<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1996
REGISTRATION NO. 333-11499
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
PROSOURCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5141 65-0335019
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
550 BILTMORE WAY, 10TH FLOOR
CORAL GABLES, FLORIDA 33134
(305) 529-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DAVID R. PARKER
CHAIRMAN OF THE BOARD
PROSOURCE, INC.
550 BILTMORE WAY, 10TH FLOOR
CORAL GABLES, FLORIDA 33134
(305) 529-2500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
JOEL I. GREENBERG, ESQ. WINTHROP B. CONRAD, JR., ESQ.
KAYE, SCHOLER, FIERMAN, HAYS & HANDLER, LLP DAVIS POLK & WARDWELL
425 PARK AVENUE 450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10017
(212) 836-8000 (212) 450-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
PROSPECTUS (Subject to Completion)
Issued October 29, 1996
3,400,000 Shares
LOGO
CLASS A COMMON STOCK
------------------------
ALL OF THE SHARES OF CLASS A COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY
PROSOURCE, INC. (THE "COMPANY"). PRIOR TO THE OFFERING, THERE HAS BEEN NO
PUBLIC MARKET FOR THE CLASS A COMMON STOCK OF THE COMPANY. IT IS
CURRENTLY ESTIMATED THAT THE INITIAL OFFERING PRICE PER SHARE WILL BE
BETWEEN $14 AND $16. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE
FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC
OFFERING PRICE.
------------------------
APPLICATION HAS BEEN MADE TO HAVE THE CLASS A COMMON STOCK APPROVED FOR
QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "PSDS."
------------------------
THE COMPANY HAS TWO CLASSES OF COMMON STOCK, THE CLASS A COMMON STOCK BEING
OFFERED HEREBY AND CLASS B COMMON STOCK. THE CLASS B COMMON STOCK IS
IDENTICAL TO THE CLASS A COMMON STOCK, EXCEPT WITH RESPECT TO VOTING POWER
AND CONVERSION RIGHTS. EACH SHARE OF CLASS A COMMON STOCK IS ENTITLED TO
ONE VOTE AND EACH SHARE OF CLASS B COMMON STOCK IS ENTITLED TO TEN
VOTES. EACH SHARE OF CLASS B COMMON STOCK IS CONVERTIBLE INTO CLASS
A COMMON STOCK ON A ONE-TO-ONE BASIS AT ANY TIME AT THE OPTION OF
THE HOLDER THEREOF AND IN CERTAIN OTHER CIRCUMSTANCES. SEE
"DESCRIPTION OF CAPITAL STOCK."
------------------------
THE OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 10 HEREOF.
------------------------
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.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Per Share............................. $ $ $
Total (3)............................. $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at
$1,000,000.
(3) The Company has granted to the Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
510,000 additional Shares at the price to public less underwriting
discounts and commissions for the purpose of covering over-allotments,
if any. If the Underwriters exercise such option in full, the total
price to public, underwriting discounts and commissions and proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about , 1996 at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in immediately available funds.
------------------------
MORGAN STANLEY & CO.
Incorporated
MERRILL LYNCH & CO.
SMITH BARNEY INC.
, 1996
<PAGE> 3
PROSOURCE IS THE NATION'S LEADING INDEPENDENT FOODSERVICE DISTRIBUTOR
SPECIALIZING IN DISTRIBUTION TO CHAIN RESTAURANTS.
ARTWORK DESCRIPTIONS
INSIDE FRONT COVER ARTWORK:
Picture of a Company truck on the top of the page. Map of the United States
showing the locations of the Company's distribution centers on the bottom of the
page.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE> 4
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT 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 BY ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY
SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
Until , 1996 (25 days after the commencement of the offering),
all dealers effecting transactions in the securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a Prospectus when acting as Underwriters and with respect to their unsold
allotments of subscriptions.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................................... 2
Risk Factors.......................................................................... 10
Use of Proceeds....................................................................... 15
Dividend Policy....................................................................... 15
Dilution.............................................................................. 16
Capitalization........................................................................ 17
Selected Consolidated Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 20
Business.............................................................................. 29
Management............................................................................ 41
Executive Compensation and Other Matters.............................................. 44
Certain Transactions.................................................................. 50
Principal Stockholders................................................................ 53
Description of Capital Stock.......................................................... 55
Shares Available for Future Sale...................................................... 57
Underwriters.......................................................................... 58
Legal Matters......................................................................... 59
Experts............................................................................... 59
Additional Information................................................................ 59
Financial Statements.................................................................. F-1
</TABLE>
------------------------
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements examined by an independent public
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
------------------------
1
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
(including the notes thereto) included elsewhere in this Prospectus. Unless the
context otherwise requires, as used in this Prospectus, (i) the terms "Company"
and "ProSource" mean ProSource, Inc., together with its direct and indirect
wholly-owned subsidiaries, (ii) the term "Common Stock" means, collectively, the
Class A Common Stock and Class B Common Stock to be outstanding immediately
following completion of the offering and (iii) the term "pro forma" or "on a pro
forma basis" with respect to financial information for the Company's fiscal year
ended December 30, 1995 means such information, as adjusted to give effect to
the acquisition by the Company of the National Accounts Division of The
Martin-Brower Company and to the consummation of the offering and the
application of the estimated net proceeds thereof (assuming an initial public
offering price of $15 per share, the midpoint of the range set forth on the
cover page of this Prospectus) as if such events had occurred on January 1,
1995. Except as otherwise noted, all information in this Prospectus (i) gives
effect to the conversion of all of the Company's outstanding shares of Common
Stock into Class B Common Stock and a 100-for-one stock split that will occur
prior to the commencement of the offering (the "Recapitalization") and (ii)
assumes that the Underwriters' over-allotment option is not exercised. The
Company's fiscal year consists of a 52- or 53-week period ending on the last
Saturday of each calendar year. Fiscal 1994 consisted of 53 weeks.
THE COMPANY
ProSource is the nation's leading independent foodservice distributor
specializing in distribution to chain restaurants and is one of the largest
foodservice distributors in the United States. The Company distributes 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 and cleaning and other supplies. The Company specializes
in providing food and food-related products to two segments of the restaurant
industry -- limited-menu quick service restaurants, including Burger King,
Arby's, Long John Silver's, Sonic, Chick-fil-A, TCBY and Wendy's, and casual
dining restaurants, including Red Lobster, Olive Garden, TGIFriday's and
Chili's. ProSource is an indirect subsidiary of Onex Corporation. See
"Business -- Controlling Stockholder" and "Risk Factors -- Control of the
Company; Benefit of the Offering to Controlling Stockholder."
The Company was formed in 1992 to acquire Burger King Distribution Services
("BKDS"), the "in-house" distributor for Burger King Corporation ("BKC"), which
serviced approximately 4,150 Burger King restaurants. In the four years since
the acquisition, ProSource has, through a combination of acquisitions and
internal growth, become a leading distributor to chain restaurants, servicing
approximately 14,450 restaurants within 18 different restaurant chains. Through
a series of acquisitions during 1993 and 1994, the Company added approximately
1,100 of the restaurants included in its current customer base. In March 1995,
the Company entered the casual dining segment of the restaurant industry and
further expanded its quick service business with the acquisition of the National
Accounts Division ("NAD") of The Martin-Brower Company ("Martin-Brower"), which
added a total of approximately 8,000 restaurants within 12 chains included in
the Company's current customer base. The Company has also been successful in
expanding through internally generated sales. For example, since its formation,
the Company has added approximately 400 of the Burger King restaurants included
in its current customer base through the growth of existing franchisee customers
and the addition of new customers. The Company has also added approximately 570
Jenny Craig Weight Loss Centres and 150 Sonic restaurants through internal
growth. Since the Company's formation in 1992, net sales have grown from $1.3
billion in 1993 (the first full year of operations) to $4.0 billion in 1995 on a
pro forma basis.
The Company is a "systems" distributor specializing in distribution to
chain restaurants. The Company believes the chain restaurant segment of the
foodservice distribution industry is particularly attractive due to (i) the high
growth rate of the restaurants in this segment, with compound annual growth of
7% over the past
2
<PAGE> 6
three years according to industry sources, primarily due to the growth of
existing chain restaurants and the introduction of new chain restaurant
concepts, (ii) the uniformity of product offerings and consistency of demand by
chain restaurant customers, (iii) the increasingly important focus by chain
restaurants on foodservice distributors that can provide consistent quality and
reliable service on a nationwide basis to maintain the chain's uniform standards
and (iv) the fragmented nature of the foodservice distribution segment serving
chain restaurants, with over 3,000 companies operating in the industry. The
Company believes that the consolidation in this industry will continue as larger
foodservice distributors with nationwide service are better able to meet the
need for consistent quality and reliable service by chain restaurants.
STRATEGIES
The Company believes that it has one of the most comprehensive distribution
networks of any independent distributor serving chain restaurants, based on
geographic coverage. With net sales of $4.0 billion in 1995 on a pro forma
basis, the Company believes, based on its estimates, that it has captured
approximately 10% of the $42 billion chain restaurant distribution market in the
United States. The Company estimates that the next largest independent systems
distributor has a market share of approximately 6%. The Company believes that
its size and scale give it an advantage over its competitors with respect to
purchasing power and lower distribution costs. The Company plans to strengthen
its position as a market leader by continuing to pursue the following strategies
for maximizing profitability and enhancing its long-term growth opportunities.
Pursue Internal and External Growth Opportunities. The Company intends to
continue to grow through a combination of adding new customers and products
within the chains that it currently serves, adding new chains and, where
appropriate, making selective acquisitions of other foodservice distributors.
- Growth With Existing Chains. The chain restaurant segment of the
restaurant industry has historically grown faster than the overall
industry. As the primary distributor to most of its customers, the
Company expects to continue to grow with the chain restaurants it serves.
In addition, the Company believes that there is the opportunity for
increased "product penetration" by increasing the range of products,
including produce, dairy and bakery products, distributed to existing
customers.
- Growth Through Addition of New Chains. The Company is continually
monitoring the marketplace for opportunities to expand the portfolio of
chains that it serves. Primary targets include chains offering menu
categories not covered by the Company's existing customers, chains
operating in geographic areas in which the Company could benefit from
increased customer density, and regional chains which could be added to
the national chains which have traditionally been the Company's focus.
- Selective Acquisitions. The Company believes the fragmented nature of
the industry and consolidation activity offer the Company opportunities
to supplement internal growth through selective acquisitions. The Company
intends to continue to focus its acquisition strategy on systems
specialists that distribute principally to limited-menu quick service and
casual dining chain restaurants which will expand its customer base or
improve geographic customer density.
Margin Improvement/Cost Reduction Programs. The Company is undertaking
several initiatives to increase margins and reduce its overall cost structure.
- Network Optimization. The Company is initiating a major project to
restructure its distribution network and create a new national
distribution system. Through this process, which is expected to take 3-5
years to complete, the Company intends to consolidate and integrate its
existing distribution network of 34 centers into 23 centers consisting of
six large regional distribution centers and 17 local distribution
centers. The Company estimates the capital investment for this network
optimization program will be approximately $35 million and, as a result
primarily of reduced miles driven to make deliveries, is projecting cost
savings following full implementation of the new system of approximately
$20-25 million annually compared to projected network costs under its
existing system.
- Enhanced Delivery Systems. The Company has recently introduced an
innovative value-added cart delivery system which the Company estimates
should result in restaurant deliveries which are 2-3 times faster than
methods currently used in the industry. The Company is currently using
cart delivery
3
<PAGE> 7
for approximately 17% of its customers and expects to service approximately 75%
through this method within three years. The Company estimates the capital
investment required for implementation of the cart delivery system will be
approximately $8 million and, as a result primarily of reduced labor costs
associated with deliveries, is projecting cost savings to the Company,
when fully implemented, of approximately $10 million annually compared to
projected costs of conventional delivery methods. The Company believes
that cart delivery will also benefit its customers by reducing the
disruption caused by deliveries and labor costs associated with unloading.
- Corporate Unification Program. The Company is in the process of
integrating its preexisting operations with the NAD operations acquired
from Martin-Brower into a new corporate support center located in Coral
Gables, Florida. The corporate support center will allow the Company to
centralize all purchasing, routing, in-bound transportation and
operations support functions. This process, which is expected to be
completed by mid-1997 at an estimated capital cost of approximately $3
million, should reduce overall personnel levels by 75 positions and, as a
result, is expected to yield aggregate cost savings of approximately $5-6
million annually.
There can be no assurance that any of the above programs will be completed
within the projected time periods or will not have costs or require investment
in excess of the amounts anticipated, or that the projected cost savings will be
realized. Anticipated capital investment requirements for, and projected cost
savings from, the margin improvement/cost reduction programs have been derived
from internal analyses prepared, in certain instances, with the assistance of
independent consultants. Cost savings estimates have been determined by assuming
current sales levels and cost structure and adjusting for savings attributable
to (i) projected reductions in miles driven, (ii) lower lease costs and labor
costs associated with reduced delivery time and (iii) reduced personnel levels.
Realization of such estimated net cost savings could be impacted by a number of
factors such as inflation and changes in volume or service levels. The Company
intends to finance these initiatives with cash provided from operations,
borrowings under its credit facility and through operating leases. Proceeds of
the offering will be used, in part, to repay $22.2 million of the $144.6 million
outstanding as of June 29, 1996 under the Company's credit facility. See "Risk
Factors -- Net Losses," "Risk Factors -- No Assurance of Achieving Anticipated
Cost Savings" and "Summary -- Future Non-recurring Charges to Earnings."
Establish Position as Preeminent Supply Chain Manager. The Company
believes that its size, scale and expertise in foodservice distribution and
transportation systems allow it to assist its customers in managing the entire
chain of supply, from the vendor location to the customer's storeroom. Emphasis
on supply chain management has allowed the Company to identify value-added
services (such as the purchasing of non-proprietary products and transportation
services from the vendor to the distribution center) which the Company can
provide to its customers, resulting in reduced costs for its customers and
improved margins for the Company.
Technological Leadership. The Company believes that it is a leader within
the industry in the application of information technology to its operations. The
Company currently has in place a variety of information technology systems,
including electronic ordering, inventory management, financial and routing
systems. The Company continues to invest in technology. It has budgeted
approximately $5 million per year for the next three to five years for new
systems and upgrades and intends to invest approximately $5 million to implement
radio frequency and bar code scanning technology in its new distribution center
management systems. The Company intends to finance these investments with cash
provided from operations, borrowings under its credit facility and through
operating leases. See "Business -- Strategies -- Technological Leadership,"
"Business -- Operations and Distribution -- Order Fulfillment" and "Risk
Factors -- Net Losses." Among a new generation of information technology being
installed are new systems in the area of electronic customer ordering, "order
optimization" to manage the Company's purchasing and inventory functions, and
freight management. In addition, in connection with its "network optimization"
program, the Company intends to put in place new customer ordering and warehouse
management systems.
Service Quality Program. The Company places a significant emphasis on
providing a high level of service to its customers. The Company continuously
measures its service performance levels by monitoring the
4
<PAGE> 8
completeness of the order, the timeliness of delivery and the customer's
satisfaction. The Company believes it is a leader in the industry in quality and
reliability of service to its customers. By providing a high level of service
and reliability, the Company believes it can reduce the number of reorders and
redeliveries, reducing costs for both the Company and its customers and
improving customer loyalty.
------------------------
Although the Company's net sales have grown from $1.3 billion in 1993 (the
first full year of operations) to $4.0 billion in 1995 on a pro forma basis, it
has sustained consistent losses during this time due to high interest expense,
competitive price pressures and costs associated with the addition of new
customers and the development of new products and services. In addition, due to
certain restructuring charges, losses on impairment in value of long-lived
assets and non-recurring charges to earnings, the Company expects to record a
net loss for 1996. As a result, the Company had an accumulated deficit of $2.5
million and $20.5 million as of December 30, 1995 and June 29, 1996,
respectively.
Set forth below are summarized unaudited operating results (in millions
except for per share data) of the Company for the three and nine month periods
ended September 30, 1995 and September 28, 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28,
1995 1996 1995 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales.................................... $ 1,008.1 $ 1,053.5 $ 2,455.9 $ 3,068.0
Gross profit................................. 78.3 80.7 193.2 235.8
Loss on impairment of long-lived assets...... -- -- -- 15.7
Restructuring charges........................ 0.2 -- 0.3 10.9
Earnings (loss) from operations.............. 3.1 5.8 7.2 (15.5)
Net earnings (loss).......................... (0.7) 1.4 (2.7) (16.6)
Net earnings (loss) per share................ $ (0.14) $ 0.25 $ (0.64) $ (3.13)
Average outstanding shares used in
calculation
(in thousands)............................. 5,236 5,375 4,242 5,305
</TABLE>
5
<PAGE> 9
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered................. 3,400,000 shares
Common Stock to be outstanding after the
offering:
Class A Common Stock....................... 3,400,000 shares
Class B Common Stock(1).................... 5,652,400 shares
Total.............................. 9,052,400 shares
Use of Proceeds.............................. To prepay a portion of the Company's
outstanding indebtedness.
Nasdaq National Market Symbol................ "PSDS"
Voting Rights; Dividends..................... Each share of Class A Common Stock is
entitled to one vote and each share of Class
B Common Stock is entitled to ten votes.
Except as otherwise required by law, the
Class A Common Stock and Class B Common Stock
will vote together on all matters submitted
to a vote of stockholders, including the
election of directors. Following the
offering, the outstanding shares of Class A
Common Stock will represent approximately six
percent of the combined voting power of the
outstanding Common Stock (seven percent if
the Underwriters' over-allotment option is
exercised in full). Each share of Class B
Common Stock is convertible into Class A
Common Stock on a one-to-one basis at any
time at the option of the holder thereof and
in certain other circumstances. Class A
Common Stock and Class B Common Stock will be
entitled to share ratably, as a single class,
in any dividends declared by the Company on
the Common Stock. See "Description of Capital
Stock."
</TABLE>
- ---------------
(1) Includes 350,100 shares of Class B Common Stock to be issued to Onex
Corporation (collectively with its affiliates, "Onex"), or an affiliate
thereof, upon conversion of $2.5 million of principal and $1.0 million of
accrued interest outstanding under a 10% convertible subordinated note due
2002 (the "Onex Convertible Note") immediately prior to the offering.
Excludes 1,208,625 shares of Class B Common Stock reserved for issuance (i)
upon the exercise of stock options granted under the Company's Amended
Management Option Plan (1995) (the "1995 Option Plan"), (ii) upon the
exercise of stock options granted under the Company's 1996 Stock Option Plan
and (iii) under an outstanding warrant and certain other indebtedness which
is convertible into shares of Class B Common Stock at the option of the
holder thereof at any time. Also excludes 266,667 shares of Class B Common
Stock (assuming an initial public offering price equal to the midpoint of
the range set forth on the cover page of this Prospectus) to be issued to
Onex in payment of $4 million as consideration for the agreement of Onex to
relinquish its right to receive for an indefinite period an annual fee of
$0.8 million (subject to an annual inflation adjustment) for management
services rendered to the Company. On a fully diluted basis using the
treasury stock method (and including the 266,667 shares of Class B Common
Stock to be issued to Onex), assuming an initial public offering price equal
to the midpoint of the range set forth on the cover page of this Prospectus,
the Company will have 6,082,438 shares of Class B Common Stock issued and
outstanding after the offering. See "Capitalization," "Executive
Compensation and Other Matters -- Option Plans" and "Certain Transactions."
6
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AND CERTAIN OTHER DATA)
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEARS ENDED SIX MONTHS ENDED
ENDED ------------------------------------------ ----------------------------
DECEMBER 31, DECEMBER 25, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29,
1992(a) 1993(b) 1994(c) 1995(d) 1995 1996
------------ ------------ ------------ ------------ ----------- --------------
(26 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS) (26 WEEKS) (26 WEEKS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $618.4 $1,329.3 $1,598.1 $3,461.8 $ 1,447.8 $2,014.1
Cost of sales................. 560.0 1,210.9 1,464.5 3,193.3 1,332.9 1,859.0
-------- -------- -------- -------- -------- --------
Gross profit.................. 58.4 118.4 133.6 268.5 114.9 155.1
Operating expenses............ 51.7 114.2 131.0 255.2 110.7 149.8
Loss on impairment of
long-lived assets(e)........ -- -- -- -- -- 15.7
Restructuring charges(e)...... -- -- -- 0.7 0.1 10.9
-------- -------- -------- -------- -------- --------
Earnings (loss) from
operations.................. 6.7 4.2 2.6 12.6 4.1 (21.3)
Interest expense, net......... 3.0 5.5 6.6 13.3 6.3 7.3
-------- -------- -------- -------- -------- --------
Earnings (loss) before income
taxes and extraordinary
charge...................... 3.7 (1.3) (4.0) (0.7) (2.2) (28.6)
Income tax (provision)
benefit..................... (1.5) 0.5 1.6 (0.1) 1.0 10.6
-------- -------- -------- -------- -------- --------
Earnings (loss) before
extraordinary charge........ 2.2 (0.8) (2.4) (0.8) (1.2) (18.0)
Extraordinary charge, net..... -- -- -- (0.8) (0.8) --
-------- -------- -------- -------- -------- --------
Net earnings (loss)........... $ 2.2 $ (0.8) $ (2.4) $ (1.6) $ (2.0) $ (18.0)
======== ======== ======== ======== ======== ========
PER SHARE DATA:
Earnings (loss) before
extraordinary
charge per share(f)......... $ 0.96 $ (0.34) $ (0.99) $ (0.17) $ (0.33) $ (3.39)
Net earnings (loss) per
share(f).................... $ 0.96 $ (0.34) $ (0.99) $ (0.35) $ (0.53) $ (3.39)
Average outstanding shares
used in calculation (in
thousands).................. 2,311 2,406 2,410 4,491 3,746 5,302
OTHER DATA:
EBITDA (g)...................... $ 10.2 $ 12.3 $ 10.8 $ 27.4 $ 10.3 $ 11.5
Net operating asset
turnover(h)................... 11.0x 13.6x 16.5x 18.3x 16.9x 18.3x
Depreciation and amortization... $ 3.4 $ 7.9 $ 8.0 $ 12.7 $ 5.6 $ 5.3
Capital expenditures............ $ 1.9 $ 3.5 $ 1.4 $ 5.7 $ 1.7 $ 8.0
Number of restaurants served
(at end of period)............ 4,184 5,113 6,752 14,562 14,700 14,451
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 29, 1996
DECEMBER 31, DECEMBER 25, DECEMBER 31, DECEMBER 30, ----------------------------
1992 1993(B) 1994(C) 1995(D) ACTUAL AS ADJUSTED(I)
------------ ------------ ------------ ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 39.5 $ 42.7 $ 41.6 $ 115.9 $ 113.5 $ 113.5
Total assets.................. 158.1 200.0 218.3 489.2 502.0 501.7
Total debt.................... 61.1 68.5 65.6 163.2 173.4 122.8
Stockholders' equity.......... 24.7 25.3 22.5 49.4 32.7 83.0
</TABLE>
- ---------------
(a) The Company was formed to effect the acquisition of BKDS on June 30, 1992.
(b) Includes the acquisition of certain operating assets of McCabe's Quality
Foods, California, Inc. for $3.9 million on February 27, 1993 and the
acquisition of certain assets and the assumption of certain liabilities of
Valley Food Services, Inc. for $9.3 million on March 27, 1993.
(c) Includes the acquisition of certain assets and the assumption of certain
liabilities of Malone Products, Inc. for $3.8 million on October 31, 1994.
(d) Includes the acquisition of substantially all of the assets and the
assumption of certain liabilities of NAD for $170 million on March 31,
1995.
(e) Charges resulting from the corporate and network consolidation program,
primarily for termination of leases and losses on the sale of furniture,
equipment and leasehold improvements, loss on impairment in value of land
and owned buildings and certain capitalized software costs.
7
<PAGE> 11
(f) See Note 1 (j) in the Notes to Consolidated Financial Statements.
(g) EBITDA represents earnings (loss) before provision for interest expense,
income taxes, depreciation, amortization, extraordinary charges, loss on
impairment of long-lived assets and restructuring charges. EBITDA is
presented to provide additional information about the Company's ability to
meet its future debt service, capital expenditure and working capital
requirements. EBITDA is one of the measures which determines the Company's
ability to borrow under its credit facility. EBITDA should not be
considered in isolation or as a substitute for operating income, cash flows
from operating activities and other income or cash flow statement data
prepared in accordance with generally accepted accounting principles or as
a measure of the Company's profitability or liquidity.
(h) Annualized net sales divided by the average balance of stockholders' equity
plus long-term debt.
(i) Includes pro forma adjustments to give effect to (i) the consummation of
the offering and (ii) the application of the estimated net proceeds thereof
as described in "Use of Proceeds," assuming an initial public offering
price equal to the midpoint of the range set forth on the cover page of
this Prospectus.
FUTURE NON-RECURRING CHARGES TO EARNINGS
The Company expects to incur certain non-recurring charges in the quarter
in which the offering is consummated. These charges are summarized as follows:
Expenses (pre-tax) associated with the amendment or termination of various
agreements:
- A non-cash charge of $1.5 million, assuming an initial public offering
price equal to the midpoint of the range set forth on the cover page of
this Prospectus, to record the effect of an amendment to the 1995 Option
Plan prior to the offering under which unvested options will vest
according to a specified time schedule. Such charge will equal the
aggregate difference between the initial public offering price of the
Class A Common Stock and the exercise price for such options. Vested
options will be unaffected. See "Executive Compensation and Other
Matters -- Option Plans." This $1.5 million will be reflected as a charge
to operations with a corresponding increase in additional paid-in
capital.
- A charge of $1.3 million for the termination of a consulting agreement
between the Company and certain former owners of Valley Food Services,
Inc., which agreement was due to expire on March 28, 1998.
- Onex currently receives an annual fee for management services rendered to
the Company. Onex has agreed to relinquish its right to receive such fee
upon completion of the offering, in consideration for which Onex will
receive $4.0 million payable in Class B Common Stock valued at the
initial public offering price. See "Certain Transactions -- Onex
Management Fees." This $4.0 million will be reflected as a charge to
operations with a corresponding increase in Common Stock and additional
paid-in capital.
Extraordinary charges:
- A pre-tax charge of up to $10.0 million associated with prepayment
penalties and the write-off of deferred financing costs to the extent
that the Company replaces its revolving credit facility and term loans.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
8
<PAGE> 12
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED SIX MONTHS ENDED
------------ -------------------------
DECEMBER 30, JULY 1, JUNE 29,
1995(A) 1995(A) 1996(B)
------------ ---------- ----------
<S> <C> <C> <C>
(52 WEEKS) (26 WEEKS) (26 WEEKS)
STATEMENT OF OPERATIONS DATA:
Net sales........................................... $ 3,993.4 $ 1,979.4 $ 2,014.1
Cost of sales....................................... 3,689.4 1,829.1 1,859.0
------------ ---------- ----------
Gross profit........................................ 304.0 150.3 155.1
Operating expenses.................................. 290.9 146.4 149.8
Loss on impairment of long-lived assets(c).......... -- -- 15.7
Restructuring charges(c)............................ 0.7 0.1 10.9
------------ ---------- ----------
Earnings (loss) from operations..................... 12.4 3.8 (21.3)
Interest expense, net............................... 11.0 6.4 4.8
------------ ---------- ----------
Earnings (loss) before income taxes and
extraordinary
charge........................................... 1.4 (2.6) (26.1)
Income tax (provision) benefit...................... (0.9) 1.1 9.4
------------ ---------- ----------
Earnings (loss) before extraordinary charge......... $ 0.5 $ (1.5) $ (16.7)
========== ========= =========
PER SHARE DATA:
Earnings (loss) before extraordinary charge per
share(d)......................................... $ 0.05 $ (0.20) $ (1.85)
========== ========= =========
Average outstanding shares used in calculation (in
thousands)....................................... 8,217 7,458 9,040
</TABLE>
- ---------------
(a) Includes pro forma adjustments to give effect to the acquisition of NAD and
the consummation of the offering and the application of the estimated net
proceeds thereof as described in "Use of Proceeds," assuming an initial
public offering price equal to the midpoint of the range set forth on the
cover page of this Prospectus, as if such events had occurred on January 1,
1995. For a detailed description, see Notes to Unaudited Pro Forma
Condensed Consolidated Financial Information.
