze, among other things, ways to integrate the NAD
operations, improve customer service, reduce operating costs and increase
existing warehouse capacity, the Company adopted a plan, which was approved by
its Board of Directors, to consolidate and integrate its corporate and network
operations, including the closing of 19 distribution facilities under lease
agreements and 11 owned distribution facilities. As a result, in the first
quarter of 1996, the Company accrued restructuring charges of $10.9 million,
primarily related to the termination of the existing facility leases and
employee related costs. The Company began the integration of some of these
facilities, including communications to its employees and its customers in 1996.
During 1997, the Company undertook a thorough evaluation of each specific
facility's return on investment and alternative uses. As a result, the Company
now intends to close 10 distribution facilities currently leased and 9
distribution facilities currently owned. The Company expects to complete the
plan in stages through the year 2002. During 1996 and 1997, the Company paid in
the aggregate $2.8 million and $1.7 million, respectively, in costs primarily
related to facility leases and relocation costs. In addition, during 1997 the
Company reclassified $3.4 million to acquisition related liabilities. As of
December 27, 1997, the Company had approximately $3.0 million of accrued unpaid
restructuring charges. Management believes that the remaining accrued
restructuring charges are adequate to complete its plans.
The significant change brought about by the plan to integrate and
consolidate the existing distribution network impaired the value of long-lived
assets to be held and used until the plan is completed. As a result, in
conjunction with the recording of the restructuring reserves in the first
quarter of 1996, the Company recognized a loss on impairment in value of
long-lived assets. The loss consisted of $7.3 million of land and owned
buildings, $4.3 million of furniture and equipment and leasehold improvements
management plans to hold and use through the completion of the plan, and $4.1
million of capitalized software costs which do not meet the long-term
information technology strategy of the Company. The Company measured the amount
of the loss by comparing fair value of the land and the owned buildings
(determined by independent appraisals and updated with current comparisons to
similar assets) to capitalized cost. The carrying value of furniture and
equipment and capitalized software costs was written down to net realizable
value since it is being replaced.
The Company discontinued its distribution services to Arby's restaurants
effective April 1, 1997. In connection therewith, as of December 28, 1996, the
Company accrued approximately $10.6 million of costs associated with the
termination of this agreement. During 1997, the Company paid and charged in the
aggregate $9.1 million in costs primarily related to lease costs in connection
with idle equipment and warehouse space and costs associated with rerouting the
Company's transportation fleet required as a result of the loss of the Arby's
business. In addition, the Company reclassified approximately $1.2 million to
the
F-48
<PAGE> 159
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allowance for doubtful accounts receivable to reserve against outstanding Arby's
accounts receivable. As of December 27, 1997, the Company had approximately $0.3
million of accrued unpaid termination charges which management believes will be
paid during 1998.
4. PROPERTY AND EQUIPMENT
Property and equipment and related depreciable lives were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, DEPRECIABLE
1996 1997 LIVES
------------ ------------ ------------------
<S> <C> <C> <C>
Land.................................... $ 3,636 $ 3,662 --
Buildings and improvements.............. 16,413 17,092 15 to 40 years
Warehouse and transportation
equipment............................. 24,465 25,592 3 to 10 years
Computer software....................... 4,262 7,391 1 1/2 to 5 years
Leasehold improvements.................. 4,384 8,966 3 to 13 years
Office equipment........................ 7,261 8,209 3 to 7 years
Projects in progress.................... 11,760 18,456 --
------- -------
72,181 89,368
Less accumulated depreciation and
amortization.......................... 22,544 29,407
------- -------
Property and equipment, net............. $49,637 $59,961
======= =======
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Goodwill................................................... $41,298 $41,298
Identifiable intangibles................................... 3,870 3,870
------- -------
45,168 45,168
Less accumulated amortization.............................. 3,732 5,285
------- -------
Intangible assets, net..................................... $41,436 $39,883
======= =======
</TABLE>
F-49
<PAGE> 160
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consisted of the following loan agreements with banks (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
$150 million accounts receivable securitization facility,
due March 14, 2002....................................... $ -- $125,000
$75 million revolving credit facility, due March 14,
2002..................................................... -- 49,200
$210 million revolving credit facility, retired and repaid
March 14, 1997........................................... 84,834 --
$15 million term-loan facility, retired and repaid March
14, 1997................................................. 12,750 --
$15 million term-loan facility, retired and repaid March
14, 1997................................................. 15,000 --
-------- --------
Total long-term debt.................................. 112,584 174,200
Less current portion....................................... 1,500 --
-------- --------
Long-term debt, less current portion.................. $111,084 $174,200
======== ========
</TABLE>
(a) Existing Credit Facilities
In March, 1997, the Company entered into two five-year loan agreements
aggregating $225 million (the "Existing Credit Facilities") with a group of
financial institutions to replace its previous credit facility. In connection
with this early retirement of long-term debt, the Company recorded a pre-tax
extraordinary charge of $10.3 million ($6.3 million net of taxes) in the first
quarter of fiscal 1997. This charge reflected the write-off of deferred
financing costs of $6.3 million, prepayment penalties of $2.7 million and $1.3
million in costs associated with the termination of interest-rate protection
agreements.
The Existing Credit Facilities bear interest based on either the prime rate
or LIBOR plus an additional spread based on certain financial ratios and mature
on March 14, 2002. The effective rate at December 27, 1997 was 7.34%. The
Company is required to comply with various covenants in connection with the
Existing Credit Facilities and borrowings are subject to calculations based on
accounts receivable and inventory. The revolving credit facility is secured by
liens on substantially all of the Company's assets and contains various
restrictions on, among other things, the Company's ability to pay dividends and
dispose of assets. Additionally, in the event of a change in control, the
outstanding principal amount of these facilities shall become due and payable.
PRC is the legal borrower for the accounts receivable securitization facility.
Pursuant to the terms of the accounts receivable securitization facility PSC
sells, on an ongoing basis and without recourse, an undivided interest in a
designated pool of trade accounts receivable to PRC. In order to maintain the
designated balance in the pool of accounts receivable sold, PSC is obligated to
sell undivided interests in new receivables as existing receivables are
collected. PSC has retained substantially the same credit risk as if the
receivables had not been sold. PSC, as agent for PRC, retains collection and
administrative responsibilities on the receivables sold to PRC. The creditors
for this facility have security interests in PRC's assets (consisting primarily
of accounts receivable purchased from PSC) and are entitled to be satisfied by
such assets prior to equity holders. The Company pays a quarterly variable
commitment fee, as defined in the agreements, based on the unused portion of the
facilities which fee averaged 0.33% of such unused portion during 1997. At
December 27, 1997, the Company had approximately $35 million available under the
Existing Credit Facilities.
(b) Previous Credit Facility
On March 31, 1995, in conjunction with the acquisition of NAD, the Company
entered into a $240 million Loan and Security Agreement (the "Previous Credit
Facility") with a group of banks that was retired and repaid before its maturity
on March 14, 1997. The Previous Credit Facility provided for a revolving-credit
F-50
<PAGE> 161
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
facility of up to $210 million and term loans aggregating $30 million. The
interest rate on the Previous Credit Facility was reset every month to reflect
current market rates. The effective rate during fiscal 1995 and 1996 was 8.7
percent. This rate reflected the effect of interest-rate protection agreements,
which were terminated on March 14, 1997 in connection with the retirement of
this facility.
7. LEASES
The Company leases certain of its facilities, vehicles and other equipment
under long-term operating leases. Certain transportation equipment leases call
for contingent rental payments based upon total miles. Future minimum lease
payments under non-cancelable operating leases as of December 27, 1997, by
fiscal year are as follows (in thousands):
<TABLE>
<S> <C>
1998.............................................. $ 28,600
1999.............................................. 25,183
2000.............................................. 22,222
2001.............................................. 18,342
2002.............................................. 13,581
Thereafter........................................ 36,315
--------
Total $144,243
========
</TABLE>
Rent expense, including contingent rental expense, was approximately $30.6
million, $39.3 million and $36.8 million during fiscal years 1995, 1996 and
1997, respectively.