(b) Includes pro forma adjustments to give effect to the consummation of the
offering and the application of the estimated net proceeds thereof as
described in "Use of Proceeds," assuming an initial public offering price
equal to the midpoint of the range set forth on the cover page of this
Prospectus, as if such events had occurred on January 1, 1996. For a
detailed description, see Notes to Unaudited Pro Forma Condensed
Consolidated Financial Information.
(c) See Note (e) to Summary Consolidated Financial Data.
(d) See Note (f) to Summary Consolidated Financial Data.
9
<PAGE> 13
RISK FACTORS
In addition to the other information set forth in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the shares of Class A Common Stock offered
hereby.
Net Losses. Although the Company was profitable in its first six months of
operation in 1992, the Company had net losses of $0.8 million, $2.4 million and
$0.8 million (before an extraordinary charge in 1995 of $0.8 million related to
the write-off of certain deferred debt issuance costs) in 1993, 1994 and 1995,
respectively, due to (i) high interest expense associated with financing
incurred in connection with the formation of the Company and the Company's
subsequent acquisitions, (ii) competitive price pressures resulting in lower
gross margins and (iii) costs associated with the addition of new customers
(both internally and through acquisitions) and the development of new products
and services. In addition, the Company incurred a net loss of $18.0 million in
the six months ended June 29, 1996 due to restructuring charges and losses on
impairment in value of long-lived assets and expects to reflect certain
non-recurring charges to earnings in the quarter in which the offering is
consummated. See "Selected Consolidated Financial Data -- Future Non-recurring
Charges to Earnings." As a result, the Company had an accumulated deficit of
$2.5 million and $20.5 million as of December 30, 1995 and June 29, 1996,
respectively, and expects to record a net loss for 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." While
the Company intends to use the net proceeds of the offering to reduce
outstanding indebtedness, there can be no assurance that the Company will not
increase the outstanding indebtedness after the offering in connection with
future capital expenditures or acquisitions, or that price pressures and costs
associated with the addition of new customers and the development of new
products and services will not continue to have an adverse effect on the
Company's operating results. Furthermore, there can be no assurance that the
Company will not sustain net losses in the future. See "-- No Assurance of
Achieving Anticipated Cost Savings" and "-- Competition." The Company expects to
make capital investments aggregating approximately $76 million over the next
five years in connection with several initiatives to increase margins and reduce
its overall cost structure, including the development of a new national
distribution network, the implementation of an innovative cart delivery system
and the integration of operations into a new corporate support center located in
Coral Gables, Florida, as well as new management information systems and
upgrades and implementation of radio frequency and bar code scanning technology
in its new distribution center management systems. See
"Business -- Strategies -- Margin Improvement/Cost Reduction Programs,"
"Business -- Strategies -- Technological Leadership" and "Business -- Operations
and Distribution -- Order Fulfillment." Such costs are expected to be
capitalized and depreciated or amortized over periods ranging from three to ten
years. The Company expects such increase in depreciation and amortization to be
fully offset in each year by cost savings and productivity improvements
resulting from such initiatives.
Future Non-recurring Charges to Earnings. The Company expects to incur
certain non-recurring charges in the quarter in which the offering is
consummated. These pre-tax charges include (i) a non-cash charge of $1.5
million, assuming an initial public offering price equal to the midpoint of the
range set forth on the cover page of this Prospectus, to record the effect of an
amendment to the 1995 Option Plan prior to the offering under which unvested
options will vest according to a specified time schedule, (ii) a charge of $1.3
million for the termination of a consulting agreement between the Company and
certain former owners of Valley Food Services, Inc., which agreement was due to
expire on March 28, 1998, representing all remaining payments under such
agreement, (iii) a non-cash charge of $4.0 million, resulting from the issuance
of Class B Common Stock to Onex in consideration for the termination of a
management services agreement, and (iv) a charge of up to $10.0 million
associated with prepayment penalties and the write-off of deferred financing
costs to the extent and at the time that the Company replaces its revolving
credit facility and term loans. Such pre-tax charges will result in an aggregate
after-tax charge of approximately $10.4 million. As a result of such charges and
certain restructuring charges and losses on impairment in value of long-lived
assets reflected in the six month period ended June 29, 1996, the Company
expects to record a net loss for 1996. See "Selected Consolidated Financial
Data -- Future Non-recurring Charges to Earnings" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
10
<PAGE> 14
Low Margin Business; Inflation. The foodservice distribution industry in
general, and the chain restaurant segment of the industry in which the Company
operates in particular, are characterized by low profit margins and high asset
turnover. As a result, the Company's results of operations are sensitive to, and
may be materially adversely impacted by, among other things, competitive price
pressures, unexpected increases in fuel or other transportation related costs,
severe weather conditions, difficulties with the collectibility of accounts
receivable and inventory losses. There can be no assurance that one or more of
such factors will not adversely affect the Company's operating results. In
addition, a majority of the restaurants served by the Company purchase products
from the Company based on product cost plus a negotiated fixed dollar amount per
unit of measure. Accordingly, while increases in the cost of food and other
products do not reduce the Company's gross profit, such increases do result in a
lower gross profit percentage. Furthermore, inflation in operating expenses
without corresponding productivity increases could adversely affect the
Company's operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Dependence on Certain Chains and Customers. The Company derives
substantially all of its net sales from certain limited-menu quick service and
casual dining chains. The largest chains serviced by the Company are Burger
King, Red Lobster and Arby's, representing 38%, 15% and 10% of 1995 net sales,
respectively, on a pro forma basis. Adverse developments affecting such chains
or a decision by a corporate owner or franchisor to revoke its approval of the
Company as a distributor could have a material adverse effect on the Company's
operating results.
The Company's customers are generally individual franchisees or
corporate-owned restaurants within such restaurant chains. Although the
corporate owner or franchisor of a chain generally reserves the right to approve
the distributors for its franchisees, each customer makes its selection of a
foodservice distributor from an approved group of distributors. The Company's
largest customer is Darden Restaurants, Inc. (owner of all Olive Garden and Red
Lobster restaurants), representing 21% of the Company's 1995 net sales on a pro
forma basis. No other customer accounted for more than 10% of the Company's pro
forma net sales in 1995. Adverse events affecting any of the Company's largest
customers, a material decrease in sales to any of 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.
In connection with the acquisition of BKDS in 1992, the Company entered
into an exclusive distributor agreement and related distribution agreements with
BKC, pursuant to which, through 2002, (i) the Company is designated as the
exclusive distributor to BKC's company-owned and operated Burger King
restaurants in the United States (which accounted for 3.9% of 1995 net sales on
a pro forma basis), (ii) the Company is one of ten companies approved as
regional distributors to franchised Burger King restaurants in the United
States, and (iii) the Company is the only company approved by BKC to service
Burger King restaurants on a national basis. The Company has also entered into
distribution agreements through 1998 with Olive Garden and Red Lobster pursuant
to which the Company is the primary distributor to the restaurants owned by
Olive Garden and Red Lobster operating in the United States. All Olive Garden
and Red Lobster restaurants are currently company-owned. Such contracts may be
terminated at the option of BKC, Olive Garden or Red Lobster, as the case may
be, upon a material breach by the Company and under certain other circumstances.
See "Business -- Customers."
Ability to Integrate Acquisitions; No Assurance of Future
Acquisitions. The Company has achieved a significant portion of its growth
since 1992 through acquisitions. Although each of the acquired companies has a
significant operating history, the Company has a limited history of owning and
operating these businesses on a consolidated basis. The Company was formed in
1992 to acquire BKDS. Through a series of acquisitions during 1993 and 1994, the
Company added approximately 1,100 of the restaurants included in its current
customer base. In March 1995, the Company entered the casual dining segment of
the restaurant industry and further expanded its quick service business with the
acquisition of NAD from Martin-Brower, its largest acquisition to date, adding
approximately 8,000 of the restaurants included in the Company's current
customer base. While the Company believes that the acquisition of NAD provides
significant opportunities to increase
11
<PAGE> 15
margins and reduce costs through among other things, the realization of
economies of scale through corporate integration, there can be no assurance that
the Company's expectations for the performance of the combined companies will be
met or that management will be able to successfully implement such integration
on a timely, cost-efficient basis without disruption in the quality and
reliability of service to its customers or diversion of management resources.
The integration of such businesses will also require improvements in the
Company's management information systems which are currently in progress. There
can be no assurance, however, that such improvements will be realized on a
timely, cost-efficient basis.
As part of the Company's growth strategy, the Company will continue to
review acquisition opportunities in the future. There can be no assurance,
however, that the Company will be able to continue to acquire businesses on
satisfactory terms or that it will be able to integrate successfully any such
acquired businesses into existing operations.
No Assurance of Achieving Anticipated Cost Savings. The Company is
undertaking several initiatives to reduce its overall cost structure (the "Cost
Savings Initiatives"). These include (i) a "network optimization" process under
which it intends to consolidate and integrate its existing distribution network
of 34 centers into 23 centers, (ii) a cart delivery system intended to reduce
the time and labor associated with restaurant deliveries and (iii) integration
of its preexisting operations with the NAD operations acquired from Martin-
Brower into a corporate support center. Management estimates that the Cost
Savings Initiatives will result in significant net cost savings for the Company.
See "Business -- Strategies -- Margin Improvement/Cost Reduction Programs" for
an estimate of such savings. Cost savings estimates have been determined by
assuming current sales levels and cost structure and adjusting for savings
attributable to (i) projected reductions in miles driven, (ii) lower lease costs
and labor costs associated with reduced delivery time and (iii) reduced
personnel levels. Management believes that such assumptions are reasonable in
light of existing business conditions and prospects. However, any actual net
costs savings which might be realized by the Company could vary from the
estimates contained herein. Realization of such estimated net cost savings could
be impacted by a number of factors such as inflation and changes in volume or
service levels. There also can be no assurance that unforeseen costs and
expenses or other factors will not offset the projected net cost savings in
whole or in part or that such net cost savings will be achieved. See " -- Net
Losses" and " -- Future Non-recurring Charges to Earnings."
Capacity Constraints; Ability to Implement Network Optimization
Program. The Company's continued growth has created and will continue to create
the need for the expansion and improvement of its facilities. As the Company
nears maximum utilization of a given facility, operations may be constrained and
inefficiencies may be created which could adversely affect operating results
until such time as either such facility is expanded or volume is shifted to
another facility. Conversely as the Company implements its network optimization
program, excess capacity may also create certain inefficiencies and adversely
affect operating results. In addition, there can be no assurance that management
will be able to successfully implement its network optimization program on a
timely, cost-effective basis without disruption in the quality and reliability
of service to its customers or diversion of management resources. See
"Business -- Strategies -- Margin Improvement/Cost Reduction Programs -- Network
Optimization."
Customers. Approximately 25% of the Company's net sales are derived from
customers with which the Company does not have contracts. These customers are
thus not restricted by contract from ceasing to do business with the Company on
little or no notice. In addition, 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. The Company
believes that from time to time it may not have been in strict compliance with
all of the performance reliability standards in certain of its customer
contracts. Although the Company is not aware of any issues of non-compliance
which 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 "Business -- Customers."
12
<PAGE> 16
Competition. The foodservice distribution industry is highly competitive.
The Company competes with other systems foodservice distribution companies
focused on chain restaurants and with broadline foodservice distributors which
distribute to a wide variety of customers. The Company believes that
distributors in the foodservice industry compete on the basis of price and the
quality and reliability of service. The Company believes that its size,
centralized purchasing operations and ability to offer broad market coverage
through a wide network of distribution centers give it a competitive advantage
over smaller regional and local distributors. However, in light of the
consolidation in the foodservice distribution industry, 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 "Business -- Competition."
Reduction in Distribution Fees. Distribution fees received from a number
of the Company's customers decreased significantly in 1993 and 1994 as a result
of competitive pricing pressures. While distribution fees have stabilized in
1995 and the first six months of 1996, and management expects such stabilization
to continue through 1996, there can be no assurance that competitive pricing
pressure will not recur in the future. See "Business -- Competition" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on Key Personnel. The Company's success is substantially
dependent upon the continued services of its senior management, particularly
David R. Parker, Chairman of the Board, and Thomas C. Highland, President and
Chief Executive Officer, of the Company. The loss of the services of one or more
of such senior management could adversely affect the Company's operating
results. The Company has entered into employment agreements with Messrs. Parker
and Highland and other members of senior management, and has obtained key-man
life insurance in the amount of $4.0 million on each of Messrs. Parker and
Highland. 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."
Control of the Company; Benefit of the Offering to Controlling
Stockholder. Upon completion of the offering, Onex will beneficially own 87% of
the outstanding shares of Class B Common Stock. Each share of Class B Common
Stock entitles the holder thereof to ten votes as compared to one vote for the
holder of each share of Class A Common Stock. Consequently, Onex will control
82% of the combined voting power of the outstanding Common Stock after
completion of the offering and will be able to control the vote on all matters
submitted to a vote of the holders of Common Stock, including the election of
directors and approval of significant corporate transactions such as amendments
to the Company's Restated Certificate of Incorporation and mergers and sales of
all or substantially all of the Company's assets. Such consolidation of voting
power could have the effect of delaying, deterring or preventing a change in
control of the Company that might be otherwise beneficial to stockholders. Onex
Corporation, based in Toronto, Canada, is a publicly listed (on The Toronto
Stock Exchange and The Montreal Exchange) diversified company that operates
through autonomous subsidiaries and strategic partnerships. Onex had
consolidated revenues of Cdn.$6.5 billion for 1995 and consolidated assets of
Cdn.$2.8 billion at June 30, 1996. In addition to its interests in ProSource, as
of September 30, 1996, Onex had investments in a broad range of companies,
including Onex Food Services, Inc. (which, through its subsidiaries, Sky Chefs,
Inc. and Caterair International Inc., is engaged in the airline catering
business), Dura Automotive Systems Inc., Tower Automotive, Inc., Phoenix
Pictures Inc., Vencap, Inc. and Imperial Parking Limited. None of Onex's current
businesses competes with or is a customer of the Company. Mr. Gerald W.
Schwartz, the Chairman, President and Chief Executive Officer of Onex and a
director of the Company, owns a controlling interest in Onex, and, therefore,
effectively controls the affairs of the Company. See "Business -- Controlling
Stockholder" and "Principal Stockholders." Approximately $15 million of the
proceeds of the offering will be used to retire subordinated indebtedness
payable to Onex. See "Use of Proceeds." In addition, Onex currently receives an
annual fee for management services rendered to the Company. Onex has agreed to
relinquish its right to receive such fee upon completion of the offering, in
consideration for which Onex will receive $4.0 million payable in Class B Common
Stock valued at the initial public offering price. See "Certain Transactions."
Shares Available for Future Sale. Sales of substantial amounts of Class A
Common Stock, or the perception that such sales could occur, after the offering
could adversely affect prevailing market prices for the
13
<PAGE> 17
Class A Common Stock. Of the 3,400,000 shares of Class A Common Stock to be
outstanding upon completion of the offering, all of such shares will be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), unless such shares are acquired by
an "affiliate" of the Company as that term is defined under Rule 144 under the
Securities Act ("Rule 144"). The shares of Class B Common Stock to be
outstanding upon completion of the offering are convertible into shares of Class
A Common Stock on a one-to-one basis at the option of the holder and in certain
other circumstances. Shares of Class A Common Stock issuable upon conversion of
Class B Common Stock have not been registered under the Securities Act and may
not be sold unless they are registered or unless an exemption from registration,
such as the exemption provided by Rule 144, is available. Certain holders of
Class B Common Stock have registration rights with respect to an aggregate of
1,080,500 shares of Class A Common Stock (assuming exercise of existing options)
issuable upon conversion thereof, and the holder of a warrant to purchase shares
of Class B Common Stock has registration rights with respect to the 283,425
shares of Class A Common Stock issuable upon conversion of such Class B Common
Stock. Pursuant to certain "lock up" agreements described herein, all shares of
Class A Common Stock issuable upon conversion of Class B Common Stock held by
the Company's existing stockholders will be eligible for sale beginning 180 days
from the date of this Prospectus, subject to certain limitations under Rule 144.
See "Shares Available for Future Sale."
Absence of Public Market; Volatility of Market Price for Stock. Prior to
the offering, there has been no public market for the Class A Common Stock, and
there can be no assurance that an active trading market for the Class A Common
Stock will develop or continue after the offering. The initial public offering
price of the Class A Common Stock will be determined by negotiations between the
Company and the Underwriters and may not be indicative of the market price of
the Class A Common Stock after the offering. See "Underwriters." From time to
time after the offering, there may be significant volatility in the market price
for the Class A Common Stock. Quarterly operating results of the Company or
other foodservice distributors, changes in general conditions in the economy,
the financial markets or the food distribution or foodservice industries,
announcements of proposed acquisitions and failure to complete announced
acquisitions, unusual weather conditions, failure to meet the projections of
securities analysts or other developments affecting the Company or its
competitors could cause the market price of the Class A Common Stock to
fluctuate substantially. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations. This volatility has had a
significant effect on the market prices of securities issued by many companies
for reasons unrelated to their operating performance.
Dilution; Dividend Policy. Investors in the offering will experience
immediate and substantial dilution, and current stockholders will receive a
material increase in the net tangible book value of their shares. See
"Dilution." The Company does not anticipate paying dividends on the Class A
Common Stock in the foreseeable future. The Company's ability to pay cash
dividends is restricted by the terms of its credit agreement.
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 this "Risk Factors" section and elsewhere
in this Prospectus. See "Prospectus Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "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.
14
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,400,000 shares of
Class A Common Stock offered hereby are estimated to be $46.4 million, assuming
an initial public offering price equal to the midpoint of the range set forth on
the cover page of this Prospectus, and after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company. The
Company intends to use the net proceeds of the offering as follows:
- to prepay $15 million in outstanding principal under a subordinated note
payable to Onex which bears interest at 12% and matures on April 1, 2005,
and 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, which note bears
interest at an effective rate of approximately 9% per annum over the life
of such note and matures on March 31, 2002 (collectively, the
"Subordinated Notes"); and
- to repay $22.2 million of outstanding indebtedness under the Company's
revolving credit facility, which bore interest as of June 29, 1996 at
prime plus 0.5% or the Eurodollar rate plus 2.75% per annum, and matures
on March 31, 2000. On a weighted average basis the interest rate was
9.06% for 1995. As of June 29, 1996, there was $144.6 million outstanding
under the revolving credit facility. See "Certain Transactions -- Onex
Subordinated Notes," "Note 6 in the Notes to Consolidated Financial
Statements" and "Summary -- Strategies."
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since
inception. The current policy of the Company's Board of Directors is to retain
all earnings to provide funds for the operation and expansion of the Company's
business. The Company does not anticipate declaring or paying cash dividends on
the Common Stock in the foreseeable future. Future cash dividends, if any, will
be at the discretion of the Board of Directors and will depend upon, among other
things, future earnings, capital requirements and surplus, the general financial
condition of the Company, restrictive covenants and agreements to which the
Company may be subject, and such other factors as the Board of Directors may
deem relevant. The terms of the Company's credit agreement prohibit it from
paying dividends to its stockholders without the approval of the lending group.
The Company's Restated Certificate of Incorporation provides that the holders of
Class A Common Stock and Class B Common Stock share ratably in any dividend
declared by the Board of Directors, subject to the preferential rights of any
outstanding Preferred Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Capital Stock."
15
<PAGE> 19
DILUTION
At June 29, 1996, the net tangible book value (deficit) of the Company was
$(10.4) million or $(1.97) per share of Common Stock. After giving effect to the
sale of 3,400,000 shares of Class A Common Stock offered hereby by the Company
at an assumed initial public offering price equal to the midpoint of the range
set forth on the cover page of this Prospectus and the application of the
estimated net proceeds therefrom as described in "Use of Proceeds" and the
issuance of 350,100 shares of Class B Common Stock to be issued to Onex upon
conversion of the Onex Convertible Note immediately prior to the offering, the
pro forma net tangible book value of the Company at June 29, 1996 would have
been $39.9 million or $4.41 per share. This represents an immediate increase in
pro forma net tangible book value of $6.38 per share to existing stockholders
and an immediate dilution of $10.59 per share to new investors purchasing Class
A Common Stock in the offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $15.00
Net tangible book value (deficit) per share at June 29,
1996(1)....................................................... $(1.97)
Increase in net tangible book value per share attributable to the
conversion of the Onex Convertible Note....................... .23
Increase in net tangible book value per share attributable to the
offering...................................................... 6.15
Pro forma net tangible book value per share after the offering..... 4.41
------
Dilution per share to new investors(2)............................. $10.59
======
</TABLE>
- ---------------
(1) Net tangible book value (deficit) per share of Common Stock is determined by
dividing the Company's tangible net value (tangible assets less liabilities)
at June 29, 1996 by the number of shares of Common Stock that will be
outstanding prior to the offering.
(2) Dilution is computed by subtracting pro forma net tangible book value per
share of Common Stock after the offering from the assumed initial public
offering price per share.
The following table summarizes, on a pro forma basis at June 29, 1996, the
differences between the total consideration and the average price per share paid
by the existing stockholders and by the new investors purchasing shares of Class
A Common Stock in the offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................ 5,652,400 62% $ 56,642,000 53% $ 10.02
New investors................................ 3,400,000 38% 51,000,000 47% 15.00
---------- --- ------------ ---
Total...................................... 9,052,400 100% $107,642,000 100%
========== === ============ ===
</TABLE>
The table assumes the issuance of 350,100 shares of Class B Common Stock to
be issued to Onex upon conversion of the Onex Convertible Note immediately prior
to the offering. The table also assumes (i) no exercise of any outstanding
options or warrants to purchase Common Stock, (ii) no conversion of any other
outstanding indebtedness which is convertible into Common Stock and (iii) no
issuance of Class B Common Stock to Onex in consideration for the agreement of
Onex to relinquish its right to receive an annual fee for management services
rendered to the Company. See "Certain Transactions." Exercise of such options or
warrants, or conversion of such indebtedness would be anti-dilutive.
16
<PAGE> 20
CAPITALIZATION
The following table sets forth, on an unaudited basis, the capitalization
of the Company as of June 29, 1996, and the capitalization as of such date as
adjusted to give effect to (i) the consummation of the offering and (ii) the
application of the estimated net proceeds thereof as described in "Use of
Proceeds," assuming an initial offering price equal to the midpoint of the range
set forth on the cover page of this Prospectus. The data presented below should
be read in conjunction with the Company's financial statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 29, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Total debt, including current maturities:
Senior debt......................................................... $144,594 $ 122,315
Subordinated notes payable.......................................... 24,832 --
Convertible subordinated notes payable(1)........................... 4,001 500
-------- --------
Total debt.................................................. $173,427 $ 122,815
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000,000 shares
authorized; no shares issued..................................... -- --
Class A Common Stock, par value $.01 per share; 50,000,000 shares
authorized; no shares issued and outstanding actual and 3,400,000
shares issued and outstanding as adjusted........................ -- 34
Class B Common Stock, par value $.01 per share; 10,000,000 shares
authorized; 5,302,300 shares issued and outstanding actual and
5,652,400 shares issued and outstanding as adjusted(2)........... 53 57
Additional paid-in capital.......................................... 53,088 102,981
Accumulated deficit................................................. (20,497) (20,081)
Accumulated foreign currency translation adjustment................. 68 68
-------- --------
Total stockholders' equity.................................. 32,712 83,059
-------- --------
Total capitalization.................................................. $206,139 $ 205,874
======== ========
</TABLE>
- ---------------
(1) On an actual basis, includes $2.5 million of principal and $1.0 million of
accrued interest outstanding under the Onex Convertible Note, which Onex
intends to convert into Common Stock immediately prior to the offering. See
"Certain Transactions -- Onex Subordinated Notes."
(2) On an adjusted basis, includes 350,100 shares of Class B Common Stock to be
issued to Onex upon conversion of the Onex Convertible Note immediately
prior to the offering. Excludes 1,208,625 shares of Class B Common Stock
reserved for issuance (i) upon the exercise of stock options granted under
the Company's 1995 Option Plan, (ii) upon the exercise of stock options
granted under the Company's 1996 Stock Option Plan and (iii) under an
outstanding warrant and certain other indebtedness which is convertible into
shares of Class B Common Stock at the option of the holder thereof at any
time. Also excludes 266,667 shares of Class B Common Stock (assuming an
initial public offering price equal to the midpoint of the range set forth
on the cover page of this Prospectus) to be issued to Onex in payment of $4
million as consideration for the agreement of Onex to relinquish its right
to receive for an indefinite period an annual fee of $0.8 million (subject
to an annual inflation adjustment) for management services rendered to the
Company. On a fully diluted basis using the treasury stock method (and
including the 266,667 shares of Class B Common Stock to be issued to Onex),
assuming an initial public offering price equal to the midpoint of the range
set forth on the cover page of this Prospectus, the Company will have
6,082,438 shares of Class B Common Stock issued and outstanding after the
offering. See "Executive Compensation and Other Matters -- Option Plans" and
"Certain Transactions."
17
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AND CERTAIN OTHER DATA)
The historical selected consolidated financial data presented below as of
and for the six months ended December 31, 1992 (the Company began operations in
July 1992) and the years ended December 25, 1993, December 31, 1994 and December
30, 1995, are derived from, and are qualified by reference to, the Company's
financial statements that have been audited by KPMG Peat Marwick LLP,
independent auditors. The selected consolidated financial data presented below
for the six months ended July 1, 1995 and June 29, 1996 have been derived from
unaudited financial information prepared by the Company. In the opinion of
management, the income statement and balance sheet data for the six months ended
July 1, 1995 and June 29, 1996 reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of results of
interim periods. Operating results for the six months ended June 29, 1996 are
not necessarily indicative of results to be expected for the full fiscal year.