8. INCOME TAXES
The income tax benefit (provision) before extraordinary items and
cumulative effect of a change in accounting principle for fiscal years 1995,
1996 and 1997, respectively, consisted of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- ------
<S> <C> <C> <C>
Current taxes:
Federal.............................................. $(1,236) $ 937 $ (582)
State................................................ (408) (9) (545)
------- ------- ------
Total current taxes............................... (1,644) 928 (1,127)
------- ------- ------
Deferred taxes, excluding other components:
Federal.............................................. 1,126 11,449 1,170
State................................................ 264 3,217 404
------- ------- ------
Total deferred taxes, excluding other
components...................................... 1,390 14,666 1,574
------- ------- ------
Other:
Alternative minimum tax-credit (utilization)
carryforwards..................................... 666 (184) 38
Utilization of operating-loss carryforwards.......... (497) -- --
------- ------- ------
Total other....................................... 169 (184) 38
------- ------- ------
Income tax benefit (provision)......................... $ (85) $15,410 $ 485
======= ======= ======
</TABLE>
F-51
<PAGE> 162
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the differences between the Company's
effective income tax rate and the statutory Federal income tax rate for fiscal
years 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
----- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State income taxes (net of federal taxes)................. (16.9) 5.2 5.0
Goodwill amortization..................................... (10.9) (0.3) (0.7)
Other..................................................... (18.4) (0.7) (5.4)
----- ---- ----
(12.2)% 38.2% 32.9%
===== ==== ====
</TABLE>
The tax effects of each type of temporary difference that gave rise to the
Company's deferred tax assets and deferred tax liabilities at December 28, 1996
and December 27, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Acquisition-related expenses.............................. $ 3,567 $ 1,262
Accounts receivable, principally due to allowance for
doubtful accounts...................................... 1,222 2,011
Property, plant and equipment, principally due to
differences in depreciation............................ 1,935 1,063
Self-insurance reserves................................... 3,493 3,355
Impairment of long-lived assets........................... 4,036 3,231
Restructuring and contract-termination charges............ 8,121 3,224
Benefit of federal and state net operating-loss
carryforwards.......................................... 5,797 23,933
Other..................................................... 2,025 2,682
------- -------
Total deferred tax assets.............................. 30,196 40,761
Less valuation allowance.................................. -- --
------- -------
Total deferred tax assets, net......................... $30,196 $40,761
------- -------
Deferred tax liabilities:
Computer software......................................... $(1,811) $(3,225)
Acquisition-related liabilities........................... (803) (1,138)
Other..................................................... (568) (406)
------- -------
Total deferred tax liabilities......................... (3,182) (4,769)
------- -------
Net deferred tax assets................................ $27,014 $35,992
======= =======
</TABLE>
In order to fully realize the net deferred tax assets at December 27, 1997,
the Company will need to generate future taxable income of approximately $90
million. Management believes that it is more likely than not that the Company's
deferred tax asset will be realized as a result of future taxable income,
expected to be generated based on the Company's reasonable projections of future
earnings. The Company anticipates that increases in taxable income will result
primarily from (i) future projected revenue and gross margin growth through the
addition of new restaurant chains and the expansion of services provided to new
and existing restaurant chains, (ii) a reduction in interest expense due to a
reduction in its indebtedness, (iii) cost savings through its corporate and
network consolidation plan and (iv) other cost-reduction initiatives. In
addition, management believes reasonable tax planning strategies and other
potential transactions will be available that could be used to realize the
deferred tax asset before the expiry of any material net operating losses, which
will not begin to occur until after 2010.