The data presented below should be read in conjunction with the Company's
financial statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
------------------------------------------ -----------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29,
1993(B) 1994(C) 1995(D) 1995 1996
SIX MONTHS ------------ ------------ ------------ ---------- ----------
ENDED
DECEMBER 31, (52 WEEKS) (53 WEEKS) (52 WEEKS) (26 WEEKS) (26 WEEKS)
1992(A)
------------
(26 WEEKS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $618.4 $1,329.3 $1,598.1 $3,461.8 $1,447.8 $2,014.1
Cost of sales......................... 560.0 1,210.9 1,464.5 3,193.3 1,332.9 1,859.0
------ ------ ------ ------- ------ ------
Gross profit.......................... 58.4 118.4 133.6 268.5 114.9 155.1
Operating expenses.................... 51.7 114.2 131.0 255.2 110.7 149.8
Loss on impairment of long-lived
assets(e)........................... -- -- -- -- -- 15.7
Restructuring charges(e).............. -- -- -- 0.7 0.1 10.9
------ ------ ------ ------- ------ ------
Earnings (loss) from operations....... 6.7 4.2 2.6 12.6 4.1 (21.3)
Interest expense, net................. 3.0 5.5 6.6 13.3 6.3 7.3
------ ------ ------ ------- ------ ------
Earnings (loss) before income taxes
and extraordinary charge............ 3.7 (1.3) (4.0) (0.7) (2.2) (28.6)
Income tax (provision) benefit........ (1.5) 0.5 1.6 (0.1) 1.0 10.6
------ ------ ------ ------- ------ ------
Earnings (loss) before extraordinary
charge.............................. 2.2 (0.8) (2.4) (0.8) (1.2) (18.0)
Extraordinary charge, net............. -- -- -- (0.8) (0.8) --
------ ------ ------ ------- ------ ------
Net earnings (loss)................... $ 2.2 $ (0.8) $ (2.4) $ (1.6) $ (2.0) $ (18.0)
====== ====== ====== ======= ====== ======
PER SHARE DATA:
Earnings (loss) before extraordinary
charge per share(f)................. $ 0.96 $ (0.34) $ (0.99) $ (0.17) $ (0.33) $ (3.39)
Net earnings (loss) per share(f)...... $ 0.96 $ (0.34) $ (0.99) $ (0.35) $ (0.53) $ (3.39)
Average outstanding shares used in
calculation (in thousands).......... 2,311 2,406 2,410 4,491 3,746 5,302
BALANCE SHEET DATA (at end of period):
Working capital(g).................... $ 39.5 $ 42.7 $ 41.6 $ 115.9 $ 95.9 $ 113.5
Total assets.......................... 158.1 200.0 218.3 489.2 483.2 502.0
Total debt (g)........................ 61.1 68.5 65.6 163.2 142.8 173.4
Stockholders' equity ................. 24.7 25.3 22.5 49.4 48.9 32.7
OTHER DATA:
EBITDA (h)............................ $ 10.2 $ 12.3 $ 10.8 $ 27.4 $ 10.3 $ 11.5
Net operating asset turnover (i)...... 11.0x 13.6x 16.5x 18.3x 16.9x 18.3x
Depreciation and amortization......... $ 3.4 $ 7.9 $ 8.0 $ 12.7 $ 5.6 $ 5.3
Capital expenditures.................. $ 1.9 $ 3.5 $ 1.4 $ 5.7 $ 1.7 $ 8.0
Number of restaurants served (at end
of period).......................... 4,184 5,113 6,752 14,562 14,700 14,451
</TABLE>
- ---------------
(a) The Company was formed to effect the acquisition of BKDS on June 30, 1992.
(b) Includes the acquisition of certain operating assets of McCabe's Quality
Foods, California, Inc. for $3.9 million on February 27, 1993 and the
acquisition of certain assets and the assumption of certain liabilities of
Valley Food Services, Inc. for $9.3 million on March 27, 1993.
18
<PAGE> 22
(c) Includes the acquisition of certain assets and the assumption of certain
liabilities of Malone Products, Inc. for $3.8 million on October 31, 1994.
(d) Includes the acquisition of substantially all of the assets and the
assumption of certain liabilities of NAD for $170 million on March 31,
1995.
(e) Charges resulting from the corporate and network consolidation program,
primarily for termination of leases and losses on the sale of furniture,
equipment and leasehold improvements, loss on impairment in value of land
and owned buildings and certain capitalized software costs.
(f) See Note 1(j) in the Notes to Consolidated Financial Statements.
(g) At July 1, 1995, working capital reflects $32.6 million payable to
Martin-Brower in connection with the acquisition of NAD. Total debt was
increased in August 1995 by borrowings incurred to pay such amount.
(h) EBITDA represents earnings (loss) before provision for interest expense,
income taxes, depreciation, amortization, extraordinary charges, loss on
impairment of long-lived assets and restructuring charges. EBITDA is
presented to provide additional information about the Company's ability to
meet its future debt service, capital expenditure and working capital
requirements. EBITDA is one of the measures which determines the Company's
ability to borrow under its credit facility. EBITDA should not be
considered in isolation or as a substitute for operating income, cash flows
from operating activities and other income or cash flow statement data
prepared in accordance with generally accepted accounting principles or as
a measure of the Company's profitability or liquidity.
(i) Annualized net sales divided by the average balance of stockholders' equity
plus long-term debt, assuming that the incurrence of debt referred to in
(g) above occurred on March 31, 1995.
FUTURE NON-RECURRING CHARGES TO EARNINGS
The Company expects to incur certain non-recurring charges in the quarter
in which the offering is consummated. These charges are summarized as follows:
Expenses (pre-tax) associated with the amendment or termination of various
agreements:
- A non-cash charge of $1.5 million, assuming an initial public offering
price equal to the midpoint of the range set forth on the cover page of
this Prospectus, to record the effect of an amendment to the 1995 Option
Plan prior to the offering under which unvested options will vest
according to a specified time schedule. Such charge will equal the
aggregate difference between the initial public offering price of the
Class A Common Stock and the exercise price for such options. Vested
options will be unaffected. See "Executive Compensation and Other
Matters -- Option Plans." This $1.5 million will be reflected as a charge
to operations with a corresponding increase in additional paid-in
capital.
- A charge of $1.3 million for the termination of a consulting agreement
between the Company and certain former owners of Valley Food Services,
Inc., which agreement was due to expire on March 28, 1998.
- Onex currently receives an annual fee for management services rendered to
the Company. Onex has agreed to relinquish its right to receive such fee
upon completion of the offering, in consideration for which Onex will
receive $4.0 million payable in Class B Common Stock valued at the
initial public offering price. See "Certain Transactions -- Onex
Management Fees." This $4.0 million will be reflected as a charge to
operations with a corresponding increase in Common Stock and additional
paid-in capital.
Extraordinary charges:
- A pre-tax charge of up to $10.0 million associated with prepayment
penalties and the write-off of deferred financing costs to the extent
that the Company replaces its revolving credit facility and term loans.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
19
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company began operations in July 1992 following the acquisition of
certain assets and the assumption of certain liabilities of BKDS, the "in-house"
distributor for BKC, which serviced 4,150 Burger King restaurants. In the four
years since the acquisition, ProSource has, through a combination of
acquisitions and internal growth, become a leading distributor to chain
restaurants, servicing approximately 14,450 restaurants within 18 different
restaurant chains. Excluding the effect of acquisitions, the Company's net sales
increased at a compound annual rate of 9.8% from 1992 to 1995, compared to the
foodservice distribution industry's compound annual growth rate of approximately
2.4% over this period. The Company's acquisitions consisted of:
- The acquisition in February 1993 of certain operating assets of McCabe's
Quality Foods, California, Inc. ("McCabe's"), a regional systems
distributor based in California, for $3.9 million. Such acquisition
solidified the Company's market position in Northern California and
resulted in the addition of 127 of the Burger King restaurants included
in the Company's current customer base.
- The acquisition in March 1993 of certain assets and the assumption of
certain liabilities of Valley Food Services, Inc. ("Valley"), a regional
systems distributor based in Missouri, for $9.3 million. Such acquisition
resulted in the addition of 318 of the restaurants included in the
Company's current customer base, including certain Wendy's restaurants.
- The acquisition in October 1994 of certain assets and the assumption of
certain liabilities of Malone Products, Inc. ("Malone"), a regional
systems distributor based in Oklahoma, for $3.8 million. Such acquisition
resulted in the addition of 656 of the restaurants included in the
Company's current customer base, including certain Sonic and KFC
restaurants.
- The acquisition in March 1995 of substantially all of the assets and the
assumption of certain liabilities of NAD headquartered in Chicago,
Illinois, a national systems distributor operating eleven distribution
centers located throughout the United States and one center in Canada,
for $170 million. Such acquisition resulted in the addition of
approximately 8,000 of the restaurants included in the Company's current
customer base, including Arby's, Chick-fil-A, Chili's, Long John
Silver's, Olive Garden, Red Lobster, TCBY and TGIFriday's restaurants.
Primarily as a result of these acquisitions, the Company's net sales
increased from $1.3 billion in 1993 to $3.5 billion in 1995. The NAD
acquisition, funded primarily by debt, resulted in a substantial increase in net
interest expense from approximately $6.6 million in 1994 to approximately $13.3
million in 1995; however, net interest expense as a percentage of net sales
decreased during this period from 0.41% to 0.39%. All of the Company's
acquisitions were accounted for as purchases and are included in the Company's
consolidated financial statements from their respective dates of acquisition.
With the acquisition of NAD in March 1995, the Company initiated a program
of evaluating the profitability of its customer accounts which includes setting
target levels of profitability and developing procedures to attain these
targeted goals. Under this program, if the Company is not able to attain the
targeted level of profitability for a particular customer through price
increases, reduced operating costs or providing value-added services within a
reasonable period of time, the Company may discontinue its relationship with the
customer. The Company's decision to discontinue its relationship with such
customers has generally had a positive effect on operating results since the
Company has been able to reduce variable operating expenses and free capacity to
accommodate the growth of more profitable accounts. In addition, certain chains
decide from time to time to close restaurants or concepts which do not meet
their long-term profitability targets. The closing of restaurants by a customer
generally has a negative effect on short-term operating results until the lost
volume can be replaced with new sales. As a result of the Company's new customer
evaluation program and the decision of a certain customer to close a restaurant
concept, the Company no longer sells to 604 restaurants which accounted for
$74.0 million of net sales in 1995 on a pro forma basis.
20
<PAGE> 24
Although the Company was profitable for the first six months of operations
ended December 31, 1992, the Company had net losses of $0.8 million, $2.4
million and $0.8 million (before an extraordinary charge in 1995 of $0.8 million
related to the write-off of certain deferred debt issuance costs) in 1993, 1994
and 1995, respectively, due to (i) high interest expense associated with
financing incurred in connection with the formation of the Company and the
Company's subsequent acquisitions, (ii) competitive price pressures resulting in
lower gross margins and (iii) costs associated with the addition of new
customers (both internally and through acquisitions) and the development of new
products and services. In addition, the Company incurred a net loss of $18.0
million in the six months ended June 29, 1996 due to restructuring charges and
losses on impairment in value of long-lived assets, and expects to reflect
certain non-recurring charges to earnings in the quarter in which the offering
is consummated. See "Selected Consolidated Financial Data -- Future
Non-recurring Charges to Earnings." As a result, the Company had an accumulated
deficit of $2.5 million and $20.5 million as of December 30, 1995 and June 29,
1996, respectively, and expects to record a net loss for 1996. As the net
proceeds of the offering will be used to reduce the outstanding indebtedness of
the Company, management expects that interest expense will decrease following
the offering. See "Use of Proceeds." In addition, while distribution fees
received from a number of the Company's customers decreased significantly in
1993 and 1994 as a result of competitive pricing pressures, distribution fees
have stabilized in 1995 and the first six months of 1996. While management
expects such stabilization to continue through 1996, there can be no assurance
that competitive pricing pressure will not recur in the future. The Company is
also undertaking several initiatives to increase margins and reduce its overall
cost structure, including the development of a new national distribution
network, the implementation of an innovative cart delivery system and the
integration of operations into a new corporate support center located in Coral
Gables, Florida. For a description of certain projected cost savings and costs
to be incurred in connection with such programs, see
"Business -- Strategies -- Margin Improvement/Cost Reduction Programs" and "Risk
Factors -- No Assurance of Achieving Anticipated Cost Savings."
As of June 29, 1996 the Company had recorded net deferred tax assets of
$23.7 million. Management believes that it is more likely than not that the net
deferred tax assets will be realized through the reversal of net deductible
temporary differences during periods in which the Company generates taxable
income. In order to fully realize the net deferred tax assets, the Company will
need to generate future taxable income of approximately $56.1 million. The
Company anticipates that increases in taxable income will result primarily from
(i) future projected revenue growth through the addition of new restaurant
chains and the expansion of existing restaurant chains, (ii) a reduction in
interest expense due to a reduction in indebtedness, (iii) cost savings through
its corporate and network consolidation plan and (iv) other cost reduction
initiatives. The offering, and the concurrent issuance of shares of Common Stock
to Onex as described in this Prospectus, will have no effect on the utilization
of the Company's net deferred tax assets because those actions will not result
in an "ownership change" under Section 382 of the Internal Revenue Code of 1986,
as amended (the "Code").
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 to consolidate
its corporate and network operations. As a result, in the first quarter of 1996,
the Company accrued restructuring charges and recorded a loss on impairment in
value of long-lived assets of $10.9 million and $15.7 million, respectively.
These are anticipated costs associated with the termination of leases on
existing facilities, losses on the sale of furniture, equipment, buildings and
leasehold improvements and write-off of certain capitalized software costs which
do not meet the long-term information technology strategy of the Company. In
1995 the Company incurred restructuring charges of $0.7 million primarily
related to the integration of the Company's preexisting operations with the NAD
operations acquired from Martin-Brower into a new corporate support center in
Coral Gables, Florida. As of June 29, 1996, the Company had approximately $10.5
million of accrued unpaid restructuring charges.
The Company derives its revenues primarily from the distribution of a wide
variety of items to chain restaurants, including fresh and frozen meat and
poultry, seafood, frozen foods, canned and dry goods, fresh and pre-processed
produce, beverages, dairy products, paper goods and cleaning and other supplies.
The foodservice distribution industry in general, and the chain restaurant
segment of the industry in which the Company operates in particular, is
characterized by high asset turnover and low profit margins. As a "systems"
21
<PAGE> 25
distributor specializing in distribution to chain restaurants, the Company
generally generates higher volume, lower gross margin sales requiring fewer but
larger deliveries than a broadline distributor which distributes to a wide
variety of customers, such as independent and chain restaurants, schools,
cafeterias and hospitals. In addition, systems distribution allows for more
efficient use of vehicles, facilities and personnel, resulting in lower
operating expenses as a percentage of net sales when compared to broadline
distribution. As a result, the Company believes systems distributors are better
able to service chain restaurants than broadline distributors because they can
offer their customers a higher quality of service at a lower cost. See
"Business -- Foodservice Distribution Industry."
A majority of the restaurants served by the Company purchase products from
the Company based on product cost plus a negotiated fixed dollar amount per unit
of measure. As a result, the Company's gross margin percentage may be positively
or negatively impacted as the product cost per unit of measure decreases or
increases, respectively. The Company's product mix changed substantially in 1995
as a result of the NAD acquisition because casual dining chain restaurants,
particularly those which serve seafood, have a higher average product cost per
unit of measure, thereby reducing gross margin as a percentage of sales.
Similarly, periods of inflation in food and other product prices result in
higher sales values and product costs per unit of measure. While such increases
do not affect the Company's gross profit, they do result in a lower gross profit
percentage. However, inflation in operating expenses without corresponding
productivity improvements can have a negative effect on the Company's operating
results as operating expenses increase while gross profit remains constant.
Conversely, periods of deflation can have a positive effect on the Company's
results.
The principal components of the Company's expenses include (i) cost of
sales, which represents the net amount paid to product vendors plus amounts paid
for in-bound freight, and (ii) operating expenses which include primarily labor
and equipment charges related to warehousing and delivery. Because warehousing
and delivery expenses can be relatively fixed in the short term, unexpected
changes in the Company's net sales, such as those resulting from adverse weather
or other events, can have a significant short-term impact on operating income.
See "-- Quarterly Results and Seasonality."
The Company's fiscal year ends on the Saturday closest to December 31.
Consequently, the Company will periodically have a 53 week fiscal year. 1995 and
1993 each consisted of 52 weeks, while 1994 consisted of 53 weeks.
RECENT OPERATING RESULTS
Set forth below are summarized unaudited operating results (in millions
except for per share data) of the Company for the three and nine month periods
ended September 30, 1995 and September 28, 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28,
1995 1996 1995 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales.................................... $ 1,008.1 $ 1,053.5 $ 2,455.9 $ 3,068.0
Gross profit................................. 78.3 80.7 193.2 235.8
Loss on impairment of long-lived assets...... -- -- -- 15.7
Restructuring charges........................ 0.2 -- 0.3 10.9
Earnings (loss) from operations.............. 3.1 5.8 7.2 (15.5)
Net earnings (loss).......................... (0.7) 1.4 (2.7) (16.6)
Net earnings (loss) per share................ $ (0.14) $ 0.25 $ (0.64) $ (3.13)
Average outstanding shares used in
calculation (in thousands)................. 5,236 5,375 4,242 5,305
</TABLE>
Net sales in the three month period ended September 28, 1996 increased 4.5%
over the same period in 1995, primarily as a result of increased sales volume to
existing restaurants. Sales to restaurant chains served during both years
increased approximately 6.5%. Gross profit, expressed as a percentage of net
sales, was 7.7% for the three month period ended September 28, 1996 compared to
7.8% for the same period in 1995. The improvements in earnings from operations
in the third quarter of 1996 reflects the higher gross profit without a
22
<PAGE> 26
corresponding increase in operating expenses from the same three month period in
1995, primarily reflecting the favorable impact of the Company's continuing
focus on operating efficiencies.
RESULTS OF OPERATIONS
The following sets forth, for the periods indicated, the components of the
Company's consolidated statements of operations expressed as a percentage of net
sales.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
-------------------------------------------- -------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------------ ------------ ------------ ------- --------
<S> <C> <C> <C> <C> <C>
Net sales............................. 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of sales......................... 91.09 91.64 92.24 92.07 92.30
------ ------ ------ ------ ------
Gross profit........................ 8.91 8.36 7.76 7.93 7.70
Operating expenses.................... 8.59 8.20 7.37 7.65 7.44
Loss on impairment of long-lived
assets.............................. -- -- -- -- 0.78
Restructuring charges................. -- -- 0.02 -- 0.54
------ ------ ------ ------ ------
Earnings (loss) from operations..... 0.32 0.16 0.37 0.28 (1.06)
Interest expense, net................. (0.42) (0.41) (0.39) (0.43) (0.36)
Earnings (loss) before income taxes
and extraordinary charge............ (0.10) (0.25) (0.02) (0.15) (1.42)
Income tax (provision) benefit........ 0.04 0.10 -- 0.06 0.53
------ ------ ------ ------ ------
Earnings (loss) before extraordinary
charge.............................. (0.06) (0.15) (0.02) (0.09) (0.89)
Extraordinary charge, net............. -- -- (0.02) (0.05) --
------ ------ ------ ------ ------
Net earnings (loss)................. (0.06)% (0.15)% (0.04)% (0.14)% (0.89)%
====== ====== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 29, 1996 COMPARED TO SIX MONTHS ENDED JULY 1, 1995
Net sales increased 39.1% to $2,014.1 million in the six month fiscal
period ended June 29, 1996 (the "1996 fiscal period") from $1,447.8 million in
the six month fiscal period ended July 1, 1995 (the "1995 fiscal period"). The
increase in net sales is primarily attributable to the acquisition of NAD on
March 31, 1995. Net sales increased 1.8% in the 1996 fiscal period when compared
to net sales for the 1995 fiscal period presented on a pro forma basis. Sales in
the 1996 fiscal period were adversely impacted by the elimination of certain
customers, as well as the adverse winter weather conditions experienced in a
number of the Company's markets during the first quarter. Net sales to existing
customers in the 1996 fiscal period increased by $86.6 million or 4.5% when
compared to the 1995 fiscal period presented on a pro forma basis. This increase
in net sales is primarily due to increased sales to such customers as a result
of the addition of new restaurants and increased sales volume at existing
restaurants. Such increase was partially offset by $9.4 million in declining
sales volume at certain chains as they redesigned their menus and product
offerings for broader consumer appeal.
Gross profit increased 35.1% to $155.1 million in the 1996 fiscal period
compared to $114.9 million in the 1995 fiscal period. The gross profit
percentage decreased to 7.7% in the 1996 fiscal period compared to 7.9% in the
1995 fiscal period. The gross profit percentage decrease is primarily
attributable to the higher cost of the product mix purchased by customers added
through the acquisition of NAD (which customers had a 6.8% gross profit margin
for the 1996 fiscal period) and, to a lesser extent, negotiation of new
contracts with certain NAD customers which resulted in lower distribution fees.
In most cases, in consideration for the decrease in distribution fees, the
Company was able to secure a longer term contract and the right to provide
in-bound transportation and/or purchasing services for such customers. Gross
profit margin excluding the effect of the NAD acquisition increased to 8.7% in
the 1996 fiscal period compared to 8.6% in the 1995 fiscal period, primarily as
a result of improved inventory management which resulted in a reduction of
product cost.
23
<PAGE> 27
Operating expenses increased 35.3% to $149.8 million in the 1996 fiscal
period from $110.7 million in the 1995 fiscal period. As a percentage of net
sales, operating expenses declined to 7.4% in the 1996 fiscal period from 7.7%
in the 1995 fiscal period. This decrease is primarily a result of the
acquisition of NAD, which has a product mix with a higher unit sales value.
Operating expenses as a percentage of net sales, excluding the NAD acquisition,
were 8.4% in both fiscal periods. Operating expenses as a percentage of NAD
sales were 6.6% in the 1996 fiscal period compared to 6.4% in the 1995 fiscal
period, principally as a result of higher delivery costs due, in part, to the
start-up costs of the cart delivery program.
Losses from operations in the 1996 fiscal period were $21.3 million, as a
result of restructuring charges of $10.9 million and a loss on impairment in
value of long-lived assets of $15.7 million. Both the restructuring charges and
impairment losses are related to a plan to consolidate and integrate the
Company's corporate and network operations following the NAD acquisition. Of the
restructuring charges, approximately $7.9 million relates to the termination of
existing facility leases, $1.2 million represents costs to be incurred after
cessation of operations in the closed facilities and $1.8 million represents all
other costs. The application of Statement of Financial Accounting Standards No.
121, which became effective on January 1, 1996 and requires that long-lived
assets be reviewed for impairment (measured based on the fair value of the
assets), required the Company to recognize a loss of approximately $7.3 million
on land and owned buildings and $4.3 million on furniture and equipment and
leasehold improvements it intends 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. Earnings from
operations excluding restructuring charges and impairment losses were $5.3
million in the 1996 fiscal period compared to $4.1 million in the 1995 fiscal
period.
Net interest expense increased 16.6% to $7.3 million in the 1996 fiscal
period from $6.3 million in the 1995 fiscal period, primarily attributable to
the additional borrowings associated with the acquisition of NAD. Net interest
expense as a percentage of net sales decreased 16.2% from 0.43% to 0.36% as a
result of improved net operating asset turnover. See "-- Liquidity and Capital
Resources."
The income tax benefit for the 1996 fiscal period increased $9.6 million
over the benefit for the 1995 fiscal period. The increase in the tax benefit was
attributable to the Company's greater pre-tax loss in the 1996 fiscal period.
The effective rates of the Company's income tax benefit (expressed as a
percentage of pre-tax loss) were 37.1% for the 1996 fiscal period and 44.1% for
the 1995 fiscal period, which reflect the anticipated annual effective rates for
the respective fiscal years.
The extraordinary charge in the 1995 fiscal period represents the write-off
of unamortized deferred debt issuance costs of $1.3 million, net of the related
tax benefit of $0.5 million, associated with debt that was refinanced as a
result of the NAD acquisition. See "-- Liquidity and Capital Resources."
YEAR ENDED DECEMBER 30, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales increased 116.6% to $3,461.8 million in 1995 from $1,598.1
million in 1994. The increase in net sales was primarily attributable to the
acquisition of NAD on March 31, 1995 and the full year effect of the Malone
acquisition on October 31, 1994. Net sales excluding the effect of the NAD and
Malone acquisitions in 1995 increased by $95.8 million or 6.1% when compared to
1994 net sales. The increase in net sales is primarily due to increased sales to
existing accounts as a result of the addition of new restaurants and increased
sales volume at existing restaurants, offset, in part, by an additional week of
net sales in 1994.
Gross profit increased 101.0% to $268.5 million in 1995 from $133.6 million
in 1994. The gross profit percentage decreased to 7.8% in 1995 compared to 8.4%
in 1994. The gross profit percentage decrease is primarily attributable to the
higher cost of the product mix purchased by customers added through the NAD
acquisition. Gross profit excluding the effect of the NAD and Malone
acquisitions increased to 8.7% of sales in 1995 compared to 8.4% in 1994. The
increase is primarily a result of the renegotiation of a contract with one of
the Company's largest customers and the growth of a new account added in
mid-1994, for which the Company records a distribution fee without any related
product cost.
Operating expenses increased 94.8% to $255.2 million in 1995 from $131.0
million in 1994. As a percentage of net sales, operating expenses declined to
7.4% in 1995 from 8.2% in 1994. This decrease is a
24
<PAGE> 28
result of the acquisition of NAD which has a product mix with a higher unit
sales value. Operating expenses as a percentage of net sales, excluding the NAD
acquisition, increased to 8.4% in 1995 from 8.2% in 1994, primarily attributable
to increased personnel due to growth of the business, the payment of management
incentives which vested due to achievement of business plan objectives, and
higher workers' compensation and vehicular insurance costs.
Earnings from operations increased to $12.6 million in 1995 from $2.6
million in 1994. The 1995 earnings were reduced by $0.7 million in restructuring
charges related to the consolidation and integration of the corporate support
functions following the NAD acquisition.
Net interest expense increased 102.2% to $13.3 million in 1995 from $6.6
million in 1994, primarily attributable to the additional borrowings associated
with the acquisition of NAD. However, net interest expense as a percentage of
net sales decreased 5.5% from 0.41% to 0.39% as a result of lower interest rates
and higher net operating asset turnover. See "-- Liquidity and Capital
Resources."
The income tax provision in 1995 was $0.1 million compared to an income tax
benefit of $1.6 million in 1994. The 1995 provision resulted from a lower
pre-tax loss in 1995 which, because of permanent differences resulting from the
NAD acquisition, translated into a relatively small amount of taxable income.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 25, 1993
Net sales increased 20.2% to $1,598.1 million in 1994 from $1,329.3 million
in 1993. Net sales excluding the effect of the Valley and Malone acquisitions
increased by $229.3 million, or 18.1% of 1993 net sales, primarily from the
growth in sales to Burger King restaurants. 1994 also included an additional
week of sales.
Gross profit increased 12.8% to $133.6 million in 1994 from $118.4 million
in 1993. Gross profit as a percentage of sales decreased to 8.4% in 1994
compared to 8.9% in 1993. The decrease is primarily a result of competitive
pricing pressures on distribution fees. See "-- General."
Operating expenses increased 14.7% to $131.0 million in 1994 from $114.2
million in 1993. As a percentage of net sales, operating expenses declined to
8.2% in 1994 from 8.6% in 1993. This decrease is attributable to the planned
staff reductions during 1994 and the impact of increased sales in 1994 without a
corresponding increase in fixed operating expenses.
Earnings from operations decreased to $2.6 million in 1994 from $4.2
million in 1993, primarily as a result of the decrease in gross profit
percentage.
Net interest expense increased 19.4% to $6.6 million in 1994 from $5.5
million in 1993, primarily as a result of higher interest rates.
Income tax benefit for 1994 increased $1.1 million over the benefit for
1993. The increase in the tax benefit was attributable to the Company's greater
pre-tax loss in 1994. The Company's income tax benefit reflects an effective tax
rate of 40.9% for 1994, compared to an effective rate of 37.5% for 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations and growth primarily
with cash flow from operations, borrowings under its credit facilities,
operating leases and normal vendor trade credit terms. The Company's cash flow
from operations was $9.0 million, $0.9 million and $50.0 million, in 1993, 1994
and 1995, respectively. The significant cash flow in 1995 was attributable to
the one-time benefit of acquiring assets without assuming certain corresponding
operating liabilities in connection with the acquisition of NAD. During the 1996
fiscal period, cash used in operations was $3.0 million, primarily as a result
of lower earnings from operations in the first quarter and other seasonal
fluctuations.
Cash used in investing activities was $8.0 million in the 1996 fiscal
period, all of which related to capital expenditures, primarily for cart
delivery equipment ($2.6 million) and computer systems upgrades ($3.8 million).
The Company anticipates capital expenditures of approximately $15 to $20 million
in each of the next three to five years in connection with the implementation of
its new distribution network, including the
25
<PAGE> 29
expansion of warehousing facilities to accommodate expected growth, continued
investment in computer systems and the further deployment of cart deliveries.
The Company intends to finance such capital expenditures with cash provided from
operations, borrowings under its credit facility and through operating leases.
Cash used in investing activities was $175.6 million in 1995, primarily to fund
the NAD acquisition for $170.3 million and capital expenditures of $5.7 million
(primarily for cart delivery equipment and computer systems upgrades). In 1994
net cash provided by investing activities was $1.9 million. Proceeds from the
settlement of certain purchase price provisions relating to the BKDS acquisition
were $6.6 million, offset by $3.8 million used in the Malone acquisition and
$1.4 million for capital expenditures, primarily related to computer systems
upgrades. Cash used in investing activities was $16.1 million in 1993, of which
$13.2 million was for the Valley and McCabe's acquisitions and $2.4 million was
for capital expenditures related to computer systems upgrades.
The Company's financing activities include borrowings under, and
refinancings of, various credit facilities and the issuance of equity securities
and subordinated notes principally to finance acquisitions. The Company's
financing activities resulted in net cash provided by financing activities of
$11.5 million in the 1996 fiscal period, $126.7 million in 1995 and $8.7 million
in 1993 and net cash used by financing activities of $3.2 million in 1994. In
March 1995, the Company entered into a $240 million loan agreement with
NationsBank of Georgia N.A. and certain other financial institutions. Such
agreement provides for a revolving credit facility of up to $210 million and
term loans aggregating $30 million. Such facility and term loans were used to
finance the acquisition of NAD and refinance certain of the Company's
outstanding indebtedness. Availability under the revolving credit facility may
also be used to fund the Company's working capital requirements. As of June 29,
1996, there was an aggregate of $144.6 million outstanding under such loan
agreement. The loan agreement terminates on March 31, 2000 and the revolving
credit facility and term loans bear interest at prime plus 0.5% or the
Eurodollar borrowing rate plus 2.75%. The revolving credit facility and term
loans are secured by a lien on substantially all of the Company's assets. In
addition, the loan agreement contains restrictions on, among other things, the
Company's ability to pay dividends, prepay subordinated indebtedness, dispose of
assets, make future capital expenditures and investments and make loans and
other financial accommodations to affiliates, as well as the flow of funds from
the Company's subsidiaries to the parent company.
The net proceeds of the offering will be used as follows: (i) $15.0 million
to prepay the $15 million Subordinated Note held by Onex, (ii) $9.2 million to
prepay at a discount the $10 million Subordinated Note held by Martin-Brower and
(iii) $22.2 million to repay a portion of amounts outstanding under the
Company's revolving credit facility. The reduction of outstanding indebtedness
with the proceeds of the offering will result in a reduction of interest
expense. At June 29, 1996, the Company had $173.4 million of total indebtedness,
which had an overall weighted average annual interest rate of 9.14%, excluding
the amortization of deferred financing costs. See Note 6 of the Notes to
Consolidated Financial Statements. After giving effect to the offering and the
use of the estimated net proceeds thereof as described in "Use of Proceeds,"
assuming an initial public offering price equal to the midpoint of the range set
forth on the cover page of this Prospectus, as of June 29, 1996, pro forma total
indebtedness would have been $122.8 million, with an overall weighted average
annual interest rate of 8.9%. After giving effect to the offering, as of June
29, 1996, the Company's pro forma borrowing availability under its revolving
credit facility would have been $95 million.
The Company is in preliminary discussions with several bank groups to
refinance its revolving credit facility and term loans with new bank financing
or an asset-backed securitization facility. Based on proposals received by the
Company, the Company believes that interest on the remaining outstanding amounts
could be reduced by 100-200 basis points by such refinancing. To the extent the
Company replaces its revolving credit facility, it expects to incur a pre-tax
extraordinary charge in the quarter in which the offering is consummated of up
to $10.0 million associated with prepayment penalties of approximately $4.0
million and write-off of the deferred financing costs. The Company believes a
new credit facility will also provide more flexibility in managing the Company's
working capital requirements. There can be no assurance that the Company will be
successful in refinancing its outstanding credit facility and term loans or
consummating an asset-backed securitization.
The Company expects to incur certain other non-recurring (pre-tax) charges
to operations in the quarter in which the offering is consummated. These charges
are summarized as follows:
26
<PAGE> 30
- A non-cash charge of $1.5 million, assuming an initial public
offering price equal to the midpoint of the range set forth on the cover
page of this Prospectus, to record the effect of an amendment to the
1995 Option Plan prior to the offering under which unvested options will
vest according to a specified time schedule. Such charge will equal the
aggregate difference between the initial public offering price of the
Class A Common Stock and the exercise price for such options. This $1.5
million will be reflected as a charge to operations with a corresponding
increase in additional paid-in capital.
- A payment of $1.3 million for the termination of a consulting
agreement between the Company and certain former owners of Valley, which
agreement was due to expire on March 28, 1998.
- The issuance to Onex of $4.0 million in Class B Common Stock valued
at the initial public offering price in exchange for the agreement of
Onex to relinquish its right to receive an annual fee, payable in cash,
for management services rendered to the Company. This $4.0 million will
be reflected as a charge to operations with a corresponding increase in
Common Stock and additional paid-in capital.
The Company believes that the combination of proceeds received from the
offering, cash flow generated from operations and borrowings available under its
current credit facility (or any refinancing thereof) are sufficient to satisfy
its anticipated working capital needs for at least 12 months. Management may
determine that it is necessary or desirable to obtain financing for growth
through additional bank borrowings or the issuance of new debt or equity
securities. The Company is a holding company with no independent operations or
assets other than an investment in its operating subsidiaries, and, as such, it
is dependent on its operating subsidiaries to obtain cash flow. The Company's
loan agreement includes certain restrictive covenants which limit the flow of
funds from the Company's subsidiaries to the parent company. Such covenants are
not expected to have a material effect on the ability of the parent to meet its
cash obligations.
ASSET MANAGEMENT
Net operating asset turnover on average was 13.6 times, 16.5 times, 18.3
times and 18.3 times for 1993, 1994, 1995 and the 1996 fiscal period,
respectively. As a percentage of net sales, working capital on average was
3.30%, 2.99%, 2.95% and 3.13% for 1993, 1994, 1995, and the 1996 fiscal period,
respectively. Working capital turnover (net sales divided by working capital),
which measures the Company's effectiveness in managing its net current assets,
was on average 30.3 times, 33.4 times, 33.8 times and 31.9 times for 1993, 1994,
1995 and the 1996 fiscal period, respectively.
The Company's inventory turnover averaged 40.4 times, 44.4 times, 24.8
times, and 27.2 times for 1993, 1994, 1995, and the 1996 fiscal period,
respectively. The decrease in 1995 and 1996 is attributable to the acquisition
of NAD, which has a lower inventory turnover due to the increased complexity and
greater number of stock keeping units maintained for casual dining restaurant
chains. The high rate of inventory turnover benefits the Company by allowing it
to finance a portion of its working capital requirements through payables to its
vendors. Average accounts payable days, which measures the number of days
accounts payable are outstanding, were 19.1 days, 23.3 days, 22.4 days, and 21.9
days, for 1993, 1994, 1995, and the 1996 fiscal period, respectively.
Most of the Company's sales are made on open account terms. Credit terms
vary by customers and most allow discounts for early payment. The number of days
sales on average accounts receivable, which represents the Company's experience
in converting sales into cash, was 22.3 days, 26.1 days, 20.9 days, and 20.0
days for 1993, 1994, 1995, and the 1996 fiscal period, respectively. The
increase in days sales outstanding during 1994 resulted from inefficiencies
encountered in converting the Company's accounts receivable system.
QUARTERLY RESULTS AND SEASONALITY
Set forth is summary information with respect to the Company's operations
for the most recent ten fiscal quarters. Historically, the restaurant and
foodservice business is seasonal with lower sales in the first calendar quarter.
In addition, the weather in the first quarter of 1996 was particularly severe,
adversely impacting sales. Furthermore, the Company may experience quarterly
fluctuations in net sales depending on the timing of any
27
<PAGE> 31
acquisitions. Management believes the Company's quarterly results will continue
to be impacted by the seasonality of the restaurant business and the timing of
any future acquisitions.
<TABLE>
<CAPTION>
FISCAL YEAR 1994
---------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER(A)(B)
------- -------- -------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales....................................... $ 356.6 $ 389.5 $ 399.8 $ 452.2
Gross profit.................................... 29.9 32.3 33.0 38.4
Earnings (loss) from operations................. (0.5) 2.6 0.9 (0.4)
Net earnings (loss)............................. (1.2) 0.5 (0.5) (1.2)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1995
---------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER(C) QUARTER QUARTER
------- -------- -------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales....................................... $ 411.4 $1,036.4 $1,008.1 $ 1,005.9
Gross profit.................................... 35.4 79.5 78.3 75.3
Earnings (loss) from operations................. (0.5) 4.6 3.1 5.4
Earnings (loss) before extraordinary charge..... (1.3) 0.1 (0.7) 1.1
Net earnings (loss)............................. (2.1) 0.1 (0.7) 1.1
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
--------------------
1ST 2ND
QUARTER QUARTER
------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales....................................... $ 968.7 $1,045.4
Gross profit.................................... 73.2 81.9
Earnings (loss) from operations................. (26.9) 5.6
Net earnings (loss)............................. (19.2) 1.2
</TABLE>
- ---------------
(a) Includes the acquisition of certain assets and the assumption of certain
liabilities of Malone on October 31, 1994.
(b) Includes fourteen weeks of operations due to the 53 week year.
(c) Includes the acquisition of substantially all of the assets and the
assumption of certain liabilities of NAD on March 31, 1995.
BUSINESS COMBINATIONS
All of the Company's acquisitions have been accounted for using the
purchase method and accordingly the acquired assets and liabilities have been
recorded at fair value at the date of acquisition. The excess of the purchase
price over the fair value of tangible net assets acquired related to these
business combinations was approximately $41.3 million, including the effect of a
revision on March 31, 1996 of the estimates of certain costs related to the NAD
acquisition which increased goodwill by $7.6 million. The Company's intangible
assets, including goodwill, are being amortized on a straight-line basis ranging
from 3 to 40 years. The Company has determined that goodwill should be amortized
over 40 years, which reflects management's best estimate of the appropriate
period over which to amortize goodwill associated with those acquisitions and is
consistent with industry practice.
28
<PAGE> 32
BUSINESS
ProSource is the nation's leading independent foodservice distributor
specializing in distribution to chain restaurants and is one of the largest
foodservice distributors in the United States. The Company distributes 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 and cleaning and other supplies. The Company specializes
in providing food and food-related products to two segments of the restaurant
industry -- limited-menu quick service restaurants, including Burger King,
Arby's, Long John Silver's, Sonic, Chick-fil-A, TCBY and Wendy's, and casual
dining restaurants, including Red Lobster, Olive Garden, TGIFriday's and
Chili's. ProSource is an indirect subsidiary of Onex Corporation. See
"-- Controlling Stockholder" and "Risk Factors -- Control of the Company;
Benefit of the Offering to Controlling Stockholder."
The Company was formed in 1992 to acquire BKDS, the "in-house" distributor
for BKC, which serviced approximately 4,150 Burger King restaurants. In the four
years since the acquisition, ProSource has, through a combination of
acquisitions and internal growth, become a leading distributor to chain
restaurants, servicing approximately 14,450 restaurants within 18 different
restaurant chains. In February 1993, the Company acquired certain operating
assets of McCabe's, and in connection therewith added 127 of the Burger King
restaurants included in the Company's current customer base. In March 1993, the
Company acquired certain assets and assumed certain liabilities of Valley,
adding 318 of the restaurants included in the Company's current customer base,
including certain Wendy's restaurants. In October 1994, the Company acquired
certain assets and assumed certain liabilities of Malone, adding 656 of the
restaurants included in the Company's current customer base, including certain
Sonic and KFC restaurants. In March 1995, the Company entered the casual dining
segment of the restaurant industry and further expanded its quick service
business with the acquisition of substantially all of the assets and the
assumption of certain liabilities of NAD from Martin-Brower, which added a total
of approximately 8,000 restaurants within 12 chains included in the Company's
current customer base. The Company has also been successful in expanding through
internally generated sales. For example, since its formation, the Company has
added approximately 400 of the Burger King restaurants included in its current
customer base through the growth of existing franchisee customers and the
addition of new customers. The Company has also added approximately 570 Jenny
Craig Weight Loss Centres and 150 Sonic restaurants through internal growth.
Since the Company's formation in 1992, net sales have grown from $1.3 billion in
1993 (the first full year of operations) to $4.0 billion in 1995 on a pro forma
basis.
The Company was incorporated in 1992 as a Delaware corporation. Its
principal executive offices are located at 550 Biltmore Way, 10th Floor, Coral
Gables, Florida 33134, and the Company's telephone number is (305) 529-2500. The
Company operates under the name "ProSource Distribution Services."
FOODSERVICE DISTRIBUTION INDUSTRY
The foodservice distribution business involves the purchasing, warehousing,
marketing and transportation of fresh and frozen meat and poultry, seafood,
frozen foods, canned and dry goods, fresh and pre-processed produce, beverages,
dairy products, paper goods and cleaning and other supplies from manufacturers
to a broad range of enterprises, including restaurants, cafeterias, nursing
homes, hospitals, other health care facilities and schools. The foodservice
distribution business generally does not include distribution to supermarkets
and other retail grocery stores. In 1995, the United States foodservice
distribution industry had an estimated $129 billion in net sales. Industry
sources indicate that the industry has grown at a rate of approximately 2.4%
over the past three years.
Within the foodservice distribution industry, there are two primary types
of distributors: broadline distributors and specialist distributors. 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: (i) product specialists
which distribute only one or a limited number of products such as produce or
meat, (ii) market specialists which distribute to one type of restaurant such as
Mexican and (iii) "systems" specialists which focus on one type of customer such
as chain restaurants or health care facilities. Systems specialists typically
serve as a single source of supply for their customers.
29
<PAGE> 33
The Company is a systems distributor specializing in distribution to the
chain restaurant segment. With aggregate net sales in 1995 estimated by the
Company at approximately $42 billion, the chain restaurant segment represents a
significant portion of the foodservice distribution industry. The Company
believes the chain restaurant foodservice distribution segment is particularly
attractive due to (i) the high growth rate of chain restaurants, with compound
annual growth of 7% over the past three years according to industry sources,
primarily due to the growth of existing chain restaurants and the introduction
of new chain restaurant concepts, (ii) the uniformity of product offerings and
consistency of demand by chain restaurant customers, (iii) the increasingly
important focus by chain restaurants on foodservice distributors that can
provide consistent quality and reliable service on a nationwide basis to
maintain the chain's uniform standards and (iv) the fragmented nature of the
foodservice distribution segment serving chain restaurants, with over 3,000
companies operating in the industry. The Company believes that the consolidation
in this industry will continue as larger foodservice distributors with
nationwide service are better able to meet the need for consistent quality and
reliable service by chain restaurants.
The Company believes systems distributors are better able to service chain
restaurants than broadline distributors because they can offer their customers a
higher quality of service at a lower cost. Given the uniformity of product
offerings and the consistency of demand of chain restaurants, a systems
distributor has the opportunity to reduce its overall costs and consequently
those of its customers through purchasing and holding in inventory fewer stock
keeping units ("SKUs") than a broadline distributor. This reduces both the
in-bound and outbound freight costs through higher volumes and larger drop sizes
and provides more efficient and reliable distribution schedules thereby reducing
labor costs of both the systems distributor and its customer. In addition,
systems distributors generally require a smaller sales force than broadline
distributors require. The Company believes that the uniformity of product
offerings and frequency of deliveries also result in higher volumes, allowing a
systems distributor to chain restaurants to significantly improve net asset
turnover as compared to a broadline distributor. In addition, management
believes that the larger systems distributors have the volume and scale to offer
chain restaurants an opportunity to further reduce their costs through
value-added services such as procurement of non-proprietary items and in-bound
transportation management as well as the capital to invest in systems and
business processes to continually improve supply chain management from the
vendor to the restaurant.
STRATEGIES
The Company is the nation's leading independent foodservice distributor
specializing in distribution to chain restaurants, and believes that it has one
of the most comprehensive distribution networks of any independent distributor
serving chain restaurants, based on geographic coverage. With net sales of $4.0
billion in 1995 on a pro forma basis, the Company believes, based on its
estimates, that it has captured approximately 10% of the $42 billion chain
restaurant distribution market in the United States. The Company estimates that
the next largest independent systems distributor has a market share of
approximately 6%. The Company believes that its size and scale give it an
advantage over its competitors with respect to purchasing power and lower
distribution costs. The Company plans to strengthen its position as a market
leader by continuing to pursue the following strategies for maximizing
profitability and enhancing its long-term growth opportunities.
Pursue Internal and External Growth Opportunities. The Company intends to
continue to grow through a combination of adding new customers and products
within the chains that it currently serves, adding new chains and, where
appropriate, making selective acquisitions of other foodservice distributors.
- Growth With Existing Chains. The chain restaurant segment of the
restaurant industry has historically grown faster than the overall
industry. As the primary distributor to most of its customers, the
Company expects to continue to grow with the chain restaurants it serves.
Such growth can result from a variety of factors, including increased
traffic in existing restaurants, the addition of new customers within the
chain and the acquisition or development of new chains by the Company's
existing customers. In addition, the Company believes that there is the
opportunity for increased "product penetration" by increasing the range
of products, including produce, dairy and bakery products, distributed to
existing customers.
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- Growth Through Addition of New Chains. The Company is continually
monitoring the marketplace for opportunities to expand the portfolio of
chains that it serves. Primary targets include chains offering menu
categories not covered by the Company's existing customers, chains
operating in geographic areas in which the Company could benefit from
increased customer density, and regional chains which could be added to
the national chains which have traditionally been the Company's focus. In
seeking potential new customers, the Company attempts to concentrate on
growing chains served by broadline distributors who might benefit from
the industry focus that a systems distributor brings, as well as chains
which the Company believes would benefit from the quality of service and
attention to supply chain management that the Company provides to its
customers.
- Selective Acquisitions. The Company believes the fragmented nature of
the industry and consolidation activity offer the Company opportunities
to supplement internal growth through selective acquisitions. In
addition, the Company believes that the strength of its balance sheet
following the offering will put it in a position to take advantage of
such opportunities. The Company intends to continue to focus its
acquisition strategy on systems specialists that distribute principally
to limited-menu quick service and casual dining chain restaurants which
will expand its customer base or improve geographic customer density.
Margin Improvement/Cost Reduction Programs. The Company is undertaking
several initiatives to increase margins and reduce its overall cost structure.
- Network Optimization. The Company is initiating a major project to
restructure its distribution network and create a new national
distribution system. Through this process, which is expected to take 3-5
years to complete, the Company intends to consolidate and integrate its
existing distribution network of 34 centers into 23 centers consisting of
six large regional distribution centers and 17 local distribution
centers. The new network should provide the Company with additional
distribution center capacity for continued growth. The Company estimates
the capital investment for this network optimization program will be
approximately $35 million and, as a result primarily of reduced miles
driven to make deliveries, is projecting cost savings following full
implementation of the new system of approximately $20-25 million annually
compared to projected network costs under its existing system. However,
there can be no assurance that the proposed network will be completed
within the time period projected, that costs to implement the network
will not be higher than currently estimated or that projected costs
savings will be realized. See "-- Operations and Distribution -- Product
Replenishment," "Risk Factors -- No Assurance of Achieving Anticipated
Cost Savings" and "Risk Factors -- Capacity Constraints; Ability to
Implement Network Optimization Program."
- Enhanced Delivery Systems. The Company has recently introduced an
innovative value-added cart delivery system which the Company estimates
should result in restaurant deliveries which are 2-3 times faster than
methods currently used in the industry. The Company is currently using
cart delivery for approximately 17% of its customers and expects to
service approximately 75% through this method within three years. The
Company estimates the capital investment required for implementation of
the cart delivery system will be approximately $8 million and, as a
result primarily of reduced labor costs associated with deliveries, is
projecting cost savings to the Company, when fully implemented, of
approximately $10 million annually compared to projected costs of
conventional delivery methods. The Company believes that cart delivery
will also benefit its customers by reducing the disruption caused by
deliveries and labor costs associated with unloading. However, there can
be no assurance that costs to complete implementation will not be higher
or that projected cost savings will be realized. See "-- Operations and
Distribution -- Cart Delivery System" and "Risk Factors -- No Assurance
of Achieving Anticipated Cost Savings."
- Corporate Unification Program. The Company is in the process of
integrating its preexisting operations with the NAD operations acquired
from Martin-Brower into a new corporate support center located in Coral
Gables, Florida. The corporate support center will allow the Company to
centralize all purchasing, routing, in-bound transportation and
operations support functions. This process, which is expected to be
completed by mid-1997 at an estimated capital cost of approximately $3
million, should
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<PAGE> 35
reduce overall personnel levels by 75 positions and, as a result, is expected to
yield aggregate cost savings of approximately $5-6 million annually. However,
there can be no assurance that costs to complete implementation will not be
higher or that the projected reductions in personnel and cost savings will
be realized. See "Risk Factors -- No Assurance of Achieving Anticipated
Cost Savings."
Anticipated capital investment requirements for, and projected cost saving
from, the margin improvement/cost reduction programs have been derived from
internal analyses prepared, in certain instances, with the assistance of
independent consultants. Cost savings estimates have been determined by assuming
current sales levels and cost structure and adjusting for (i) savings
attributable to projected reductions in miles driven, (ii) lower lease costs and
labor costs associated with reduced delivery time and (iii) reduced personnel
levels. Realization of such estimated net cost savings could be impacted by a
number of factors such as inflation and changes in volume or service levels. The
Company intends to finance these initiatives with cash provided from operations,
borrowings under its credit facility and through operating leases. Proceeds of
the offering will be used, in part, to repay $22.2 million of the $144.6 million
outstanding as of June 29, 1996 under the Company's credit facility. See "Risk
Factors -- Net Losses," "Risk Factors -- No Assurance of Achieving Anticipated
Cost Savings" and "Selected Financial Data -- Future Non-recurring Charges to
Earnings."
Establish Position as Preeminent Supply Chain Manager. The Company
believes that its size, scale and expertise in foodservice distribution and
transportation systems allow it to assist its customers in managing the entire
chain of supply, from the vendor location to the customer's storeroom. Emphasis
on supply chain management has allowed the Company to identify value-added
services to customers which result in reduced costs for its customers and
improved margins for the Company. Two examples of value-added services which the
Company is currently offering to customers are the purchasing of non-proprietary
products and the management and provision of in-bound transportation services
(i.e., transportation of products from the vendor to the distribution center).
Technological Leadership. The Company believes that it is a leader within
the industry in the application of information technology to its operations. The
Company has invested approximately $10 million in information systems since its
inception in 1992 through June 29, 1996, and has budgeted approximately $5
million per year for the next three to five years for new systems and upgrades.
The Company intends to finance these investments with cash provided from
operations, borrowings under its credit facility and through operating leases.
The Company currently has in place a variety of information technology systems,
including electronic ordering, inventory management, financial and routing
systems. The Company continues to invest in technology. Among a new generation
of information technology being installed are new systems in the area of
electronic customer ordering, "order optimization" to manage the Company's
purchasing and inventory functions, and freight management. In addition, in
connection with its "network optimization" program, the Company intends to put
in place new customer ordering and warehouse management systems. Management
believes that these systems will allow the Company to manage the complexity and
diversity of its business at a lower cost and with higher service levels. See
"-- Operations and Distribution -- Order Fulfillment."
Service Quality Program. The Company places a significant emphasis on
providing a high level of service to its customers. The Company continuously
measures its service performance levels by monitoring (i) its delivery of the
cases ordered by a customer, the "order fill rate", (ii) its successful delivery
of an order within one hour of the pre-arranged time, "on-time delivery", (iii)
its delivery of all the cases ordered by a customer, the "perfect order" and
(iv) its customers' perception of the quality of service ProSource provides, the
"customer satisfaction index". The Company believes it is a leader in the
industry in quality and reliability of service to its customers. By providing a
high level of service and reliability, the Company believes it can reduce the
number of reorders and redeliveries, reducing costs for both the Company and its
customers and improving customer loyalty. See "-- Operations and
Distribution -- Order Fulfillment."
CUSTOMERS
The Company's customers as of June 29, 1996 consisted of 2,780 franchisees
and 17 corporate owners of approximately 14,450 limited-menu quick service and
casual dining chain restaurants representing 18 restaurant chains. The Company
is generally one of a limited number of suppliers to the chains it serves. The
largest chains served by the Company are Burger King, Red Lobster and Arby's,
representing 38%, 15% and
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10% of 1995 net sales, respectively, on a pro forma basis. The Company's largest
customer is Darden Restaurants, Inc. (owner of all Olive Garden and Red Lobster
restaurants), representing 21% of the Company's 1995 net sales on a pro forma
basis. No other chain or single customer accounted for more than 10% of the
Company's pro forma net sales in 1995.
The following table sets forth a list of the chains the Company served as
of December 30, 1995:
<TABLE>
<CAPTION>
1995 PRO FORMA % OF TOTAL 1995
NUMBER OF RESTAURANTS NET SALES PRO FORMA
CHAIN CUSTOMERS SERVED (IN THOUSANDS) NET SALES
- ---------------------------------------- --------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
Quick Service
Burger King............................. 946 4,428 $1,531,774 38.4%
Arby's.................................. 442 2,513 404,781 10.1
Long John Silver's...................... 85 1,479 319,028 8.0
Chick-fil-A............................. 11 658 157,409 3.9
Sonic................................... 154 734 83,640 2.1
Wendy's................................. 29 258 74,788 1.9
KFC..................................... 94 346 51,856 1.3
Manchu Wok.............................. 52 145 11,345 0.3
----- ------ ---------- -----
1,853 10,561 2,634,621 66.0
Casual Dining
Red Lobster............................. 1 715 599,818 15.0
Olive Garden............................ 1 488 255,753 6.4
TGIFriday's............................. 50 328 197,948 5.0
Chili's................................. 14 326 143,492 3.6
Spaghetti Warehouse..................... 3 38 11,641 0.3
----- ------ ---------- -----
69 1,895 1,208,651 30.3
Other
TCBY.................................... 606 1,234 78,086 2.0
Other Chains............................ 79 285 67,547 1.6
Jenny Craig(1).......................... 1 587 4,537 0.1
----- ------ ---------- -----
686 2,106 150,170 3.7
TOTALS........................ 2,608 14,562(2) $3,993,443 100.0%
===== ====== ========== =====
</TABLE>
- ---------------
(1) The Company does not take title to the products it delivers to Jenny Craig
Weight Loss Centres.