F-52
<PAGE> 163
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 28, 1996 and December 27, 1997, other current assets included
income taxes receivable of approximately $1.5 million and $0.4 million,
respectively, which consisted primarily of overpayments of tax liabilities and
pending carryback refund claims. United States federal income tax returns for
fiscal years 1992 and 1993 are currently under examination by the Internal
Revenue Service. A preliminary assessment is pending which is not material to
the consolidated financial position or results of operations as of December 27,
1997.
9. EMPLOYEE BENEFIT PLANS
(a) Defined-Contribution Plans
On January 1, 1997, the Company's defined contribution plan, which covers
substantially all employees, was renamed the ProSource Retirement Advantage
Plan. Eligible employees can contribute up to 15% of base compensation, with the
following benefits: (i) Company contributions of 2 percent, (ii) additional
Company matching of 50 percent of the first 6 percent contributed by the
employee, and (iii) vesting of Company contributions ratably over four years of
service.
The Company also had a Money Purchase Plan which covered those former NAD
salaried employees not covered by a defined-benefit plan. Under this plan, the
Company contributed 10 percent of eligible salary. The Money Purchase Plan was
terminated effective December 1996.
The amount of contribution expense incurred by the Company for these plans
was approximately $2.2 million, $2.7 million and $1.5 million for fiscal years
1995, 1996 and 1997, respectively.
(b) Defined-Benefit Pension Plans
In conjunction with the changes to the ProSource Retirement Advantage Plan
in 1997, the Company terminated all three noncontributory defined-benefit
pension plans covering substantially all employees except those covered by
multiemployer pension plans under collective-bargaining agreements. The Company
settled all pension obligations related to these terminated plans in 1997
through (i) the purchase of annuities, (ii) lump-sum payments, or (iii) the
transfer of plan benefits into the ProSource Retirement Advantage Plan, at the
participant's discretion. The accrued liability as of December 28, 1996 was
adequate to cover the unfunded termination liability of these three pension
plans.
Pension costs of approximately $0.9 million and $1.1 million reflected in
the consolidated statements of operations for fiscal years 1995 and 1996,
respectively, were determined based on actuarial studies. The Company's pension
expense for contributions to the various multiemployer pension plans under
collective-bargaining agreements was approximately $0.9 million, $1.2 million,
and $1.1 million for fiscal years 1995, 1996 and 1997, respectively.
10. STOCKHOLDERS' EQUITY
Under the ProSource, Inc. Employee Stock Purchase Plan (the "Stock Plan"),
officers and key employees of the Company ("Management Employees") purchased a
total of 408,100 shares of Class B common stock at $10.00 per share in 1992,
132,500 shares of Class B common stock at $11.00 per share in 1993 and 1994, and
270,000 shares of Class B common stock at $10.00 per share in 1995 and 1996. In
connection with the purchases of Class B common stock, each Management Employee
entered into a Management Shareholders Agreement with the Company and Onex.
The ProSource, Inc. Amended Management Option Plan (1995) (the "1995 Option
Plan") provides certain Management Employees with options to purchase one-half
the number of shares of Class B common stock purchased under the Stock Plan at
the same price per share paid by such stockholder (either $10.00 or $11.00).
Subject to the 1995 Option Plan, options granted under the 1995 Option Plan are
exercisable until
F-53
<PAGE> 164
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2000. No additional options will be granted under the 1995 Option
Plan. The 1995 Option Plan was amended in November 1996 to provide that all
unvested options vest at a rate of 10% per year through December 31, 1999, when
all remaining options vest. As a result, the Company recorded a pretax charge in
1996 of $1.2 million reflecting the difference between the market price of the
Company's Class A common stock on the date of amendment and the exercise price
of such options.
Under the 1996 Stock Option Plan (the "1996 Option Plan"), the Company may
grant options to its employees for up to 550,000 shares of Class B common stock.