(2) During the six months ended June 29, 1996, the number of restaurants served
by the Company decreased by 903, which was partially offset by the addition
of 792 new restaurants. The number of restaurants served during this period
decreased primarily as a result of the Company's discontinuation of less
profitable accounts and customer restaurant closings.
The Company has contracts with customers representing approximately 75% of
net sales, with terms ranging from 2-7 years and an average term of three years.
In connection with the acquisition of BKDS in 1992, the Company entered into an
exclusive distributor agreement and related distribution agreements with BKC,
pursuant to which, through 2002, (i) the Company is designated as the exclusive
distributor to BKC's company-owned and operated Burger King restaurants in the
United States (which accounted for 3.9% of 1995 net sales on a pro forma basis),
(ii) the Company is one of ten companies approved as regional distributors to
franchised Burger King restaurants in the United States, and (iii) the Company
is the only company approved by BKC to service Burger King restaurants on a
national basis. BKC has the right to terminate these contracts (i) upon a
material failure to perform by the Company and (ii) in the case of the exclusive
distributor agreement, upon the bankruptcy of the Company. In addition to the
521 BKC-owned restaurants, the Company also services 4,037 Burger King
restaurants owned by franchisees. In the aggregate, this represents 68% of all
Burger King restaurants in the United States. The Company has also entered into
distribution agreements with Olive Garden and Red Lobster pursuant to which the
Company is the primary distributor to the restaurants owned by Olive Garden and
Red Lobster operating in the United States. All Olive Garden and Red Lobster
restaurants are currently company-owned. Olive Garden and Red Lobster
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<PAGE> 37
have the right to terminate their respective agreements upon (i) a material
change in ownership of the Company other than as a result of a public offering
by the Company, (ii) a material breach by the Company, (iii) the bankruptcy of
the Company and (iv) a failure of the Company to meet certain performance
reliability standards. Both agreements terminate in 1998. The Company believes
that from time to time it may not have been in strict compliance with all of the
performance reliability standards in such contracts. However, it is not aware of
any issues of non-compliance which could reasonably be expected to result in
early termination of such contracts.
The Company considers its relationships with its customers to be good. The
Company holds regular meetings with its customers to discuss performance
reliability and other issues which have arisen from time to time. The Company
views the strength of its relationships with its customers, rather than its
contracts, as defining the commitment between them.
PURCHASING AND SUPPLY
The Company purchases and distributes 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 and
cleaning and other supplies. Due to the high volume of proprietary products
required by chain restaurants, the chain typically negotiates product sourcing
directly with vendors and then requires the distributor to use such vendors and
purchase at the negotiated price. Furthermore, customers within the same chain
often cooperate to utilize internal or third party purchasing organizations.
Because suppliers for proprietary products are generally designated by the
chain, the loss of any such supplier would likely result in the development of a
new source of supply by such chain. Substantially all types of non-proprietary
products distributed by the Company are available from a variety of suppliers,
some of which also supply the Company with proprietary products. Accordingly,
the Company does not believe that the loss of any supplier would have a material
adverse effect on the Company's operating results or its ability to serve its
customers.
The Company's emphasis on supply chain management has allowed the Company
to identify the purchasing of non-proprietary products as a value-added service
which it can provide to customers. The Company has formed a purchasing
subsidiary which pools the needs of its customers for non-proprietary products,
such as unlabeled paper products, cleaning supplies and produce, and uses the
resulting purchasing power to negotiate lower prices with vendors. The Company
and its customers share in the cost savings, improving margins for the Company
and reducing costs for its customers. Of the $800 million in non-proprietary
products sold to its customers in 1995, $27.5 million were purchased by the
Company and resold to its customers on this basis, and the Company believes that
a total of approximately $400 million of such purchases were potentially
available for purchase and resale in this manner. The Company believes that
expansion of its purchasing services represents an important opportunity for
growth.
MARKETING AND CUSTOMER SERVICE
The Company's senior management, together with a team of marketing, sales
and customer service personnel, are involved in maintaining relationships with
key customers and securing new accounts. The Company targets as potential new
customers restaurant chains offering menu categories not covered by the
Company's existing customers, chains operating in geographic areas in which the
Company could benefit from increased customer density, and regional chains which
could be added to the national chains which have traditionally been the
Company's focus. In seeking new customers, the Company attempts to concentrate
on growing chains served by broadline distributors which might benefit from the
industry focus that a systems distributor brings, as well as chains which the
Company believes would benefit from the quality of service and attention to
supply chain management that the Company provides to its customers.
The Company's customer service activities are highly customized to the
unique needs of the customer. Each customer has a dedicated account manager who
is responsible for overseeing all of its service needs and coordinating the
services provided through an account team of customer service professionals,
including a dedicated "logistics services manager." The logistics services
manager is responsible for coordinating day-to-day product flow for the
customer, as well as working closely with the customer's purchasing and
marketing organization.
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The Company rigorously monitors customer service levels. In order to manage
problem resolution, the Company is implementing professional help desk software
which tracks customer calls in order to ensure that appropriate action and
follow-up occurs. The Company utilizes frequent trips to the customer's site for
regularly scheduled reviews and key project meetings and telephone conferencing
in order to ensure close coordination between the Company and the customer. In
addition, the Company monitors customer perceptions through periodic surveys.
See "-- Operations and Distribution -- Order Fulfillment."
OPERATIONS AND DISTRIBUTION
The Company's operations can generally be categorized into two business
processes: (i) product replenishment and (ii) order fulfillment. Product
replenishment involves the management of logistics from the vendor location
through the delivery of products to the Company's distribution centers. Order
fulfillment involves all activities from customer order placement through
delivery to the restaurant location. Supporting the Company's business processes
are its innovative cart delivery system, its fleet of approximately 1,450
tractors and trailers and its management information systems.
Product Replenishment. While the Company is responsible for purchasing
products to be delivered to its customers, each chain typically selects the
vendor and negotiates the price at which most products will be purchased. See
"-- Purchasing and Supply." The Company determines the distribution centers
which 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 number of distribution centers used
to serve a customer is based on the number and location of the restaurants to be
serviced. Given the Company's experience in managing its product flow, losses
due to shrinkage, damage and product obsolescence represent less than 0.1% of
1995 net sales. The Company is in the process of implementing a new order
optimization system which will utilize a demand forecasting program to (i)
establish order quantities and product availability levels and (ii) order
products as needed. The new system incorporates proprietary decision support
technology that optimizes the trade-off between in-bound transportation costs
and inventory carrying costs.
The Company works with its chain customers in order to optimize
transportation from vendor locations to distribution warehouses. By utilizing
the collective demand of its customers for in-bound transportation, its existing
fleet of trucks and its expertise in managing transportation, the Company can
offer its customers in-bound transportation, in many instances on a more
economical basis than that offered by the vendors that have traditionally
provided such services. The Company believes it can offer its customers lower
in-bound transportation costs through (i) use of the Company's delivery fleet to
backhaul products, (ii) consolidation of products from more than one vendor or
for use by more than one customer to increase truckloads and (iii) brokering the
freight to third party carriers with whom the Company has negotiated lower
transportation rates. In 1995, the Company managed approximately 30% of the
total freight tonnage to its distribution centers. The Company utilizes a number
of third party carriers to provide in-bound transportation services. None of
these carriers are material to the Company's operations.
The Company currently warehouses 5,500 types of products for its customers
at 34 facilities in 27 cities. This distribution network includes the Company's
preexisting distribution centers, as well as the distribution centers acquired
in the NAD transaction. Currently, no one distribution center maintains
inventories for all customers and, as a result, some customers are not serviced
by the distribution center closest to them. The Company has begun plans to
implement a new national network of distribution centers. Through this process,
which is expected to take 3-5 years to complete, the Company intends to
consolidate and integrate its existing distribution network of 34 centers into
23 centers consisting of six large regional distribution centers ("RDCs") and 17
local distribution centers ("LDCs"). Under the new network, high volume products
will be shipped directly to both RDCs and LDCs, with low volume products being
shipped only to RDCs which will supply these products to the LDCs. The Company
expects its new distribution network to reduce costs primarily in two ways.
First, by enabling the Company to fully service more customers from a
distribution center closer to the customer, transportation costs should be
reduced. Second, more efficient utilization of its facilities should reduce by
approximately 10% the amount of warehouse space required for the same level of
business. In addition, the new network should provide the Company with
additional distribution center
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<PAGE> 39
capacity for continued growth. See "Risk Factors -- Capacity Constraints;
Ability to Implement Network Optimization Program." The Company estimates the
capital investment for the proposed network will be approximately $35 million
and is projecting cost savings following full implementation of the new system
of approximately $20-25 million annually compared to projected network costs
under its existing system. However, there can be no assurance that the proposed
network will be completed within the time period projected, that costs to
implement the network will not be higher than currently estimated or that
projected costs savings will be realized. See "Risk Factors -- No Assurance of
Achieving Anticipated Cost Savings" and "Risk Factors -- Capacity Constraints;
Ability to Implement Network Optimization Program." The consolidation of all
customers into common distribution facilities in conjunction with the
development of the network should optimize in-bound transportation costs,
outbound miles, inventory investment and warehouse capacity.
Upon receipt of the product at the distribution centers, it is inspected
and stored in racks. Each distribution center contains ambient, refrigerated and
frozen space as well as offices for operating, sales and customer service
personnel and a computer networked with the Company's centralized computer
system. In conjunction with the network optimization and integration strategy,
the Company intends to modify the racking configurations of its distribution
centers and install a new distribution center management system that controls
routing, shipping control, trip management, invoicing, inventory control and
communications.
Order Fulfillment. The Company places a significant emphasis on providing
a high service level in order fulfillment. For the six months ended June 29,
1996, the Company achieved order fill rates of 99.7% and on-time deliveries of
92%. By providing a high level of service and reliability, the Company believes
that 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 has developed pre-established routes and pre-arranged delivery times
with each customer. Product orders are placed with the Company one to three
times a week either through the Company's customer service representative or
through electronic transmission using the Company's proprietary software.
Approximately 42% of the restaurants served by the Company transmit product
orders electronically. Orders are generally placed on a designated day in order
to coordinate with the Company's pre-established delivery schedules. Processing
and dispatch of each order is generally completed within 24 hours of receipt and
the Company's standards require each order to be delivered to the customer
within one hour of a pre-arranged delivery time.
Products are picked and labeled at each distribution center. The products
are placed on either a pallet or one of the Company's delivery carts for loading
of outbound trailers. The Company utilizes radio frequency and bar code scanning
in two distribution centers, and intends to implement this technology in its new
distribution center management systems. The Company estimates that the capital
investment required for the implementation of this radio frequency and bar code
scanning technology will be approximately $5 million. The Company intends to
fund this investment with cash provided from operations, borrowings under its
credit facility and through operating leases. Delivery routes are scheduled to
both fully utilize the trailer's load capacity and minimize the number of miles
driven. The Company transports approximately 1.65 million tons of product and
its trucks travel in excess of 60 million miles annually. The Company currently
utilizes several unloading methods at the restaurant including (i) gravity aided
rollers, (ii) hand carts and ramps and (iii) its new cart delivery system.
Cart Delivery System. The Company has recently introduced an innovative
value-added cart delivery system which the Company estimates should result in
restaurant deliveries which are 2-3 times faster than methods currently used in
the industry. Under this system, at the distribution center, products are loaded
into carts which are then loaded directly onto delivery trucks. At the delivery
site, instead of unloading products by conveyor or handcart, the entire cart is
simply unloaded and rolled into the customer's storeroom. The cart delivery
system improves productivity of the Company's drivers, enhances utilization of
its tractors and trailers and improves employee safety. The Company is currently
using cart delivery for approximately 17% of its customers and expects to
service approximately 75% through this method within three years. The Company
estimates the capital investment required for implementation of the cart
delivery system will be approximately $8 million and is projecting cost savings
to the Company, when fully implemented, of approximately $10
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<PAGE> 40
million per year compared to projected costs of conventional delivery methods.
The Company believes that cart delivery will also benefit its customers by
reducing the disruption caused by deliveries and labor costs associated with
unloading. However, there can be no assurance that costs to complete
implementation will not be higher or that projected cost savings will be
realized. See "Risk Factors -- No Assurance of Achieving Anticipated Cost
Savings."
The Company believes that the cart delivery system represents a major
innovation in foodservice distribution methods. The Company hopes to expand the
cart delivery system by leaving the carts at the customer's location until the
next delivery, allowing them to be used as shelving by the customer, and
developing new software which would manage the loading of the carts and
trailers, thereby maximizing cart utilization and ease of customer use. See
"-- Strategies -- Margin Improvement/Cost Reduction Programs -- Enhanced
Delivery Systems."
Fleet. The Company operates a fleet of approximately 1,450 vehicles,
including approximately 600 tractors and 850 trailers. The Company leases
approximately 450 of the tractors from Ryder System, Inc. pursuant to
full-service leases which include maintenance, licensing and fuel tax reporting.
The remaining tractors are leased under similar full-service leases from a
variety of truck leasing companies. The Company leases approximately 350
trailers from GE Capital Services. The remainder are either Company-owned or
leased from various companies, including Ryder Truck Rental, Inc., Pitney Bowes,
Inc. and Ruan. Lease terms average six years for tractors and 7-10 years for
trailers.
Substantially all of the Company's vehicles contain on-board 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. 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. In order to implement its cart delivery system, as trailer leases
expire, the Company has begun the process of substituting new trailers which are
configured so as to accommodate the carts. This generally involves dividing the
trailers into thirds longitudinally in order to allow for separate carts to go
in each of the separate temperature controlled sections. Approximately 17% of
the Company's existing trailers are configured for cart delivery, and the
Company expects that 75% of its fleet of trailers will ultimately be so
configured. See "-- Strategies -- Margin Improvement/Cost Reduction
Programs -- Enhanced Delivery Systems."
Management Information Systems. The Company has invested approximately $10
million in information systems since its inception in 1992 through June 29,
1996, and has budgeted approximately $5 million per year for the next three to
five years for new systems and upgrades. The Company intends to finance these
investments with cash provided from operations, borrowings under its credit
facility and through operating leases. The Company currently has in place a
variety of information technology systems, including electronic ordering,
inventory management, financial and routing systems. These systems represent a
combination of systems that were installed in 1993 following formation of the
Company and systems that were acquired in connection with the acquisition of
NAD. The Company is in the process of integrating these systems and installing
new system technologies in the areas of electronic customer ordering, "order
optimization" to manage the Company's purchasing and inventory functions, and
freight management. In addition, in connection with its "network optimization"
program, the Company intends to put in place new customer ordering and warehouse
management systems. Management believes that these systems will allow the
Company to manage the complexity and diversity of its business at a lower cost
and with higher service levels. See "-- Strategies -- Technological Leadership."
COMPETITION
The foodservice distribution industry is highly competitive. The Company
competes with other systems foodservice distribution companies focused on chain
restaurants and with broadline foodservice distributors. The Company's principal
national competitors are Sysco Corp., Alliant Foodservice Inc. (formerly Kraft
Distribution), MBM Corp., NEBCO-Ameriserv, Marriott Distribution Services Inc.,
King Provision Corp. and Pepsi Foodservices, an in-house distributor for
PepsiCo, Inc. The Company also competes with regional distributors, principally
for business from franchisee-owned Burger King restaurants. The Company believes
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that distributors in the foodservice industry compete on the basis of price and
the quality and reliability of service. 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 that it is in a strong position to
compete for national chain accounts. The Company attributes its ability to
compete effectively against smaller regional and local distributors in part to
the cost advantages resulting from its size, centralized purchasing operations
and ability to offer broad market coverage through a wide network of
distribution centers. However, in light of the consolidation in the foodservice
distribution industry, 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.
In addition, distribution fees received from a number of the Company's
customers decreased significantly in 1993 and 1994 as a result of competitive
pricing pressures. While distribution fees have stabilized in 1995 and the first
six months of 1996, and management expects such stabilization to continue
through 1996, there can be no assurance that competitive pricing pressure will
not recur in the future. See "Risk Factors -- Competition."
PROPERTIES
The Company's principal executive office is located in Coral Gables,
Florida, with additional administrative facilities located in Chicago, Cleveland
and Coral Gables. The Company is currently in the process of consolidating these
operations into a new principal executive office and corporate support center
located in Coral Gables. This facility, consisting of approximately 83,000
square feet of leased space, is expected to begin operation during October 1996.
See "-- Strategies -- Margin Improvement/Cost Reduction Programs -- Corporate
Unification Program."
38
<PAGE> 42
The following table sets forth certain information with respect to the
Company's 34 operating distribution centers:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET
------------------------------------------------------------------------- -----------
<S> <C>
Atlanta, Georgia(1)...................................................... 217,670
Burlington, New Jersey................................................... 60,880
Chester, New York........................................................ 131,400
Chicago, Illinois........................................................ 67,457
Cleveland, Ohio.......................................................... 40,540
Columbus, Ohio........................................................... 174,000
Dallas, Texas (1)(3)..................................................... 176,400
Denver, Colorado(4)...................................................... 57,608
Detroit, Michigan........................................................ 34,897
Greensboro, North Carolina............................................... 41,000
Gridley, Illinois........................................................ 151,000
Houston, Texas(1)........................................................ 77,900
Kansas City, Kansas(2)(5)................................................ 216,450
Lakeland, Florida........................................................ 31,806
Los Angeles, California(2)............................................... 245,540
Miami, Florida........................................................... 31,225
New Orleans, Louisiana................................................... 36,180
New York, New York....................................................... 35,000
Norman, Oklahoma (6)..................................................... 52,000
Orlando, Florida......................................................... 150,000
Oxford, Massachusetts.................................................... 40,000
Phoenix, Arizona......................................................... 38,200
Portland, Oregon......................................................... 74,500
San Jose, California..................................................... 31,500
Trenton, Ontario......................................................... 20,000
Virginia Beach, Virginia................................................. 23,045
Washington, DC(7)........................................................ 83,000
---------
Total:......................................................... 2,339,198
=========
</TABLE>
- ---------------
(1) Two facilities.
(2) Three facilities.
(3) Includes approximately 39,200 square feet of supplemental space in three
remote facilities.
(4) Includes approximately 38,610 square feet of supplemental space in two
remote facilities.
(5) Includes approximately 23,500 square feet of supplemental space in a remote
facility.
(6) Includes approximately 11,000 square feet of supplemental space in a remote
facility.
(7) Includes approximately 30,000 square feet of supplemental space in a remote
facility.
Of the 34 facilities, 20 facilities (representing an aggregate of approximately
832,830 square feet) are leased and 14 facilities (representing an aggregate of
approximately 1,506,370 square feet) are owned by the Company.
EMPLOYEES
As of June 29, 1996, the Company had approximately 3,800 full-time
employees, of whom approximately 420 were employed in corporate support
functions and approximately 3,380 were warehouse, driver and administrative
staff in the distribution centers. Approximately 690 of the Company's employees
were covered by 11 collective bargaining contracts with seven local unions, six
of which are associated with the International Brotherhood of Teamsters, and one
of which is independent. Three contracts, covering approximately 90 employees,
will expire by the end of 1996, and three contracts, covering approximately 180
employees, will
39
<PAGE> 43
expire during 1997. The Company has not experienced any significant labor
disputes or work stoppages. The Company believes that its relationships with its
employees are good.
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 is not
aware of any violations of, or pending changes in, such laws, regulations and
codes that are likely to result in material penalties or material increases in
compliance costs. 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.
The Company owns and leases distribution centers, at some of which on-site
vehicle fueling activities may have resulted in releases of diesel or other
petroleum products to the soil or groundwater. The Company may be subject to
liability for clean-up of contaminated soil or groundwater at these distribution
centers and is in the process of investigating or remediating the contamination.
Although there can be no assurances, the Company does not believe that the
estimated costs associated with any required investigation or remediation will
have a material adverse effect on the Company's financial condition, results of
operations or liquidity. The Company has engaged in a program to remove
underground fuel storage tanks located on its properties. As a result, with the
exception of two such tanks, which are scheduled to be removed during 1996, all
underground fuel storage tanks have been removed from the Company's properties.
In addition, several of the Company's facilities are located over areas of
regional groundwater contamination or are near sites which have contaminated
soil or groundwater. The Company has not been named a responsible party at, and
does not anticipate any liability associated with, any of these sites.
LITIGATION
From time to time the Company is involved in litigation relating to claims
arising out of its 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.
CONTROLLING STOCKHOLDER
The Company is controlled by Onex. Onex Corporation, based in Toronto,
Canada, is a publicly listed (on The Toronto Stock Exchange and The Montreal
Exchange) diversified company that operates through autonomous subsidiaries and
strategic partnerships. Onex had consolidated revenues of Cdn.$6.5 billion for
1995 and consolidated assets of Cdn.$2.8 billion at June 30, 1996. In addition
to its interests in ProSource, as of September 30, 1996, Onex had investments in
a broad range of companies, including Onex Food Services, Inc. (which, through
its subsidiaries, Sky Chefs, Inc. and Caterair International Inc., is engaged in
the airline catering business), Dura Automotive Systems, Inc., Tower Automotive,
Inc., Phoenix Pictures Inc., Vencap, Inc. and Imperial Parking Limited. None of
Onex's current businesses competes with or is a customer of the Company. Onex
currently owns 86% of the outstanding Common Stock of the Company. Upon
completion of the offering, Onex will own 87% of the outstanding Class B Common
Stock, representing 82% of the combined voting power of the outstanding Common
Stock. See "Principal Stockholders" and "Certain Transactions."
40
<PAGE> 44
MANAGEMENT
The following table sets forth certain information concerning the directors
and executive officers of the Company as of the date of this Prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
David R. Parker........................... 53 Chairman of the Board of Directors
Thomas C. Highland........................ 54 President, Chief Executive Officer and
Director
Daniel J. Adzia........................... 54 Vice-Chairman, Chief Marketing Officer and
Director
William F. Evans.......................... 49 Executive Vice President, Chief Financial
Officer
Paul A. Garcia de Quevedo................. 42 Vice President, Treasurer and Secretary
Dennis T. Andruskiewicz................... 42 Senior Vice President, Operations Support
William G. Berryman....................... 53 Senior Vice President, Chief Information
Officer
Robert S. Donaldson....................... 41 Senior Vice President, Field Operations
John E. Foley............................. 47 Senior Vice President, Operations
Development
John P. Gainor............................ 39 Senior Vice President, Logistics and
Purchasing
Gerald W. Schwartz........................ 54 Director
Anthony R. Melman......................... 49 Director
Michael E. Treacy......................... 40 Director
Michael Carpenter......................... 49 Director
Anthony Munk.............................. 36 Director
C. Lee Johnson............................ 64 Director
R. Geoffrey P. Styles..................... 65 Director
</TABLE>
David R. Parker Mr. Parker has served as Chairman of the Board of
Directors since the formation of the Company in 1992. From July 1, 1991 to July
1, 1992, Mr. Parker was an independent investor, working primarily on the
formation of the Company and the acquisition of BKDS. Prior to such time, he was
Senior Executive Vice President of Ryder System, Inc. and President of the
Vehicle Leasing and Services Division. Previously, he was Chief Operating
Officer of Ryder's Business Services Group which included the company's
worldwide aviation support businesses and its insurance management services
businesses. Before joining Ryder System in 1984, Mr. Parker was Executive Vice
President and Sector Executive of American Can Company (Primerica). Mr. Parker
serves on the Boards of Directors of Premark International, Inc. and SunTrust
Bank, Miami, N.A.
Thomas C. Highland Mr. Highland has served as President, Chief Executive
Officer and a Director of the Company since its formation in 1992. Before
serving in this capacity, Mr. Highland was President of BKDS from 1988 to 1992.
Prior thereto, he held various executive positions at Warner Lambert Company,
including Vice President, U.S. Distribution, Director, Distribution Operations,
Pharmaceutical Group and Director, Distribution Center Operations from 1963 to
1988.
Daniel J. Adzia Mr. Adzia has served as Vice-Chairman, Chief Marketing
Officer of the Company since the acquisition of NAD in March 1995 and a Director
of the Company since April 1995. From 1975 to 1995, Mr. Adzia served in various
executive capacities at Martin-Brower including President of NAD. Prior to
joining Martin-Brower, Mr. Adzia held various sales and sales management
positions with Oscar Mayer & Co.
William F. Evans Mr. Evans has served as Executive Vice President, Chief
Financial Officer of the Company since July 1995. Prior to joining the Company,
he was the Senior Vice President, Corporate Operations of H&R Block, Inc. from
August 1992 to June 1995. Prior to 1992, Mr. Evans served in executive
capacities at D&B Software Services, Inc. from 1990 to 1992, Management Science
America, Inc. from 1989 to 1990 and Electromagnetic Sciences, Inc. from 1985 to
1989. From June 1980 to November 1985, Mr. Evans served as a partner of KPMG
Peat Marwick LLP, the Company's independent auditors. Mr. Evans serves as a
Director of LXE, Inc. and Interim Services, Inc. Mr. Evans is a certified public
accountant.
41
<PAGE> 45
Paul A. Garcia de Quevedo Mr. Garcia has served as Vice President,
Treasurer and Secretary of the Company since its formation in 1992. Prior to
such time, Mr. Garcia served as Vice President, Finance, for BKDS. Mr. Garcia
joined BKDS in January 1986. Mr. Garcia is a certified public accountant.
Dennis T. Andruskiewicz Mr. Andruskiewicz has served as Senior Vice
President, Operations Support of the Company since the acquisition of NAD in
March 1995. Before serving in such capacity, Mr. Andruskiewicz was the Vice
President of Distribution for Martin-Brower from 1990 to 1995 and the Director
of Distribution for the Planters Life Savers Division of RJR Nabisco from 1974
to 1990.
William G. Berryman Mr. Berryman has served as Senior Vice President,
Chief Information Officer of the Company since May 1996. Before serving in such
capacity, Mr. Berryman was Chief Information Officer, Vice President, MIS for
The Penn Traffic Company, a food, general merchandise and drug retailer and
involved in the manufacture of various food products from May 1995 to April
1996, Vice President for Technology Solutions Co. from September 1994 to April
1995 and Vice President, MIS, for Dominick's Finer Foods from April 1989 to
December 1993.
Robert S. Donaldson Mr. Donaldson has served as Senior Vice President,
Field Operations of the Company since January 1995. From January 1993 to
December 1994, he served as Vice President of Business Development of the
Company. Prior to joining the Company, Mr. Donaldson was the President of
Institution Food House, Inc., a broadline foodservice distributor from 1986 to
1993 and Vice President of Sky Brothers, Inc., a foodservice distributor from
1973 to 1986.
John E. Foley Mr. Foley has served as Senior Vice President, Operations
Development of the Company since August 1995 and Senior Vice President, Finance
and Systems, Chief Financial Officer from April 1994 to July 1995. Prior to
joining the Company, Mr. Foley was the Senior Vice President, Grand Metropolitan
Computer Systems for Grand Metropolitan, PLC from 1992 to 1995 and Vice
President, MIS for Burger King Corporation from 1990 to 1992.
John P. Gainor Mr. Gainor has served as Senior Vice President, Logistics
and Purchasing of the Company since November 1995, Vice President, Operations
Support from July 1992 to May 1993 and from November 1994 to November 1995 and
Eastern Region, Vice President from June 1993 to October 1994. Prior to joining
the Company in April 1992, he held various executive positions, including
Director, Transportation and Planning, Manager, Transportation, Manager, Private
Carriage Operations and Regional Transportation Manager, at Warner Lambert
Company since 1982.
Gerald W. Schwartz Mr. Schwartz has served as a Director of the Company
since its formation in 1992. Mr. Schwartz is Chairman of the Board, President
and Chief Executive Officer of Onex Corporation and has served in such capacity
since its formation in 1983. Mr. Schwartz serves on the Board of Directors of
Alliance Communications Corporation.
Anthony R. Melman Mr. Melman has served as a Director of the Company since
its formation in 1992. Mr. Melman has been Vice President of Onex Corporation
since 1984. Prior to joining Onex, Mr. Melman held various executive positions
at Canadian Imperial Bank of Commerce and Union Acceptances Limited, a South
African merchant banking organization.
Michael E. Treacy Dr. Treacy has served as a Director of the Company since
October 1992. Dr. Treacy is the Managing Director of Treacy & Company, LLC and
has served as the President of Treacy Forum since 1985. Dr. Treacy holds a Ph.D.
in management science from M.I.T. and was a professor of management science at
the Sloan School of Management at M.I.T. from 1983 to 1989.
Michael Carpenter Mr. Carpenter has served as a Director of the Company
since October 1992. Since January 1995, he has been Chairman and Chief Executive
Officer of Travelers Life and Annuity Company. He also serves as Executive Vice
President of Travelers Group, Inc., responsible for business development and
planning. Mr. Carpenter was Chairman of the Board, President and Chief Executive
Officer of Kidder, Peabody Group Inc., a wholly owned subsidiary of General
Electric Company from January 1989 to June 1994. Mr. Carpenter serves on the
Board of Directors of General Signal, Inc., a diversified manufacturing company.
42
<PAGE> 46
Anthony Munk Mr. Munk has served as a Director of the Company since
January 1995. He joined Onex Corporation in April 1988, and is currently a Vice
President. During the period January 1995 to September 1995, Mr. Munk served as
Senior Vice President and is currently a Director of The Horsham Corporation, a
Canadian based company which has interests in gold, real estate and refining
ventures.
C. Lee Johnson Mr. Johnson has served as a Director of the Company since
October 1992. Since July 1986, he has been President of Limited Distribution
Services (a subsidiary of The Limited, Inc.). From 1984 to 1986, he was Senior
Vice President, Beatrice U.S. Food Corporation and President, Beatrice
Distribution, Inc. Mr. Johnson serves on the Board of Directors of Columbus Port
Authority and the Executive Committee and Board of Directors of Columbus Chamber
of Commerce.
R. Geoffrey P. Styles Mr. Styles has served as a Director of the Company
since October 1992 and is a director of Onex Corporation. Since 1990, he served
as Director of Drivers Jonas (Canada) Ltd. and since 1988, he served as Chairman
and Director of Grosvenor International Holdings Limited. He serves on the
Boards of Directors of Royal Trust Company, The Geon Company, Echo Bay Mines
Ltd., Fairwater Capital Corporation, Working Ventures Canadian Fund Inc. and
Scott's Hospitality Inc.
TERMS OF OFFICE AND COMMITTEES
All directors of the Company currently hold office until the next annual
meeting of stockholders of the Company or until their successors are elected and
qualified. Messrs. Parker and Highland were elected to the Board of Directors
pursuant to the Management Shareholders Agreement under which the management
shareholders have the right to have two designees nominated to the Board of
Directors by Onex. While the management shareholders' right to nominate
designees to the Company's Board of Directors will terminate upon completion of
the offering, Onex has indicated that it has no present intention to withdraw
its support for the continued service of Messrs. Parker and Highland on the
Board of Directors. See "Certain Transactions -- Shareholders
Agreements -- Management Shareholders Agreement." Executive officers hold office
until their successors are chosen and qualified, subject to earlier removal by
the Board of Directors. There are no family relationships among any of the
directors or executive officers of the Company.
The Board of Directors has established an Audit Committee comprising
Messrs. Treacy, Carpenter and Styles. The Audit Committee is responsible for
recommending to the Board of Directors the engagement of independent auditors of
the Company and reviewing with the independent auditors the scope and results of
the audits, the internal accounting controls of the Company, audit practices and
the professional services furnished by the independent auditors.
The Board of Directors has also established a Compensation and Nominating
Committee comprising Messrs. Schwartz, Melman and Johnson and an Equity
Compensation Committee comprising Messrs. Carpenter and Styles. The Compensation
and Nominating Committee is responsible for reviewing and approving all
non-equity based compensation arrangements for officers of the Company. In
addition, the Compensation and Nominating Committee advises and makes
recommendations to the Board of Directors on the selection of candidates as
nominees for election as directors. The Equity Compensation Committee is
responsible for reviewing and approving all equity based compensation
arrangements for officers of the Company and for administering the Company's
option plans. Prior to the offering, the Company did not have a compensation or
a nominating committee.
DIRECTOR COMPENSATION
Following completion of the offering, directors who are not officers or
employees of the Company or Onex will receive an annual fee of $20,000. All
directors will be reimbursed for out-of-pocket expenses. Dr. Michael E. Treacy
received a Company-guaranteed loan of $0.2 million from a third party lender to
finance, in part, the purchase of 30,000 shares of Common Stock in 1993. See
"Certain Transactions -- Certain Equity Offerings to Management."
43
<PAGE> 47
EXECUTIVE COMPENSATION AND OTHER MATTERS
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
earned during the fiscal year ended December 30, 1995 by the Company's chief
executive officer and each of the four other most highly compensated executive
officers whose total annual salary and bonus exceeded $100,000 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION(1) -------------
----------------- SECURITIES ALL OTHER
FISCAL SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS(#)(2) ($)(3)
- -------------------------------------------- ------ ------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C>
David R. Parker............................. 1995 300,000 150,000 5,000 153,120
Chairman of the Board of Directors
Thomas C. Highland.......................... 1995 300,000 150,000 3,750 103,120
President, Chief Executive Officer
Daniel J. Adzia(4).......................... 1995 225,385 112,500 22,500 21,410
Vice Chairman, Chief Marketing Officer
John E. Foley............................... 1995 170,000 70,000 15,000 3,400
Senior Vice President, Operations
Development
Robert S. Donaldson......................... 1995 157,500 58,575 -- 3,109
Senior Vice President, Field Operations
</TABLE>
- ---------------
(1) Excludes perquisites and other personal benefits because such compensation
did not exceed the lesser of $50,000 or 10% of the total annual salary and
bonus for any of the Named Executive Officers.
(2) Options to acquire shares of Common Stock.
(3) The amounts shown in the "All Other Compensation" column consist of the
following: (i) Mr. Parker: $150,000 consulting fee paid by Onex for services
rendered in 1995 (including amounts actually paid in 1996), and $3,120 in
Company matching contributions to the Company's Associates' Savings Plan, a
defined contribution plan (the "401-K Plan"), (ii) Mr. Highland: $100,000
consulting fee paid by Onex for services rendered in 1995 and $3,120 in
Company matching contributions to the 401-K Plan, (iii) Mr. Adzia: $21,410
in Company contributions to the Company's Money Purchase Plan for Former NAD
Salaried Employees, a defined contribution plan, (iv) Mr. Foley: $3,400 in
Company matching contributions to the 401-K Plan and (v) Mr. Donaldson:
$3,109 in Company contributions to the 401-K Plan. In addition, Messrs.
Parker, Highland, Adzia and Donaldson received Company-guaranteed loans from
a third party lender to finance, in part, purchases of Common Stock by such
executive officers. As of December 30, 1995, the outstanding amounts under
such loans were $373,188, $437,250, $300,000 and $141,563, respectively. See
"Certain Transactions -- Certain Equity Offerings to Management."
(4) Represents amounts paid from April 1, 1995 through the end of 1995. Prior to
such time Mr. Adzia was employed by NAD.
44
<PAGE> 48
The following table provides information regarding stock options granted to
the Named Executive Officers during fiscal year 1995. No stock appreciation
rights were granted.
OPTION GRANTS DURING FISCAL YEAR 1995
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS(1) REALIZABLE VALUE
------------------------------------------------------------ AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE ------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) EXPIRATION DATE 5%($) 10%($)
- ------------------------ ------------ ------------ --------- ------------------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
David R. Parker......... 5,000 4.9% 10.00 December 31, 2000 13,814 30,526
Thomas C. Highland...... 3,750 3.7 10.00 December 31, 2000 10,361 22,894
Daniel J. Adzia......... 22,500 22.1 10.00 December 31, 2000 62,163 137,365
John E. Foley........... 15,000 14.7 10.00 December 31, 2000 41,442 91,577
Robert S. Donaldson..... -- -- -- -- -- --
</TABLE>
- ---------------
(1) Options vest according to the following schedule: 10% at the end of each of
years 1995 through 1999, with the remaining 50% vesting at the end of such
five-year period.
The following table sets forth certain information regarding the number and
year-end value of unexercised options held by the Named Executive Officers at
December 30, 1995. No stock options were exercised by the Named Executive
Officers during fiscal year 1995.
AGGREGATE OPTION EXERCISES IN 1995 FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES "IN-THE-MONEY"
UNDERLYING UNEXERCISED OPTIONS AT FISCAL
OPTIONS AT FISCAL YEAR-END($)
YEAR-END(#) EXERCISABLE/
NAME EXERCISABLE/UNEXERCISABLE(2) UNEXERCISABLE(2)(3)
- --------------------------------------------------- ---------------------------- ---------------------
<S> <C> <C>
David R. Parker.................................... 10,498/61,152 52,490/305,760
Thomas C. Highland................................. 5,438/32,062 27,190/160,310
Daniel J. Adzia.................................... 2,250/20,250 11,250/101,250
John E. Foley...................................... 1,500/13,500 7,500/ 67,500
Robert S. Donaldson................................ 1,020/ 9,180 4,080/ 36,720
</TABLE>
- ---------------
(1) No options were exercised in 1995.
(2) Options vest according to the following schedule: 10% at the end of each of
years 1995 through 1999, with the remaining 50% vesting at the end of such
five-year period.
(3) Options are "in-the-money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The amounts set forth
represent the difference between an assumed initial public offering price
equal to the midpoint of the range set forth on the cover page of this
Prospectus and the exercise price of the option multiplied by the applicable
number of options.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into employment agreements (each an "Employment
Agreement") with each of Messrs. David R. Parker, Thomas C. Highland, Daniel J.
Adzia, Paul A. Garcia de Quevedo, Dennis Andruskiewicz and John E. Foley (each
an "Employee"). Each Employment Agreement provides that the Employee will
receive an annual salary (subject to increase at the discretion of the Board of
Directors), a cash bonus calculated in accordance with the Company's management
bonus or incentive compensation plan in effect from time to time and certain
benefits. The term of each Employment Agreement is three years (one year in the
case of Mr. Andruskiewicz), with automatic one year extensions unless terminated
earlier by the Company or the Employee upon prior written notice. In the event
that the Company terminates the
45
<PAGE> 49
Employee's employment for disability or without cause, the Employee is entitled
to receive his salary, a pro rata portion of the actual incentive payment that
he would have received under the management incentive plan for the year in which
termination occurs and all other benefits in effect for senior management
employees at the time of termination ("Termination Benefits") for a period of
one year from the date of termination, except in the cases of Messrs. Highland
and Adzia. In the event that the Company terminates Mr. Highland's employment
for disability or without cause, he is entitled to receive payment in an amount
equal to 150% of the sum of the Termination Benefits for a period of eighteen
months from the date of termination. In the event that the Company terminates
Mr. Adzia's employment for disability or without cause, he is entitled to
receive 100% of the Termination Benefits for a period ending on the later of
April 1, 1998 and eighteen months from the date of termination. If the Company
terminates the Employee's employment, including Messrs. Highland or Adzia, for
any other reason, the Employee is entitled to receive the Termination Benefits
through the date of termination. Each Employee is also subject to a one-year
covenant not to compete effective upon termination of employment for any reason,
except in the cases of Messrs. Highland (eighteen months) and Adzia (terminating
on the later of April 1, 1998 and eighteen months from the date of termination).
Pursuant to agreements with Onex, Messrs. Parker and Highland received
consulting fees from Onex in the following amounts: (i) $150,000 in 1995
(including amounts actually paid in 1996) and $100,000 in each of 1994 and 1993
in the case of Mr. Parker, and (ii) $100,000 in each of 1995 and 1994 in the
case of Mr. Highland. Such consulting arrangements will be terminated effective
upon completion of the offering, and, in consideration therefor, the base salary
payable to Messrs. Parker and Highland will be increased to a rate of $425,000
per annum for the remainder of 1996 and $450,000 per annum for 1997. Thereafter,
in accordance with their Employment Agreements, the salary payable to Messrs.
Parker and Highland will be subject to increase at the discretion of the Board
of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation and Nominating Committee, which currently consists of
Messrs. Schwartz, Melman and Johnson, was formed in July 1996. The Equity
Compensation Committee, which currently consists of Messrs. Carpenter and
Styles, was formed in September 1996. Prior to the formation of the Compensation
and Nominating Committee, compensation decisions were made and approved by the
Company's Board of Directors.
In January 1996, the Company completed the sale of 61,500 shares of Common
Stock in the aggregate to certain officers and management employees of the
Company at a purchase price of $10.00 per share. In May 1995, the Company
completed the sale of 208,500 shares of Common Stock in the aggregate to certain
directors, officers and management employees of the Company at a purchase price
of $10.00 per share. During 1994, the Company sold 6,900 shares of Common Stock
in the aggregate to certain officers and directors of the Company at a purchase
price of $11.00 per share. During 1993, the Company sold 125,600 shares of
Common Stock in the aggregate to certain directors, officers and employees of
the Company at a purchase price of $11.00 per share. Of these shares, the number
of such shares purchased by each executive officer and director of the Company
who purchased shares during such periods, and the aggregate amount of the
purchase price financed through Company-guaranteed loans, is set forth below:
<TABLE>
<CAPTION>
EXECUTIVE OFFICER OR DIRECTOR NUMBER OF SHARES AMOUNT FINANCED
----------------------------------------------------- ---------------- ---------------
<S> <C> <C>
David R. Parker...................................... 143,300 $ 373,188
Thomas C. Highland................................... 75,000 450,000
Daniel J. Adzia...................................... 45,000 300,000
William F. Evans..................................... 45,000 300,000
Paul A. Garcia de Quevedo............................ 15,000 100,000
Dennis T. Andruskiewicz.............................. 13,000 75,000
Robert S. Donaldson.................................. 20,400 150,000
John E. Foley........................................ 30,000 --
John P. Gainor....................................... 15,000 100,000
Michael E. Treacy.................................... 30,000 220,000
Michael Carpenter.................................... 18,200 --
C. Lee Johnson....................................... 4,500 --
R. Geoffrey P. Styles................................ 4,500 --
</TABLE>
46
<PAGE> 50
The aggregate amount of such loans guaranteed by the Company as of June 29,
1996 was $3.3 million. The shares of Common Stock purchased were pledged to the
Company as collateral for the Company's guaranty. All of such shares are subject
to the Shareholders Agreements (as defined herein). Pursuant to the Shareholders
Agreements, the Company may purchase such shares at a discount if a shareholder
defaults on such indebtedness. See "Certain Transactions."
OPTION PLANS
Amended Management Option Plan (1995). The 1995 Option Plan provides for
the grant of "non-qualified stock options" ("NQSO's") to management employees of
the Company ("1995 Employee Participants") at the time that such employees
purchase Common Stock of the Company. Options granted under the 1995 Option Plan
have an exercise price equal to the price at which the 1995 Employee Participant
purchased such stock. Options are exercisable for shares of Class B Common
Stock. The 1995 Option Plan provides for it to be administered by the Board of
Directors of the Company or a committee thereof. Prior to the offering it was
administered by the Board of Directors, and following the offering it will be
administered by the Equity Compensation Committee. Options granted under the
1995 Option Plan are not transferrable or assignable.
Options vest according to the following schedule: ten percent at the end of
years 1995 through 1999, with the remaining 50% vesting at the end of such
five-year period. Options granted under the 1995 Option Plan remain exercisable
until December 31, 2000. In the event the Company sells substantially all of its
assets or all of the Company's or any of its principal subsidiaries' shares of
Common Stock in a transaction in which the consideration is principally other
than common stock and results in Onex earning certain specified rates of return
on its initial purchase of Common Stock, then all unexercised options under the
1995 Option Plan with respect to periods not yet ended are deemed earned and
exercised immediately prior to the date the triggering transaction closes.
The 1995 Option Plan terminates on the earlier of (i) December 31, 2000 and
(ii) the sale of all of the Common Stock owned by Onex, the sale of all of the
issued and outstanding stock of the Company or the sale of all or substantially
all of the assets of a subsidiary of the Company.
Upon completion of the offering, options to purchase 350,200 shares of
Class B Common Stock will be outstanding. No additional options will be granted
under the 1995 Option Plan.
1996 Stock Option Plan. Prior to the completion of the offering, the Board
of Directors and stockholders of the Company will approve the 1996 Stock Option
Plan (the "1996 Plan"). The Company has reserved 550,000 shares of Class B
Common Stock for issuance upon exercise of options granted under the 1996 Plan.
The Company intends to grant options to purchase approximately 350,000 shares of
Class B Common Stock at an exercise price equal to the initial public offering
price immediately prior to the completion of the offering.
Pursuant to the 1996 Plan, executive officers and key employees of the
Company are eligible to receive awards of stock options. The 1996 Plan provides
for the award of NQSO's only. The 1996 Plan will be administered by the Equity
Compensation Committee (the "Committee"). Subject to the provisions of the 1996
Plan, the Committee will determine when and to whom awards will be granted, and
the number of shares covered by each award. The Committee may interpret the 1996
Plan and may at any time adopt such rules and regulations for the 1996 Plan as
it deems advisable. In addition, the Committee may cancel or suspend awards.
Options granted under the 1996 Plan are not transferable or assignable, other
than upon death.
The exercise price for options granted under the 1996 Plan will be at least
100% of the fair market value of a share of Class B Common Stock on the date of
grant. Options will vest ratably on each of the first four anniversaries of the
date of grant. However, notwithstanding such vesting, no option will become
exercisable until the earlier of (i) the date on which the Market Value of the
Class B Common Stock is at least 25% greater than the exercise price of such
option and (ii) the eighth anniversary of the date of grant. "Market Value" of
the Class B Common Stock is determined by taking the average closing price of
the Class A Common Stock on the Nasdaq National Market or the principal
securities exchange on which the Common
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<PAGE> 51
Stock is listed for any five consecutive trading days. Subject to the foregoing,
vested options may be exercised for a period of up to 10 years from the date of
grant.
The Committee may provide for the payment of the option price in cash, by
delivery of other Common Stock having a fair market value equal to the exercise
price, by a combination thereof or by such other manner as the Committee shall
determine, including a cashless exercise procedure.
The Board of Directors may at any time and from time to time suspend,
amend, modify or terminate the 1996 Plan; provided, however, that, to the extent
required by Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") or any other law, regulation or stock exchange
rule, no such change shall be effective without the requisite approval of the
Company's stockholders. In addition, no such change may adversely affect any
award previously granted, except with the written consent of the grantee.
No options may be granted under the 1996 Plan after the tenth anniversary
of the approval of the 1996 Plan.
DEFINED CONTRIBUTION PLANS
401(k) Plan. The Company maintains the Associates' Savings Plan (the
"401(k) Plan"), a defined contribution retirement plan with a cash or deferral
arrangement as described in Section 401(k) of the Code. The 401(k) Plan is
intended to be qualified under Section 401(a) of the Code. All employees who are
at least 21 years old, work at least 1,000 hours a year and are not excluded by
a bargaining agreement or certain other exclusions are eligible to participate
in the 401(k) Plan. The 401(k) Plan provides that each participant may make
elective contributions from 1% to 15% of his or her compensation, subject to
statutory limits. The Company contributes to the 401(k) Plan fifty cents for
every dollar contributed up to the first 4% of an eligible employee's
compensation. All contributions made by participants are fully vested and are
not subject to forfeiture. A participant vests in any contributions made by the
Company at a rate of 20% for each year of service. Each participant's entire
401(k) account is distributed to the participant or his or her beneficiary,
without regard to vesting, upon retirement, death, disability, or termination of
employment with the Company after the completion of five years of service. The
trustee under the 401(k) Plan, at the direction of each participant, invests the
assets of the 401(k) Plan in a number of investment options.
Money Purchase Plan. The Company maintains the Money Purchase Plan for
Former NAD Salaried Employees (the "Money Purchase Plan"), a defined
contribution retirement plan with a cash or deferral arrangement, as described
in Section 401(a) of the Code. All salaried employees of the Company who were
former salaried employees of Martin-Brower immediately preceding the acquisition
of NAD by the Company and either participated in a defined contribution plan or
have completed two years of service with the Company are eligible to participate
in the Money Purchase Plan. As of December 30, 1995, 324 employees participated
in the Money Purchase Plan. All contributions are made by the Company. The
Company contributes an amount equal to 10% of each eligible employee's
compensation, subject to statutory limits. All contributions made by the Company
are fully vested with the participant and are not subject to forfeiture. Each
participant's account is distributed to such participant or the participant's
named beneficiary (or surviving spouse in the case of the death of a
participant) upon the termination of service with the Company, retirement,
disability or death of the participant, generally in the form of an annuity
purchased from the proceeds of the participant's account. A committee appointed
by the Company's Board of Directors, at the direction of each participant,
invests the assets of the Money Purchase Plan in a number of investment options.
PENSION PLANS
ProSource Distribution Services Salaried Defined Benefit Plan (the
"Salaried Pension Plan"), ProSource Distribution Services Hourly Defined Benefit
Plan (the "Hourly Pension Plan") and ProSource Distribution Services Pension
Plan for Former NAD Hourly Employees (the "NAD Pension Plan"; and together with
the Salaried Pension Plan and Hourly Pension Plan, each a "Pension Plan") are
tax-qualified benefit pension plans. The Salaried Pension Plan and Hourly
Pension Plan cover all of the Company's salaried and hourly
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<PAGE> 52
employees, respectively, who have been employed with the Company for at least
one year, subject to certain exceptions. The NAD Pension Plan covers (i) former
NAD employees who participated in the Martin-Brower pension plan and were
employed by the Company by September 30, 1995 and (ii) every other former NAD
employee who completes one year of service for the Company and is compensated on
an hourly or mileage basis. Each Pension Plan is funded through a tax-exempt
trust into which contributions are made as necessary based on actuarial funding
analysis. The Company's funding policy is to contribute an amount not less than
the minimum funding requirements under the Employee Retirement Income Security
Act of 1974, as amended or supplemented, nor more than the maximum deductible
amount for income tax purposes.
Each Pension Plan provides for the payment of benefits upon retirement,
early retirement, death, disability and termination of employment. All benefits
become fully vested after five years of service. Benefits under the Salaried
Pension Plan and NAD Pension Plan are determined under a formula based on a
participant's compensation and credited service. Benefits under the Hourly
Pension Plan are determined under a formula based solely on a participant's
credited service. Participants may elect from several optional forms of benefit
distribution.
SALARIED PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
FINAL AVERAGE -------------------------------------------------------
COMPENSATION (5 YEARS) 15 20 25 30 35
- ---------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$125,000 $29,471 $39,295 $49,199 $58,943 $58,943
150,000 35,721 47,628 59,536 71,443 71,443
175,000 35,721 47,628 59,536 71,443 71,443
200,000 35,721 47,628 59,536 71,443 71,443
225,000 35,721 47,628 59,536 71,443 71,443
250,000 35,721 47,628 59,536 71,443 71,443
300,000 35,721 47,628 59,536 71,443 71,443
400,000 35,721 47,628 59,536 71,443 71,443
450,000 35,721 47,628 59,536 71,443 71,443
500,000 35,721 47,628 59,536 71,443 71,443
550,000 35,721 47,628 59,536 71,443 71,443
</TABLE>
The Named Executive Officers have been credited with the following years of
service under the Salaried Pension Plan: David R. Parker -- four; Thomas C.
Highland -- eight; John E. Foley -- two; and Robert S. Donaldson -- three.
Daniel J. Adzia does not participate in the Salaried Pension Plan. The Salaried
Pension Plan defines "compensation" as cash remuneration to an employee for
services rendered, constituting an employee's salary, bonus, commissions and
contributions to any Company cafeteria plan or cash or deferred arrangement made
by the employee through pre-tax deductions, and credits compensation only up to
the limit of covered compensation under Section 401(a)(17) of the Code. The
covered compensation, as determined under the Salaried Benefit Plan, is, in the
aggregate, not substantially different than the amount reflected in the Annual
Compensation column of the Summary Compensation Table set forth above. The
estimates of annual retirement benefits reflected in the above table are based
on payment in the form of a straight-life annuity and are not subject to any
deduction for Social Security or other offset amounts.
Monthly normal retirement benefits under the Hourly Pension Plan are
determined by taking the product of the participant's years of credited service
(up to a maximum of 30 years) and $20. Monthly normal retirement benefits under
the NAD Pension Plan are equal to 1 3/4% of the participant's covered
compensation for each one-year period of credited service divided by 12.
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<PAGE> 53
CERTAIN TRANSACTIONS
SHAREHOLDERS AGREEMENTS
Management Shareholders Agreement. The following is a summary of certain
provisions of the Amended and Restated Management Shareholders Agreement, dated
as of May 31, 1995, among the Company, Onex and certain officers and employees
("Management Shareholders") of the Company (the "Management Shareholders
Agreement"). The following executive officers of the Company are party to the
Management Shareholders Agreement: David R. Parker, Thomas C. Highland, Daniel
J. Adzia, William F. Evans, Paul A. Garcia de Quevedo, Dennis T. Andruskiewicz,
Robert S. Donaldson, John E. Foley and John P. Gainor.
The Management Shareholders Agreement governs, among other things, the
manner and means by which Common Stock, or securities convertible into shares of
Common Stock, held by the Management Shareholders at any time may be
transferred. Pursuant to such Agreement, the transfer of shares of the Company's
Common Stock, including shares received upon the conversion of options, by
Management Shareholders is prohibited except (i) to immediate family members (or
to trusts for the exclusive benefit of the transferor or his immediate family
members), (ii) to other Management Shareholders or management employees of the
Company in cases of hardship or other unusual circumstances (with the approval
of the Company's Board of Directors), subject to a right of first refusal in
favor of the Company, or (iii) through the public markets, provided that such
sales do not occur within 180 days of any public offering of Common Stock, that
such sales during any 90-day period do not exceed the greater of (a) 500 shares
of Common Stock and (b) 5% of the sum of the Management Shareholder's shares
then held by him and the Management Shareholder's shares previously sold by him
and that such sales do not exceed 50% of his shares in the aggregate, including
shares previously sold, without the prior approval of the Board of Directors,
subject to a right of first refusal in favor of the Company. If the Management
Shareholder's employment terminates for any reason, pursuant to the Company's
Restated Certificate of Incorporation, shares of Class B Common Stock held by
such Management Shareholder shall automatically convert into Class A Common
Stock, unless transferred to Onex or another Management Shareholder. See
"Description of Capital Stock."
The Management Shareholders Agreement provides the Management Shareholders
with the option to participate on a pro rata basis with Onex in sales of Common
Stock, and Onex with the right to compel participation of the Management
Shareholders in sales of Common Stock by Onex, subject, in each case, to certain
exceptions. In addition to the above-described provisions, the Management
Shareholders Agreement contains provisions granting the Management Shareholders
certain registration rights. See "Shares Available for Future Sale."