In 1996 and 1997, the Company granted options to purchase 358,000 and 16,000
shares, respectively, of Class B common stock at $14.00 per share. Options under
the 1996 Option Plan vest ratably over four years from the date of grant. These
options cannot be exercised, however, until the earlier of (i) the date on which
the market value of the Company's common stock is 25% greater than the exercise
price and (ii) the eighth anniversary of the date of grant. Subject to the
provisions of the 1996 Option Plan, vested options may be exercised for a period
of up to 10 years from the date of grant.
Under the ProSource, Inc. 1997 Directors Stock Option Plan (the "1997
Directors Plan"), which was approved by the shareholders in April 1997, the
Company may grant options to its directors, who so elect to receive such options
in lieu of fees, to purchase shares of Class A common stock at $4.00 per share
below the stated fair market value on the date of grant. Options to purchase up
to 100,000 shares of Class A common stock may be granted under this plan. In
April 1997, the Company granted options to purchase 10,500 shares of Class A
common stock at $5.25 per share. Options under the 1997 Directors Plan vest and
become exercisable one year from the date of grant, provided that the holder
thereof is still a director of the Company at such time. Subject to the
provisions of the 1997 Directors Plan, options may be exercised for a period of
up to 10 years after the vesting date. During the year ended December 27, 1997,
the Company recognized $28,000 of compensation expense associated with this
plan.
A summary of the status of the Company's three option plans for the years
ended December 30, 1995, December 28, 1996, and December 27, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
1995 EXERCISE 1996 EXERCISE 1997 EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options
outstanding -- beginning....... 237,450 $10.22 327,700 $10.16 706,450 $12.10
Options granted.................. 101,750 10.00 388,750 13.69 26,500 10.53
Options exercised................ -- -- (125) 10.00 -- --
Options canceled................. (11,500) 10.00 (9,875) 10.00 (93,300) 11.91
------- ------ ------- ------ ------- ------
Options outstanding -- ending.... 327,700 $10.16 706,450 $12.10 639,650 $12.06
======= ====== ======= ====== ======= ======
Options exercisable --year-end... 41,500 $10.12 78,401 $10.13 176,449 $11.86
======= ====== ======= ====== ======= ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 27, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ------------------------------
NUMBER WEIGHTED AVG. NUMBER
OUTSTANDING REMAINING WEIGHTED AVG. EXERCISABLE WEIGHTED AVG.
EXERCISE PRICES AT 12/27/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/27/97 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 5.25.................... 10,500 9 years $ 5.25 -- $ 5.25
10.00.................... 262,100 3 years 10.00 87,034 10.00
11.00.................... 33,050 3 years 11.00 9,915 11.00
14.00.................... 334,000 9 years 14.00 79,500 14.00
------- ------- ------ ------- ------
Totals............... 639,650 6 years $12.06 176,449 $11.86
======= ======= ====== ======= ======
</TABLE>
F-54
<PAGE> 165
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal year 1996, the Company adopted SFAS No. 123. Under the
provisions of the new standard, the Company elected to continue using the
intrinsic-value method of accounting for stock-based compensation plans granted
to employees under Accounting Principles Board Opinion No. 25 and provide
pro-forma disclosure for the fair-value based method of accounting for
compensation costs related to stock-option plans and other forms of stock-based
compensation under SFAS No. 123.
The Company estimated the weighted-average fair value of each option
granted during 1995, 1996 and 1997 at $8.27, $7.34 and $5.41, respectively. The
fair value of these options was computed at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995, 1996 and 1997, respectively: risk-free interest rates of
6.3%, 6.2% and 6.3%; dividend yields of 0.0% for all years presented, volatility
factors of the expected market price of the Company's common stock of 33.0% for
all years presented and a weighted-average expected life of the options of 7, 7
and 5 years, respectively.
The Black-Scholes option valuation model was developed for use in computing
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the computed fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except per share data).