The Management Shareholders Agreement terminates if Onex ceases to hold in
the aggregate 20% of the outstanding voting capital stock of the Company or if
another person or group holds in the aggregate a greater percentage of the
outstanding voting capital stock of the Company than Onex.
Director Shareholders Agreement. The following is a summary of certain
provisions of the Director Shareholders Agreement, dated as of May 31, 1995,
among the Company, Onex and certain directors ("Director Holders") of the
Company (the "Director Shareholders Agreement" and, together with the Management
Shareholders Agreement, the "Shareholders Agreements"). The following directors
of the Company are party to the Director Shareholders Agreement: Michael E.
Treacy, Michael Carpenter, C. Lee Johnson and R. Geoffrey P. Styles.
The Director Shareholders Agreement governs, among other things, the manner
and means by which Common Stock, or securities convertible into shares of Common
Stock, held by the Director Holders at any time may be transferred. Pursuant to
such Agreement, the transfer of shares of the Common Stock, including shares
received upon the conversion of options, by Director Holders is prohibited
except (i) to immediate family members (or to trusts for the exclusive benefit
of the transferor or his immediate family members), or (ii) through the
facilities of any securities exchange, provided that such sales do not occur
within 180 days of any public offering of Common Stock.
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<PAGE> 54
The Director Shareholders Agreement provides the Director Holders with the
option to participate on a pro rata basis with Onex in sales of Common Stock,
and Onex with the right to compel participation of the Director Holders in sales
of the Common Stock by Onex, subject, in each case, to certain exceptions. In
addition to the above-described provisions, the Director Shareholders Agreement
contains provisions granting the Director Holders certain registration rights.
See "Shares Available for Future Sale."
The Director Shareholders Agreement terminates if Onex ceases to hold in
the aggregate 20% of the outstanding voting capital stock of the Company or if
another person or group holds in the aggregate a greater percentage of the
outstanding voting capital stock of the Company than Onex.
ONEX MANAGEMENT FEES
The Company paid Onex fees of $0.8 million, $0.8 million, $0.8 million and
$0.4 million for management services rendered in 1993, 1994, 1995 and the six
months ended June 29, 1996, respectively. Such fee is payable indefinitely and
is subject to an annual inflation adjustment. Onex has agreed to relinquish its
right to receive such fee upon completion of the offering, in consideration for
which Onex will receive $4.0 million payable in Class B Common Stock valued at
the initial public offering price.
CERTAIN EQUITY OFFERINGS TO MANAGEMENT
In January 1996, the Company completed the sale of 61,500 shares of Common
Stock in the aggregate to certain officers and management employees of the
Company at a purchase price of $10.00 per share. In May 1995, the Company
completed the sale of 208,500 shares of Common Stock in the aggregate to certain
directors, officers and management employees of the Company at a purchase price
of $10.00 per share. During 1994, the Company sold 6,900 shares of Common Stock
in the aggregate to certain officers and directors of the Company at a purchase
price of $11.00 per share. During 1993, the Company sold 125,600 shares of
Common Stock in the aggregate to certain directors, officers and employees of
the Company at a purchase price of $11.00 per share. Of these shares, the number
of such shares purchased by each executive officer and director of the Company
who purchased shares during such periods, and the aggregate amount of the
purchase price financed through Company-guaranteed loans, is set forth below:
<TABLE>
<CAPTION>
EXECUTIVE OFFICER OR DIRECTOR NUMBER OF SHARES AMOUNT FINANCED
----------------------------------------------------- ---------------- ---------------
<S> <C> <C>
David R. Parker...................................... 143,300 $ 373,188
Thomas C. Highland................................... 75,000 450,000
Daniel J. Adzia...................................... 45,000 300,000
William F. Evans..................................... 45,000 300,000
Paul A. Garcia de Quevedo............................ 15,000 100,000
Dennis T. Andruskiewicz.............................. 13,000 75,000
Robert S. Donaldson.................................. 20,400 150,000
John E. Foley........................................ 30,000 --
John P. Gainor....................................... 15,000 100,000
Michael E. Treacy.................................... 30,000 220,000
Michael Carpenter.................................... 18,200 --
C. Lee Johnson....................................... 4,500 --
R. Geoffrey P. Styles................................ 4,500 --
</TABLE>
The aggregate amount of such loans guaranteed by the Company as of June 29,
1996 was $3.3 million. The shares of Common Stock purchased were pledged to the
Company as collateral for the Company's guaranty. All of such shares are subject
to the Shareholders Agreements. Pursuant to the Shareholders Agreements, the
Company may purchase such shares at a discount if a shareholder defaults on such
indebtedness.
ONEX SUBORDINATED NOTES
In connection with the financing of the acquisition of BKDS, the Company
issued to Onex, a 10% convertible subordinated note due 2002, in the principal
amount of $2.5 million (the "Onex Convertible Note"). In connection with the
acquisition of NAD, the Company issued to Onex a 12% Subordinated Note
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<PAGE> 55
due 2005 in the principal amount of $15 million (the "12% Subordinated Note")
and a convertible subordinated note due 2005 in the principal amount of $3.5
million (the "Onex NAD Note"). Onex intends to convert $2.5 million of principal
and $1.0 million of accrued interest outstanding under the Onex Convertible Note
into 350,100 shares of Common Stock immediately prior to completion of the
offering based on the stated conversion price of $10.00 per share. The
outstanding principal balance of $15 million under the 12% Subordinated Note
will be prepaid using the proceeds of the offering. During the year ended
December 30, 1995, $2.1 million of principal under the Onex NAD Note was repaid,
resulting in an outstanding balance of $1.4 million at December 30, 1995. On
February 1, 1996, Onex converted $0.8 million principal amount of the Onex NAD
Note into 80,000 shares of the Common Stock and the remaining balance on such
note of approximately $0.6 million plus accrued interest of $0.1 million was
paid to Onex. See "Use of Proceeds."
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<PAGE> 56
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock before the offering and after giving
effect to the offering by (i) each person known to the Company to own
beneficially more than 5% of any class of the Company's outstanding Common
Stock, (ii) each director of the Company, (iii) each Named Executive Officer of
the Company, and (iv) all executive officers and directors of the Company, as a
group. All information with respect to beneficial ownership has been furnished
to the Company by the respective stockholders of the Company. 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. None of the Company's
stockholders are selling shares in the offering.
<TABLE>
<CAPTION>
SHARES OF CLASS B SHARES OF CLASS B
COMMON STOCK COMMON STOCK CLASS A AND B
BENEFICIALLY OWNED BENEFICIALLY OWNED COMBINED VOTING
PRIOR TO THE OFFERING(1) AFTER THE OFFERING(1) POWER(2)
------------------------ ------------------------ ---------------
NAME NUMBER PERCENTAGE NUMBER PERCENTAGE PERCENTAGE
- ----------------------------------- --------- ---------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Onex Corporation(4)................ 4,458,696 84.1% 4,808,796 85.1% 80.2%
161 Bay Street
Toronto, Ontario
Canada
Onex DHC LLC(4).................... 4,458,696 84.1 4,458,696 78.9 74.4
421 Leader Street
Marion, Ohio 43302
David R. Parker(3)................. 153,798 2.9 153,798 2.7 2.6
Thomas C. Highland(3).............. 80,438 1.5 80,438 1.4 1.3
Daniel J. Adzia(3)................. 47,250 * 47,250 * *
Robert S. Donaldson(3)............. 21,420 * 21,420 * *
John E. Foley(3)................... 31,500 * 31,500 * *
Gerald W. Schwartz(4).............. 4,572,000 86.2 4,922,100 87.1 82.1
Anthony R. Melman(5)............... -- -- -- -- --
Michael E. Treacy(3)............... 31,500 * 31,500 * *
Michael Carpenter.................. 18,200 * 18,200 * *
Anthony Munk(5).................... -- -- -- -- --
C. Lee Johnson..................... 4,500 * 4,500 * *
R. Geoffrey P. Styles.............. 7,300 * 7,300 * *
All directors and executive
officers of the Company as a
group (17 persons)............... 5,061,056 95.0 5,411,156 95.3 89.9
</TABLE>
- ---------------
* Less than 1%.
(1) Pursuant to the Recapitalization, prior to completion of the offering, the
Company's Common Stock will be converted into Class B Common Stock and all
of the Company's existing stockholders will receive shares of Class B Common
Stock in exchange for the shares of Common Stock currently held by them.
Each share of Class B Common Stock will be convertible into Class A Common
Stock on a one-to-one basis at any time at the option of the holder thereof
and in certain other circumstances. All information in the table gives
effect to the Recapitalization and assumes that no shares of Class B Common
Stock are converted into shares of Class A Common Stock. See "Description of
Capital Stock."
(2) The column entitled "Class A and Class B Combined Voting Power Percentage"
in the table shows the combined voting power of the votes attributable to
Class A Common Stock (each share of which is entitled to one vote) and Class
B Common Stock (each share of which is entitled to ten votes) of the holders
thereof.
(3) Includes shares of Common Stock which the directors and executive officers
have the right to acquire through the exercise of options within 60 days as
follows: David R. Parker -- 10,498; Thomas C. Highland -- 5,438; Daniel J.
Adzia -- 2,250; Robert S. Donaldson -- 1,020; John E. Foley -- 1,500; and
Michael E. Treacy -- 1,500.
(4) Includes 4,458,696 shares with respect to which Onex Corporation, Onex DHC
LLC and Mr. Schwartz share beneficial ownership.
(5) Excludes shares in which Messrs. Melman and Munk have an indirect interest,
with respect to which Mr. Schwartz is the beneficial owner.
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<PAGE> 57
In addition, as of October 16, 1996, Messrs. Schwartz, Melman and Styles
beneficially owned 14,639,639, 62,000 and 14,000 subordinate voting shares of
Onex Corporation ("Subordinate Voting Shares"), respectively, representing 36.3%
of the outstanding Subordinate Voting Shares in the case of Mr. Schwartz, and
less than 1% of the outstanding Subordinate Voting Shares in the case of Messrs.
Melman and Styles. All directors and executive officers of the Company as a
group owned 14,715,639 Subordinate Voting Shares, representing 36.5% of the
outstanding Subordinate Voting Shares. Subordinate Voting Shares beneficially
owned includes shares which Messrs. Schwartz (400,000), Melman (62,000) and
Styles (6,000) may have the right to acquire through the exercise of options
within 60 days (the options become exercisable in the event that the average
market price of the Subordinate Voting Shares exceeds the exercise price of the
options (Cdn. $13.25) by at least 25%). Mr. Schwartz also beneficially owns
100,000 multiple voting shares of Onex Corporation ("Multiple Voting Shares"),
representing all of the outstanding Multiple Voting Shares. All information with
respect to beneficial ownership of Onex Corporation capital stock has been
furnished by the respective stockholders of Onex Corporation. Subordinate Voting
Shares carry one vote per share and as a class are entitled to 40% of the
aggregate votes attached to all voting shares of Onex Corporation, to elect 40%
of Onex Corporation's Board of Directors and to appoint the auditors. Multiple
Voting Shares are entitled to elect 60% of Onex Corporation's Board of Directors
and carry such number of votes in the aggregate as represents 60% of the
aggregate votes attached to all voting shares of Onex Corporation.
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<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of (i) 50,000,000
shares of Class A Common Stock, par value $0.01 per share, and 10,000,000 shares
of Class B Common Stock, par value $0.01 per share, and (ii) 10,000,000 shares
of Preferred Stock, par value $0.01 per share. Of the authorized shares of Class
A Common Stock, 3,400,000 shares are being offered in the offering and 6,851,025
shares will be reserved for issuance upon conversion of Class B Common Stock
into Class A Common Stock. Of the authorized shares of Class B Common Stock,
5,652,400 will be held by the Company's existing stockholders, and 1,208,625
will be reserved for issuance upon exercise of options and warrants and
conversion of outstanding convertible indebtedness. No shares of preferred stock
will be issued and outstanding upon completion of the offering. A description of
the material terms and provisions of the Company's Restated Certificate of
Incorporation affecting the relative rights of the Class A Common Stock, the
Class B Common Stock and the Preferred Stock is set forth below. The following
description of the capital stock of the Company is intended as a summary only
and is qualified in its entirety by reference to the form of the Company's
Restated Certificate of Incorporation filed with the Registration Statement of
which this Prospectus forms a part and to Delaware corporate law.
COMMON STOCK
Voting Rights. Except for matters where applicable law requires the
approval of one or both classes of Common Stock voting as separate classes and
as otherwise described below, holders of Class A Common Stock and Class B Common
Stock vote as a single class on all matters submitted to a vote of the
stockholders, including the election of directors. Each share of Class A Common
Stock is entitled to one vote and each share of Class B Common Stock is entitled
to ten votes. Generally, all matters to be voted on by stockholders must be
approved by a majority (or, in the case of election of directors, by a
plurality) of the votes entitled to be cast by all shares of Class A Common
Stock and Class B Common Stock present in person or represented by proxy, voting
together as a single class. Under Delaware law, the affirmative vote of the
holders of a majority of the outstanding shares of Class A Common Stock would be
required to approve, among other matters, an adverse change in the powers,
preferences or special rights of the shares of Class A Common Stock.
Dividends. Holders of Class A Common Stock and Class B Common Stock will
share ratably in any dividend declared by the board of directors, subject to any
preferential rights of any outstanding Preferred Stock. Dividends consisting of
shares of Class A Common Stock and Class B Common Stock may be paid only as
follows: (i) shares of Class A Common Stock may be paid only to holders of
shares of Class A Common Stock, and shares of Class B Common Stock may be paid
only to holders of Class B Common Stock; and (ii) shares shall be paid
proportionally with respect to each outstanding share of Class A and Class B
Common Stock.
The Company may not subdivide or combine shares of either class of Common
Stock without at the same time proportionally subdividing or combining shares of
the other class.
Conversion. Each share of Class B Common Stock is convertible at the
option of the holder thereof into one share of Class A Common Stock. Any shares
of Class B Common Stock transferred to a person other than an existing holder of
Class B Common Stock or any affiliate thereof shall automatically convert into
shares of Class A Common Stock upon such disposition. In addition, in the event
that any employee of the Company holding Class B Common Stock ceases to be an
employee for any reason, the shares of Class B Common Stock held by such
employee shall automatically convert into shares of Class A Common Stock, unless
transferred to Onex or another employee stockholder.
Other Rights. In the event of any merger or consolidation of the Company
with or into another company that is not a subsidiary of the Company in
connection with which shares of Common Stock are converted into or exchangeable
for shares of stock, other securities or property (including cash), all holders
of Common
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<PAGE> 59
Stock, regardless of class, will be entitled to receive the same kind and amount
of shares of stock and other securities and property (including cash).
On liquidation, dissolution or winding up of the Company, after payment in
full of the amounts required to be paid to holders of Preferred Stock, if any,
all holders of Common Stock, regardless of class, are entitled to share ratably
in any assets available for distribution to holders of shares of Common Stock.
No shares of either class of Common Stock are subject to redemption or have
preemptive rights to purchase additional shares of Common Stock.
Upon completion of the offering, all the outstanding shares of Class A
Common Stock and Class B Common Stock will be legally issued, fully paid and
nonassessable.
PREFERRED STOCK
The Preferred Stock is issuable from time to time in one or more series and
with such designations and preferences for each series as shall be stated in the
resolutions providing for the designation and issue of each such series adopted
by the board of directors of the Company. The board of directors is authorized
by the Company's Restated Certificate of Incorporation to determine, among other
things, the voting, dividend, redemption, conversion and liquidation powers,
rights and preferences and the limitations thereon pertaining to such series.
The board of directors, without stockholder approval, may issue Preferred Stock
with voting and other rights that could adversely affect the voting power of the
holders of the Common Stock and could have certain anti-takeover effects. The
Company has no present plans to issue any shares of Preferred Stock. The ability
of the board of directors to issue Preferred Stock without stockholder approval
could have the effect of delaying, deferring or preventing a change in control
of the Company or the removal of existing management.
LIMITATION ON THE LIABILITY OF DIRECTORS
The Company's Restated Certificate of Incorporation provides that, to the
fullest extent permitted by the Delaware General Corporation Law (the "DGCL"),
directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breaches of their fiduciary duty as a
director. This provision, however, does not eliminate a director's liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases or (iv)
for any transactions from which the director derived an improper personal
benefit. In addition, this provision does not limit directors' liability under
federal securities laws.
DELAWARE LAW, CHARTER AND BY-LAW PROVISIONS
Section 203 of the DGCL prohibits certain business combinations with
certain stockholders for a period of three years after they acquire 15% of the
outstanding voting stock of a corporation. The Company has expressly elected not
to be governed by Section 203 of the DGCL.
The Restated Certificate of Incorporation and By-Laws of the Company to be
adopted upon completion of the offering will (i) prohibit the stockholders of
the Company from taking action by written consent in lieu of a meeting by less
than unanimous written consent and (ii) provide that special meetings of
stockholders may be called only by the Board of Directors. Such provisions could
have the effect of discouraging attempts by others to obtain control of the
Company or delaying changes in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A and Class B Common Stock
is The Bank of New York.
56
<PAGE> 60
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 3,400,000 shares of
Class A Common Stock issued and outstanding and 5,652,400 shares of Class B
Common Stock issued and outstanding. All of the shares of Class A Common Stock
to be sold in the offering will be freely tradeable without restrictions or
further registration under the Securities Act, except for any shares purchased
by an "affiliate" of the Company (as that term is defined in Rule 144), which
will be subject to the resale limitations of Rule 144. The shares of Class B
Common Stock to be outstanding upon completion of the offering are convertible
into shares of Class A Common Stock on a one-to-one basis at the option of the
holder and in certain other circumstances. Shares of Class A Common Stock
issuable upon conversion of Class B Common Stock have not have been registered
under the Securities Act and may not be sold in the absence of an effective
registration statement under the Securities Act other than in accordance with
Rule 144 or another exemption from registration.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares of
Common Stock for at least two years, or a person who may be deemed an
"affiliate", is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of one percent of the total number of
shares of the class of stock being sold or the average weekly reported trading
volume of the class of stock being sold during the four calendar weeks preceding
such sale. A person who is not deemed an "affiliate" of the Company at any time
during the three months preceding a sale and who has beneficially owned shares
for at least three years is entitled to sell such shares under Rule 144 without
regard to the volume limitations described above. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly through the use
of one or more intermediaries controls, is controlled by, or is under common
control with, such issuer. The Securities and Exchange Commission (the
"Commission") has published a notice of proposed rulemaking which, if adopted as
proposed, would shorten the applicable holding periods to one and two years,
respectively (from the current two- and three-year periods described above). The
Company cannot predict whether such amendments will be adopted or the effect
thereof on the trading market for the Class A Common Stock. The foregoing
summary of Rule 144 is not intended to be a complete description thereof.
Certain directors, officers and management employees, holding an aggregate
of 1,080,500 shares and options to purchase shares of Class B Common Stock (the
"Management Shares"), and Martin-Brower, the holder of a warrant to purchase
283,425 shares of Class B Common Stock (the "Martin-Brower Shares"), have
certain rights to require the Company to register under the Securities Act sales
of shares of Class A Common Stock issuable upon conversion of such shares,
subject to certain restrictions. If, subsequent to the completion of the
offering, the Company proposes to register any of its securities under the
Securities Act, such holders are entitled to notice of such registration and to
include their shares in such registration with their expenses borne by the
Company, subject to the right of an underwriter participating in the offering to
limit the number of shares included in the registration by such holders. With
regard to the Management Shares, the Company is required only to register such
shares on a pro rata basis with shares registered on behalf of Onex.
The Company and each of the Company's existing stockholders have agreed,
among other things, not to sell or otherwise transfer any shares of Common Stock
for a period of 180 days after the date of this Prospectus. See "Underwriters."
Prior to the offering, there has been no market for the Class A Common
Stock and no prediction can be made as to the effect, if any, that market sales
of outstanding shares of Class A Common Stock, or the availability of such
shares for sale, will have on the market price of the Class A Common Stock
prevailing from time to time. Nevertheless, sales of substantial amounts of
Class A Common Stock in the public market, or the perception that such sales
could occur, could adversely affect prevailing market prices for the Class A
Common Stock offered in the offering.
57
<PAGE> 61
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below have severally
agreed to purchase, and the Company has agreed to sell to them, severally, the
respective number of shares of Class A Common Stock set forth opposite the names
of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Morgan Stanley & Co. Incorporated.........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................
Smith Barney Inc. ........................................................
-------
Total........................................................... 3,400,000
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Class A Common Stock offered hereby (other
than those covered by the over-allotment option described below) if any such
shares are taken.
The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other Underwriters or to certain other dealers. After the
initial offering of the shares of Class A Common Stock, the offering price and
other selling terms may from time to time be varied by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 510,000
additional shares of Class A Common Stock at the public offering price set forth
on the cover page hereof, less underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
Class A Common Stock offered hereby. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of Class A
Common Stock as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares of Class A Common Stock
offered by the Underwriters hereby.
The Underwriters have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
Application has been made to have the Class A Common Stock approved for
quotation on the Nasdaq National Market under the symbol "PSDS."
The Company and each of the Company's existing stockholders, have agreed,
subject to certain exceptions described below, not to (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock (whether such shares or any such securities are now owned by the
undersigned or are hereafter acquired), or (ii) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Common Stock, whether
58
<PAGE> 62
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise for a
period of 180 days after the date of this Prospectus, without the prior written
consent of Morgan Stanley & Co. Incorporated, as representative of the several
Underwriters, provided that the Company may issue shares upon the exercise of an
option or warrant or the conversion of a security outstanding on the date of
this Prospectus of which the Underwriters have been advised, during such 180-day
period. The lock-up agreements permit (i) the pledge of Common Stock as security
for existing indebtedness incurred in connection with financing the purchase of
such Common Stock and any refinancings thereof, and (ii) in the case of Onex,
the transfer of Common Stock to any Onex affiliate.
From time to time, certain of the Underwriters have provided, and continue
to provide, investment banking services to the Company and its affiliates. Mr.
Michael Carpenter, a director of the Company, serves as Executive Vice President
of Travelers Group, Inc. Smith Barney Inc., one of the Underwriters, is a
wholly-owned subsidiary of Travelers Group, Inc.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price has been determined by negotiations
between the Company and the Underwriters. Among the factors considered in
determining the initial public offering price were the future prospects of the
Company and its industry in general, sales, earnings and certain other financial
and operating information of the Company in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of the Company.
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby and
certain legal matters will be passed upon for the Company by Kaye, Scholer,
Fierman, Hays & Handler, LLP, New York, New York and for the Underwriters by
Davis Polk & Wardwell.