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Pro forma net loss.................................. $(1,587) $(23,817) $(13,943)
Pro forma net loss per share -- basic and diluted... $ (0.35) $ (4.10) $ (1.49)
</TABLE>
In conjunction with the acquisition of NAD, the Company issued warrants to
Martin-Brower. At December 28, 1996 and December 27, 1997, the warrants were
exercisable for 283,425 shares of Class B common stock at $12.35 per share
during the period from April 1, 1997 through March 31, 2000, and upon
consummation of certain transactions.
On November 15, 1996, the Company completed the issuance of 3,400,000
shares of Class A common stock (at a price of $14.00 per share) through an
initial public offering, resulting in net proceeds to the Company of
approximately $43.2 million, after deducting underwriting discounts and
commissions, and other offering costs of approximately $4.4 million. The net
proceeds of the offering were used: (i) to prepay $15 million in outstanding
principal and $1.1 million in accrued interest under a subordinated note payable
to Onex; (ii) to prepay, at a discount, $10 million in outstanding principal and
$0.1 million in accrued interest under a subordinated note payable to
Martin-Brower for a total payment of $9.2 million and (iii) to repay $16.6
million of outstanding indebtedness under the Company's revolving-credit
facility, after deducting a $1.3 million payment concurrent with the offering
for the termination of a consulting agreement between the Company and certain
former owners of an acquired company. Also in connection with the initial public
offering, the Company incurred a noncash charge of $4 million resulting from the
issuance to Onex of 285,714 shares of Class B common stock valued at the initial
public-offering price in exchange for the agreement of Onex to relinquish its
rights to receive an annual fee, previously paid in cash, for management
services rendered to the Company.
Under the ProSource, Inc. 1997 Employee Stock Purchase Plan, which was
approved by the shareholders in April 1997, employees of the Company purchased a
total of 33,799 shares of Class A common stock at
F-55
<PAGE> 166
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$6.035 per share in 1997. In January 1998, an additional 30,336 shares of Class
A common stock were purchased by employees at $6.035 per share under this plan.
11. CONTINGENCIES AND GUARANTEES
The Company has guaranteed the principal due on certain loans obtained by
its officers and employees in connection with the purchase of common stock under
the Stock Plan. At December 27, 1997, such guarantees amounted to approximately
$0.8 million and were covered by a letter of credit. At December 27, 1997, the
Company was also obligated for $15.0 million in other letters of credit issued
on behalf of the Company primarily as a guarantee of payment for obligations
arising from workers' compensation claims. At December 27, 1997, the Company had
$9.2 million available in unused letters of credit under its Existing Credit
Facilities.
The Company and its subsidiaries are parties to various legal actions
arising in the ordinary course of business. Management believes that the outcome
of such cases will not have a material adverse effect on the consolidated
results of operations or the financial position of the Company.
12. CONCENTRATIONS OF CREDIT RISK
Burger King Corporation ("BKC") owned and franchisee-owned Burger King
restaurants collectively accounted for 45%, 41% and 46% of the Company's sales
in fiscal years 1995, 1996 and 1997, respectively. Sales to BKC-owned
restaurants represented approximately 5% of sales for each of the aforementioned
years. Amounts due from BKC-owned restaurants at December 28, 1996 and December
27, 1997 were $5.5 million and $5.8 million, respectively.
In addition, sales to Darden Restaurants, Inc. (owner of Red Lobster and
Olive Garden restaurants) accounted for 18%, 20%, and 21% of the Company's sales
in fiscal years 1995, 1996 and 1997, respectively. Amounts due from Darden
Restaurants, Inc. at December 28, 1996 and December 27, 1997, were approximately
$41.1 million and $41.4 million, respectively.
Sales to company-owned and franchisee-owned Arby's restaurants accounted
for 10% of Company sales in fiscal years 1995 and 1996. No other customer or
restaurant concept accounted for more than 10% of the Company's sales in fiscal
years 1995, 1996 or 1997. The Company periodically performs credit evaluations
on its customers' financial condition and generally does not require collateral.
13. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
During the fourth quarter of 1997, the Financial Accounting Standards
Board's Emerging Issues Task Force reached a consensus on Issue No. 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project that Combines Business Process Reengineering and Information
Technology Transformation." The consensus requires that the cost of business
process reengineering activities, whether done internally or by third parties,
is to be expensed as incurred. As a result, any remaining unamortized portion of
previously capitalized business process reengineering costs is required to be
written off. The cumulative impact of initially conforming to this new standard
in the fourth quarter of 1997 was reported as a change in accounting principle
in the accompanying consolidated statements of operations, with a cumulative
charge, net of tax, of $6.4 million, or $0.69 per share.
14. NET LOSS PER SHARE
For all years presented in the accompanying consolidated statements of
operations, all stock options and other potential common shares were excluded
from the calculation of diluted loss per share, since they would produce
anti-dilutive results. As a result, there are no reconciling items to the
numerator and denominator of the basic and diluted loss per share computations.
F-56
<PAGE> 167
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following were outstanding during fiscal 1997, but were excluded from
the computation of diluted net loss per common share for fiscal 1997.
<TABLE>
<CAPTION>
RELATED NUMBER OF CONVERSION
COMMON STOCK SHARES PRICE PER SHARE EXPIRATION
------------------------ ---------------- -----------------------------
<S> <C> <C> <C>
Options -- 1995 Option Plan..... 288,650 shares -- Class $10.00 or $11.00 December 2000
B
Options -- 1996 Option Plan..... 340,500 shares -- Class $14.00 November 2006 to January 2007
B
Options -- 1997 Directors
Plan.......................... 10,500 shares -- Class A $5.25 April 2007
Stock Warrants.................. 283,425 shares -- Class $12.35 March 2000
B
$0.5 million convertible
subordinated note............. 25,000 shares -- Class A $20.00 November 1999
</TABLE>
15. SUBSEQUENT EVENT
On January 29, 1998, the Company signed a definitive merger agreement with
AmeriServe Food Distribution, Inc. ("AmeriServe"). Under the terms of the
agreement, AmeriServe has agreed to pay $15.00 in cash for each outstanding
share of the Company's common stock. In addition, under the agreement, all
outstanding options will be accelerated and option holders will receive $15.00
less the applicable exercise for each share issuable upon exercise of the
options. AmeriServe has indicated that it intends to refinance all of the
Company's outstanding debt.
The merger is subject to regulatory approvals and other customary
conditions to closing. Onex Corporation and certain of its affiliates, which own
approximately 61% of the Company's outstanding stock, representing approximately
85% of the voting power, have committed to vote in favor of the merger, which
will assure the necessary shareholder approval. The merger is expected to close
in the second quarter of fiscal 1998.
F-57
<PAGE> 168
=========================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 4
The Company.............................. 4
Risk Factors............................. 8
Use of Proceeds.......................... 15
Capitalization........................... 16
Selected AmeriServe Historical Financial
Data................................... 17
Selected PFS Historical Financial Data...
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 18
The Business............................. 21
Management............................... 33
Security Ownership of Certain Beneficial
Holders and Management................. 37
Certain Relationships and Related
Transactions........................... 39
Description of Indebtedness.............. 41
Description of Notes..................... 44
Description of Certain Federal Income Tax
Consequences........................... 98
Plan of Distribution..................... 102
Legal Matters............................ 103
Experts.................................. 103
Index of Certain Defined Terms........... 104
Index to Unaudited Pro Forma Consolidated
Financial Statements................... P-1
Index to Historical Financial
Statements............................. F-1
</TABLE>
---------------------------------------------------------
- ---------------------------------------------------------
=========================================================
[AMERISERVE LOGO]
AMERISERVE FOOD
DISTRIBUTION, INC.
8 7/8% NEW SENIOR NOTES
DUE 2006
10 1/8% NEW SENIOR
SUBORDINATED NOTES
DUE 2007
------------------------------
PROSPECTUS
------------------------------
APRIL 14, 1998
---------------------------------------------------------
- ---------------------------------------------------------