EXPERTS
The consolidated financial statements of ProSource, Inc., as of December
31, 1994 and December 30, 1995, and each of the years in the three-year period
ended December 30, 1995 (and related schedules), have been included herein and
in the registration statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The combined financial statements of the National Accounts Division (a
division of The Martin-Brower Company) as of July 1, 1994 and July 2, 1993 and
for the years then ended included in this Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, schedules and exhibits thereto, the
"Registration Statement") under the Securities Act with respect to the Class A
Common Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Class A Common Stock, reference is made to the
Registration Statement, which may be inspected, without charge, at the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its New York
59
<PAGE> 63
Regional Office, Seven World Trade Center, 13th Floor, New York, New York 10048
and its Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of all or any portion of the Registration Statement
may be obtained from the Public Reference Section of the Commission, upon
payment of prescribed fees. In addition, the Commission maintains a web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's web site is http://www.sec.gov.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
60
<PAGE> 64
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
<S> <C>
Independent Auditors' Report........................................................ F-2
ProSource, Inc. Consolidated Balance Sheets as of December 31, 1994, December 30,
1995 and June 29, 1996............................................................ F-3
ProSource, Inc. Consolidated Statements of Operations for the years ended
December 25, 1993, December 31, 1994, December 30, 1995 and the periods ended
July 1, 1995 and June 29, 1996.................................................... F-4
ProSource, Inc. Consolidated Statements of Stockholders' Equity for the years ended
December 25, 1993, December 31, 1994, December 30, 1995 and the period ended
June 29, 1996..................................................................... F-5
ProSource, Inc. Consolidated Statements of Cash Flows for the years ended
December 25, 1993, December 31, 1994, December 30, 1995 and the periods ended July
1, 1995 and June 29, 1996......................................................... F-6
ProSource, Inc. Notes to Consolidated Financial Statements.......................... F-7
National Accounts Division Unaudited Condensed Combined Balance Sheet as of
March 31, 1995.................................................................... F-22
National Accounts Division Unaudited Condensed Combined Statement of Income and
Changes in Divisional Equity for the thirty-nine weeks ended March 31, 1995....... F-23
National Accounts Division Unaudited Condensed Combined Statement of Cash Flows for
the thirty-nine weeks ended March 31, 1995........................................ F-24
National Accounts Division Notes to Unaudited Condensed Combined Financial
Statements........................................................................ F-25
Report of Independent Accountants................................................... F-27
National Accounts Division Combined Balance Sheets as of July 2, 1993 and July 1,
1994.............................................................................. F-28
National Accounts Division Combined Statements of Income and Changes in Divisional
Equity for the 52 weeks ended July 2, 1993 and July 1, 1994....................... F-29
National Accounts Division Combined Statements of Cash Flows for the 52 weeks ended
July 2, 1993 and July 1, 1994..................................................... F-30
National Accounts Division Notes to Combined Financial Statements................... F-31
ProSource, Inc. Unaudited Pro Forma Condensed Consolidated Statements of
Operations........................................................................ F-39
ProSource, Inc. Unaudited Pro Forma Condensed Consolidated Statements of Operations
for the year ended December 30, 1995.............................................. F-40
ProSource, Inc. Unaudited Pro Forma Condensed Consolidated Statements of Operations
for the six months ended June 29, 1996............................................ F-41
ProSource, Inc. Notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations........................................................................ F-42
</TABLE>
F-1
<PAGE> 65
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 31, 1994 and December 30, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 30, 1995. 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 31, 1994 and December 30, 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 30, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Miami, Florida
February 1, 1996, except for Note 14,
as to which the date is October 10, 1996
F-2
<PAGE> 66
PROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994, DECEMBER 30, 1995 AND JUNE 29, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
1996 (NOTE PRO FORMA
1994 1995 1996 15) 1996
-------- -------- ----------- ------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 1,151 $ 2,325 $ 2,750 -- $ 2,750
Accounts receivable, net of allowance for
doubtful accounts of $2,911, $2,585 and $2,459
in 1994, 1995 and 1996, respectively........... 122,668 230,089 218,986 -- 218,986
Inventories...................................... 41,054 140,432 149,218 -- 149,218
Deferred income taxes, net....................... 1,393 4,298 11,118 -- 11,118
Prepaid expenses and other current assets........ 5,765 10,736 12,079 -- 12,079
-------- -------- -------- -------- --------
Total current assets...................... 172,031 387,880 394,151 -- 394,151
Property and equipment, net........................ 29,166 52,507 41,372 -- 41,372
Intangible assets, net............................. 12,850 36,450 43,135 -- 43,135
Deferred income taxes, net......................... 1,944 3,901 12,551 -- 12,551
Other assets, principally deferred debt issuance
costs, less accumulated amortization of $1,065,
$1,397 and $2,329 in 1994, 1995 and 1996,
respectively..................................... 2,338 8,435 10,795 -- 10,795
-------- -------- -------- -------- --------
Total assets.............................. $218,329 $489,173 $ 502,004 $ -- $502,004
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $115,527 $242,645 $ 249,395 -- $249,395
Accrued liabilities.............................. 12,699 27,819 29,711 -- 29,711
Current portion of long-term senior debt......... 2,183 1,500 1,500 -- 1,500
-------- -------- -------- -------- --------
Total current liabilities................. 130,409 271,964 280,606 -- 280,606
Long-term senior debt, less current portion........ 59,838 132,011 143,094 -- 143,094
Subordinated notes payable to Onex................. 3,126 19,791 18,501 (3,501) 15,000
Other subordinated notes payable................... 500 9,918 10,332 -- 10,332
Other noncurrent liabilities....................... 1,913 6,068 16,759 -- 16,759
-------- -------- -------- -------- --------
Total liabilities......................... 195,786 439,752 469,292 (3,501) 465,791
-------- -------- -------- -------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
10,000,000 shares; issued and outstanding no
shares in 1994, no shares in 1995 and no shares
in 1996........................................ -- -- -- -- --
Class A Common Stock, $.01 par value. Authorized
50,000,000 shares; issued and outstanding no
shares in 1994, no shares in 1995 and no shares
in 1996 and 3,400,000 shares on a pro forma
basis.......................................... -- -- -- -- --
Class B Common Stock, $.01 par value. Authorized
10,000,000 shares; issued and outstanding
2,341,800 shares in 1994, 5,177,300 shares in
1995 and 5,302,300 shares in 1996 and 5,652,400
shares on a pro forma basis.................... 23 52 53 4 57
Additional paid-in-capital....................... 23,504 51,838 53,088 3,497 56,585
Accumulated deficit.............................. (984) (2,540) (20,497) -- (20,497)
Accumulated foreign currency translation
adjustments.................................... -- 71 68 -- 68
-------- -------- -------- -------- --------
Total stockholders' equity................ 22,543 49,421 32,712 3,501 36,213
-------- -------- -------- -------- --------
Total liabilities and stockholders'
equity.................................. $218,329 $489,173 $ 502,004 $ -- $502,004
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 67
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 25, 1993,
DECEMBER 31, 1994, DECEMBER 30, 1995 AND THE
PERIODS ENDED JULY 1, 1995 AND JUNE 29, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993 1994 1995 1995 1996
(52 WEEKS) (53 WEEKS) (52 WEEKS) (26 WEEKS) (26 WEEKS)
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................ $1,329,347 $1,598,136 $3,461,837 $1,447,760 $2,014,074
Cost of sales........................ 1,210,942 1,464,545 3,193,270 1,332,939 1,859,000
---------- ---------- ---------- ---------- ----------
Gross profit............... 118,405 133,591 268,567 114,821 155,074
Operating expenses, including
management fees to Onex of $751,
$781 and $808 in fiscal years 1993,
1994 and 1995, respectively, and
$412 and $414 in the periods ended
July 1, 1995 and June 29, 1996,
respectively....................... 114,204 131,023 255,216 110,692 149,758
Loss on impairment of long-lived
assets............................. -- -- -- -- 15,733
Restructuring charges................ -- -- 711 68 10,866
---------- ---------- ---------- ---------- ----------
Earnings (loss) from
operations............... 4,201 2,568 12,640 4,061 (21,283)
Interest expense, including interest
to Onex of $246, $255 and $1,738 in
the fiscal years 1993, 1994 and
1995, respectively, and $649 and
$1,033 in the periods ended July 1,
1995 and June 29, 1996,
respectively....................... (5,766) (6,868) (14,678) (6,781) (8,152)
Interest income...................... 241 271 1,339 531 866
---------- ---------- ---------- ---------- ----------
Loss before income taxes
and extraordinary
charge................... (1,324) (4,029) (699) (2,189) (28,569)
Income tax (provision) benefit....... 497 1,647 (85) 965 10,612
---------- ---------- ---------- ---------- ----------
Loss before extraordinary charge... (827) (2,382) (784) (1,224) (17,957)
Extraordinary charge, net of income
tax benefit of $502 in 1995........ -- -- (772) (772) --
---------- ---------- ---------- ---------- ----------
Net loss................... $ (827) $ (2,382) $ (1,556) $ (1,996) $ (17,957)
========== ========== ========== ========== ==========
Net loss per share:
Loss before extraordinary charge... $ (0.34) $ (0.99) $ (0.17) $ (0.33) $ (3.39)
---------- ---------- ---------- ---------- ----------
Net loss........................... $ (0.34) $ (0.99) $ (0.35) $ (0.53) $ (3.39)
========== ========== ========== ========== ==========
Average outstanding shares used in
calculation (in thousands)......... 2,406 2,410 4,491 3,746 5,302
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 68
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 25, 1993,
DECEMBER 31, 1994, DECEMBER 30, 1995
AND THE PERIOD ENDED JUNE 29, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL ACCUMULATED FOREIGN CURRENCY
COMMON PAID-IN EARNINGS TRANSLATION
STOCK CAPITAL (DEFICIT) ADJUSTMENTS TOTAL
------ ---------- ----------- ---------------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992............... $ 22 $ 22,478 $ 2,225 $ -- $ 24,725
Issuance of 125,600 shares............. 1 1,381 -- -- 1,382
Acquisition and retirement of 1,500
shares.............................. -- (16) -- -- (16)
Net loss............................... -- -- (827) -- (827)
--
--- ------ ------- -------
Balance, December 25, 1993............... 23 23,843 1,398 -- 25,264
Issuance of 6,900 shares............... -- 76 -- -- 76
Acquisition and retirement of 39,200
shares.............................. -- (415) -- -- (415)
Net loss............................... -- -- (2,382) -- (2,382)
--
--- ------ ------- -------
Balance, December 31, 1994............... 23 23,504 (984) -- 22,543
Issuance of 2,858,500 shares........... 29 28,556 -- -- 28,585
Acquisition and retirement of 23,000
shares.............................. -- (222) -- -- (222)
Foreign currency translation
adjustments......................... -- -- -- 71 71
Net loss............................... -- -- (1,556) -- (1,556)
--
--- ------ ------- -------
Balance, December 30, 1995............... 52 51,838 (2,540) 71 49,421
Issuance of 141,500 shares
(unaudited)......................... 1 1,414 -- -- 1,415
Acquisition and retirement of 16,500
shares (unaudited).................. -- (164) -- -- (164)
Foreign currency translation
adjustments (unaudited)............. -- -- -- (3) (3)
Net loss (unaudited)................... -- -- (17,957) -- (17,957)
--
--- ------ ------- -------
Balance at June 29, 1996 (unaudited)..... $ 53 $ 53,088 $ (20,497) $ 68 $ 32,712
=== ====== ======= == =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 69
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 25, 1993,
DECEMBER 31, 1994, DECEMBER 30, 1995 AND THE
PERIODS ENDED JULY 1, 1995 AND JUNE 29, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995 1995 1996
(52 WEEKS) (53 WEEKS) (52 WEEKS) (26 WEEKS) (26 WEEKS)
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (827) $ (2,382) $ (1,556 ) $ (1,996 ) $(17,957)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and
equipment............................................ 5,047 4,868 9,163 4,415 3,444
Amortization of intangible assets and deferred debt
issuance costs....................................... 2,846 3,103 3,530 1,147 1,881
Bad debt expense....................................... 766 2,427 1,845 757 960
Write-off of deferred loan fees........................ -- -- 1,274 1,274 --
Loss on impairment of long-lived assets................ -- -- -- -- 15,733
Deferred income taxes (benefit)........................ 697 (1,391) (1,749 ) (1,581 ) (10,740)
Gain on sale of property and equipment................. (166) (325) (184 ) (13 ) --
Changes in operating assets and liabilities, net of
effects of companies purchased:
Decrease (increase) in accounts receivable........... (16,159) (25,150) (13,441 ) (7,965 ) 10,143
(Increase) decrease in inventories................... (6,255) 865 7,706 7,038 (8,786)
(Increase) decrease in prepaid expenses and other
current assets.................................... (3,719) 2,723 (4,321 ) (2,390 ) (4,093)
(Increase) decrease in other assets.................. (2,737) (802) 1,208 313 (12,966)
Increase in accounts payable......................... 29,116 18,450 45,423 1,662 6,750
Increase (decrease) in accrued liabilities........... 1,469 (104) 2,997 33,041 1,892
Increase (decrease) in other noncurrent
liabilities....................................... (1,102) (1,365) (1,898 ) 181 10,691
-------- -------- --------- --------- --------
Net cash provided by (used in) operating
activities........................................ 8,976 917 49,997 35,883 (3,048)
-------- -------- --------- --------- --------
Cash flows from investing activities:
Capital expenditures..................................... (3,518) (1,376) (5,683 ) (1,709 ) (7,982)
Proceeds from sale of property and equipment............. 615 445 362 67 --
Payment for purchase of net assets acquired.............. (13,202) (3,792) (170,279 ) (141,119 ) --
Proceeds from settlement of purchase price provisions.... -- 6,600 -- -- --
-------- -------- --------- --------- --------
Net cash (used in) provided by investing
activities...................................... (16,105) 1,877 (175,600 ) (142,761 ) (7,982)
-------- -------- --------- --------- --------
Cash flows from financing activities:
Repayments of long-term debt to Onex..................... -- -- (2,085 ) (2,085 ) (615)
Repayments of long-term debt to others................... (1,781) (32,247) (78,938 ) (14,136 ) (1,550)
Borrowings on long-term debt to Onex..................... 371 255 18,750 18,625 125
Borrowings on long-term debt to others................... 8,718 29,124 160,616 75,678 12,247
Proceeds from issuance of common stock to Onex........... -- -- 26,500 26,500 800
Proceeds from issuance of common stock to others......... 1,382 76 2,085 2,085 615
Payments to acquire and retire treasury stock............ (16) (415) (222 ) (212 ) (164)
-------- -------- --------- --------- --------
Net cash provided by (used in) financing
activities...................................... 8,674 (3,207) 126,706 106,455 11,458
-------- -------- --------- --------- --------
Effect of exchange rate changes on cash.................... -- -- 71 -- (3)
Net increase (decrease) in cash and cash
equivalents..................................... 1,545 (413) 1,174 (423 ) 425
Cash and cash equivalents at beginning of year............. 19 1,564 1,151 1,151 2,325
-------- -------- --------- --------- --------
Cash and cash equivalents at end of year................... $ 1,564 $ 1,151 $ 2,325 $ 728 $ 2,750
======== ======== ========= ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest to Onex....................................... $ -- -- 41 41 1,904
======== ======== ========= ========= ========
Interest to others..................................... $ 5,569 $ 6,264 $ 12,291 $ 5,725 $ 6,506
======== ======== ========= ========= ========
Income taxes, net of refunds........................... $ 930 $ 279 $ 993 $ 30 $ 123
======== ======== ========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 70
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995 AND JUNE 29, 1996
(INSOFAR AS THESE NOTES REFER TO THE PERIOD SUBSEQUENT
TO DECEMBER 30, 1995, THEY ARE UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ProSource, Inc. (the "Parent") is engaged in the foodservice distribution
business, specializing in limited-menu quick service and casual dining
restaurant customers, primarily operating in the United States. ProSource, Inc.
and subsidiaries (the "Company") distribute to approximately 14,450 restaurants
consisting primarily of Burger King, Arby's, Long John Silver's, Sonic,
Chick-fil-A, Wendy's, Red Lobster, Olive Garden, TGI Friday's, Chili's and TCBY
restaurant concepts.
The Parent operates through three subsidiaries, ProSource Services
Corporation ("PSC"), ProSource Distribution Services Limited ("ProSource
Canada") and BroMar Services, Inc. ("BroMar"). PSC commenced operations in July
1992. The consolidated financial statements include the results of the
operations of PSC from its inception and the results of operations of ProSource
Canada and BroMar (both of which were acquired by the Company as part of 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.
The following is a summary of the Company's significant accounting
policies:
(a) Interim Financial Information
The unaudited consolidated balance sheet as of June 29, 1996, and the
unaudited consolidated statements of operations and cash flows for the 26 weeks
ended July 1, 1995 and June 29, 1996 and the unaudited consolidated statement of
stockholders' equity for the 26 weeks ended June 29, 1996 include, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the Company's consolidated financial
position, results of operations and cash flows. Operating results for the 26
weeks ended June 29, 1996 are not necessarily indicative of the results that may
be expected for the fiscal year ending December 28, 1996.
(b) Basis 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) Accounting Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE> 71
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Cash and Cash Equivalents
Cash and cash equivalents include commercial paper with original maturities
of three months or less, and cash on hand and on deposit at various financial
institutions.
(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 100 percent, 100 percent, 32 percent and 37
percent of inventories in 1993, 1994, 1995 and 1996, respectively.
(f) Property and Equipment
Property and equipment are stated at cost. Leasehold improvements and
equipment under capital leases are amortized using the straight-line method over
the lesser of asset life or lease term. Depreciation is provided using the
straight-line method, based upon the following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................................... 15 to 40 years
Warehouse and transportation equipment........................ 3 to 10 years
Computer software............................................. 1 1/2 to 5
years
Leasehold improvements........................................ 3 to 7 years
Office equipment.............................................. 3 to 7 years
</TABLE>
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
Distribution contracts.......................................... 3 to 7 years
Noncompete agreements........................................... 5 to 7 years
Customer lists.................................................. 12 years
</TABLE>
Goodwill results from business acquisitions and principally consists of the
excess of the acquisition cost over the fair value of the net assets of
businesses acquired. At each balance sheet date, the Company evaluates the
realizability of goodwill based upon expectations of operating income for each
subsidiary having a material goodwill balance. The Company believes that no
material impairment of goodwill exists at December 30, 1995 and June 29, 1996.
(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 for certain levels under its workers'
compensation, auto liability and medical and dental insurance programs. Costs in
excess of retention limits are insured under various contracts with
F-8
<PAGE> 72
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
insurance carriers. Estimated costs for workers' compensation 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 31, 1994, December 30,
1995 and June 29, 1996, the estimated liabilities related to workers'
compensation were approximately $2.4 million, $4.1 million and $4.4 million,
respectively, net of a discount of approximately $0.7 million, $1.2 million and
$1.5 million, respectively. These estimated liabilities related to workers'
compensation are included in accrued liabilities in the accompanying
consolidated financial statements.
(j) Net Loss Per Common and Common Equivalent Share
Earnings per share has been computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares (consisting of options and warrants) are excluded during
periods of net loss since they would be anti-dilutive. Shares and options issued
within one year prior to the filing of a Registration Statement relating to an
initial public offering (see Note 14) have been treated as outstanding for all
periods presented, even where the impact of the incremental shares is
anti-dilutive.
(k) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
Income taxes of interim periods are determined based on the Company's
estimate of its annual effective tax rate. The rate is revised, if necessary, as
of the end of each interim period during the fiscal year to reflect the
Company's best estimate of its annual effective tax rate.
(l) Interest Rate Protection Agreements
The differential to be paid or received under interest rate swap agreements
are accrued with the resulting net interest income or expense recorded as an
adjustment to interest expense on the underlying debt. Premiums paid for
interest rate collars are amortized to interest expense over the terms of the
agreement.
(m) Translation of Foreign Currency
The translation of the accounts of ProSource Canada into U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date and for revenue and expense accounts using an average
exchange rate during the period. Translation adjustments arising from
differences in exchange rates from period to period are included in accumulated
foreign currency translation adjustments as a component of stockholders' equity.
(n) Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 121
("SFAS 121"), which became effective on January 1, 1996, and requires long-lived
assets be reviewed for impairment (measured based on the fair value of assets).
F-9
<PAGE> 73
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
compensation costs related to stock option plans and other forms of stock based
compensation plans as an alternative to the intrinsic value based method of
accounting defined under Accounting Principles Board Opinion No. 25. Companies
who do not elect the new method of accounting for 1996 will be required to
provide pro forma disclosures as if the fair value based method had been
applied. The Company will include the disclosures required by SFAS 123 in the
notes to future consolidated financial statements.
(o) Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash
and equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value because of their short-term maturities. The carrying
amounts reported for long-term senior debt approximate fair value because it is
a variable rate instrument that re-prices monthly.
(p) Reclassifications
Certain amounts in the 1993, 1994 and 1995 consolidated financial
statements have been reclassified to conform to the 1996 consolidated financial
statements presentation.
(2) BUSINESS COMBINATIONS
(a) National Accounts Division of The Martin-Brower Company
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 revolving credit
facility, a $9 million note payable to Martin-Brower (net of a discount to
reflect a constant interest rate), $18.5 million in notes payable to Onex, and
the issuance of 26,500 shares of the Company's 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 total costs in excess of fair value of net
assets acquired 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.
(b) Malone Products, Inc.
On October 31, 1994, the Company acquired certain assets and assumed
certain liabilities of Malone Products, Inc. ("Malone"). The total cost of the
acquisition of $3.8 million was funded through a borrowing of $3.3 million under
the Company's revolving credit facility and $0.5 million of convertible
subordinated debt issued to Malone. The acquisition of Malone resulted in the
recognition of $3.4 million of costs in excess of fair value of net assets
acquired. The acquisition has been accounted for under the purchase method of
accounting. The accompanying consolidated financial statements include the
assets acquired of approximately $7 million, consisting primarily of accounts
receivable and inventories, and liabilities assumed of approxi-
F-10
<PAGE> 74
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
mately $6.6 million, consisting primarily of trade accounts payable, based on
their estimated fair values at the acquisition date.
(c) Valley Food Services, Inc.
On March 27, 1993, the Company completed the acquisition of certain assets
and the assumption of certain liabilities of Valley Food Services, Inc.
("Valley"). The total cost of the acquisition of $9.3 million was funded through
long-term senior debt. The acquisition of Valley resulted in the recognition of
$0.6 million as costs in excess of fair value of net assets acquired. The
acquisition has been accounted for under the purchase method of accounting. The
accompanying consolidated financial statements include the assets acquired of
approximately $12.4 million, consisting primarily of accounts receivable,
inventories and identifiable intangibles, and liabilities assumed of
approximately $3.7 million, consisting primarily of trade accounts payable,
based on their estimated fair values at the acquisition date.
(d) McCabe's Quality Foods, California, Inc.
On February 27, 1993, the Company acquired certain operating assets,
consisting primarily of accounts receivable and inventories, of McCabe's Quality
Foods, California, Inc. at their estimated fair values for approximately $3.9
million. This transaction was accounted for under the purchase method of
accounting and financed through PSC's existing credit facility.
(e) BKDS Acquisition
On June 30, 1992, the Company completed the acquisition of certain assets
and the assumption of certain liabilities of Burger King Distribution Services
("BKDS"), a division of Burger King Corporation ("BKC"). In 1994, the Company
and BKC settled certain purchase price provisions by BKC paying $6.6 million to
the Company. The payment has been accounted for as an adjustment of the original
purchase price by decreasing net deferred tax assets by $1.3 million,
acquisition-related distribution contracts by $3.2 million and goodwill by $2.1
million.
(3) RESTRUCTURING 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 to consolidate and
integrate its corporate and network operations. Through this plan, which was
approved by the Board of Directors, the Company specifically identified all
significant actions, consisting of the closing of 19 distribution facilities
currently leased and 11 distribution facilities currently owned. The Company has
begun activities to integrate these facilities, including communications to its
employees and its customers, and expects to complete the plan in stages through
the year 2000. As a result, in the first quarter of 1996, the Company accrued
restructuring charges of $10.9 million. The restructuring charges consist
approximately of $7.9 million in costs related to the termination of the
existing facility leases, $1.2 million of costs to be incurred after operations
cease in the closed facilities and $1.8 million of other costs. As of June 29,
1996, the Company had approximately $10.5 million of accrued unpaid
restructuring charges.
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 consists of $7.3 million of land and owned buildings
and $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
F-11
<PAGE> 75
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 owned
building (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.
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994, December 30, 1995 and June 29,
1996 consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
1996
1994 1995 -----------
------- ------- (UNAUDITED)
<S> <C> <C> <C>
Land................................................ $ 3,873 $ 4,746 $ 3,624
Buildings and improvements.......................... 13,146 20,428 15,846
Warehouse and transportation equipment.............. 5,032 20,309 22,430
Computer software................................... 12,551 14,815 13,879
Leasehold improvements.............................. 3,959 6,672 3,414
Office equipment.................................... 2,048 6,046 6,132
------ ------ ------
40,609 73,016 65,325
Less accumulated depreciation and amortization...... 11,443 20,509 23,953
------ ------ ------
$29,166 $52,507 $41,372
====== ====== ======
</TABLE>
(5) INTANGIBLE ASSETS
Intangible assets at December 31, 1994, December 30, 1995 and June 29, 1996
consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
1996
1994 1995 -----------
------- ------- (UNAUDITED)
<S> <C> <C> <C>
Identifiable intangibles............................ $10,504 $10,785 $10,785
Goodwill............................................ 8,376 33,664 41,298
------ ------ ------
18,880 44,449 52,083
Less accumulated amortization....................... 6,030 7,999 8,948
------ ------ ------
$12,850 $36,450 $43,135
====== ====== ======
</TABLE>
F-12
<PAGE> 76
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) LONG-TERM DEBT
(a) Long-Term Senior Debt
Long-term senior debt at December 31, 1994, December 30, 1995 and June 29,
1996 consisted of the following loan agreements with banks (amounts in
thousands):
<TABLE>
<CAPTION>
1996
1994 1995 -----------
------- -------- (UNAUDITED)
<S> <C> <C> <C>
$210 million revolving credit facility, at prime
rate (8.25% at June 29, 1996) plus 0.50% or
Eurodollar rate plus 3% (2.75% at June 29, 1996),
due March 31, 2000............................... $ -- $104,636 $ 116,469
$15 million term loan facility, at prime rate plus
0.50% or Eurodollar rate plus 3% (2.75% at June
29, 1996), payable in quarterly installments each
of $0.38 million commencing on July 1, 1995 and
through March 31, 2000........................... -- 13,875 13,125
$15 million term loan facility, at prime rate plus
0.50% or Eurodollar rate plus 3% (2.75% at June
29, 1996), due March 31, 2000.................... -- 15,000 15,000
$86 million revolving credit facility, at prime
rate plus 0.75% or Eurodollar rate plus 2.75%,
due June 30, 1997................................ 35,774 -- --
$15 million term loan facility, at prime rate plus
0.75% or Eurodollar rate plus 2.75%, payable in
varying amounts and maturities through June 30,
1997............................................. 13,400 -- --
$12 million revolving credit facility, at prime
rate plus 1.50%, due September 30, 1997.......... 12,497 -- --
$0.35 million term loan facility, at prime rate
plus 1.50%, payable quarterly through September
30, 1997......................................... 350 -- --
------- -------- --------
Total long-term senior debt........................ 62,021 133,511 144,594
Less current portion............................... 2,183 1,500 1,500
------- -------- --------
Long-term senior debt, less current portion........ $59,838 $132,011 $ 143,094
======= ======== ========
</TABLE>
On March 31, 1995, in conjunction with the acquisition of NAD, the Company
entered into a new $240 million Loan and Security Agreement (the "Loan
Agreement") with a group of banks that extends through March 31, 2000. Such
agreement provides for a revolving credit facility of up to $210 million and
term loans aggregating $30 million. This agreement replaced all existing senior
debt which was due to expire in September 1997.
The Loan Agreement requires PSC, ProSource Canada and BroMar (the
"Borrowers"), to meet specific affirmative and negative covenants which include,
among other requirements, limitations on the acquisition and disposition of
assets, prohibition of borrowings other than under the Loan Agreement,
restrictions on dividend payments and compliance with certain financial
covenants. The Loan Agreement is collateralized by substantially all of the
Borrowers' assets, and the pledge by the Parent of all of the issued and
outstanding stock of the Borrowers and other collateral rights. In addition, the
Parent has guaranteed payment of all amounts due under the Loan Agreement.
Borrowings under the Loan Agreement are limited to a borrowing base as
defined in the agreement. At December 30, 1995 and June 29, 1996, the Company
had approximately $82 million and $73 million,
F-13
<PAGE> 77
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively, available under the revolving credit facility. The Loan Agreement
also provides for a commitment fee of 0.50 percent per annum of the daily unused
revolving credit facility, as defined in the agreement.
In 1994, PSC entered into two interest rate swap agreements, having
notional principal amounts of approximately $10.7 million and $20 million, that
mature in 1997 and 1999, respectively. Under these agreements, PSC makes fixed
rate payments and receives floating rate payments in return. In 1995, PSC
entered into two interest rate collar transactions having notional principal
amounts of approximately $25 million and $20 million, maturing in 1998. The
counterparties to these agreements are large financial institutions. These
interest rate protection agreements were entered into to reduce the Company's
exposure to interest rate volatility and are not used for trading purposes. At
December 30, 1995 and June 29, 1996, the total fair value of these agreements
was an unrealized loss of approximately $2.2 million and $0.9 million,
respectively, based on quoted market prices as provided by the financial
institutions which are the counterparties to the interest rate protection
agreements.
Long-term senior debt at December 30, 1995 and June 29, 1996, is due as
follows (amounts in thousands):
<TABLE>
<CAPTION>
1996
1995 -----------
-------- (UNAUDITED)
<S> <C> <C>
1996 (through December 28, 1996)............................. $ 1,500 $ 750
1997......................................................... 1,500 1,500
1998......................................................... 1,500 1,500
1999......................................................... 1,500 1,500
2000......................................................... 127,511 139,344
-------- --------
$133,511 $ 144,594
======== ========
</TABLE>
The interest rate on the Company's long-term senior debt is reset every
month to reflect current market rates.
(b) Subordinated Notes Payable to Onex
Subordinated Notes Payable to Onex consist of three agreements at December
30, 1995 and two agreements at June 29, 1996. A $15 million, 12 percent,
subordinated note is payable to Onex, with interest payable annually beginning
March 31, 1996, and the principal payable in full on April 1, 2005. This note is
an unsecured obligation of the Company and is subordinated to all long-term
senior debt.
A $2.5 million convertible subordinated note, plus accrued interest of $0.9
million at December 30, 1995 and $1 million at June 29, 1996, is payable to
Onex, with interest at 10 percent compounded annually and due, together with the
principal, on July 1, 2002. Onex may convert both principal and accrued interest
on the note into shares of the Company's common stock at any time at a
conversion price of $10 per share.
A $3.5 million convertible subordinated note was payable to Onex, with
interest at prime rate (8.5 percent at December 30, 1995), compounded annually
and due, together with the principal, on April 1, 2005. During the year ended
December 30, 1995, the Company paid $2.1 million of such note to Onex resulting
in an outstanding balance of $1.4 million at December 30, 1995. On February 1,
1996, Onex converted $0.8 million of the note into 80,000 shares of the
Company's common stock and the remaining balance on the note of approximately
$0.6 million plus accrued interest was paid to Onex.
F-14
<PAGE> 78
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Other Subordinated Notes Payable
Other Subordinated Notes Payable consist of two agreements at December 30,
1995 and June 29, 1996. A $10 million subordinated note is payable to
Martin-Brower. Interest on this note is payable semiannually, beginning
September 30, 1998, with rates ranging from zero percent to 13 percent.
Principal is payable in full on March 31, 2002. This note has been discounted in
the accompanying consolidated financial statements to reflect a constant
interest rate through its maturity.
A $0.5 million convertible subordinated note (the "MPI Note") is payable to
Malone Products, Inc. Interest at 8 percent on the MPI Note is payable annually
and the principal of the MPI Note is payable in full on November 1, 1999. The
holders of the MPI Note may convert the principal of the MPI Note into shares of
the Company's common stock at any time at a conversion price of $20.00 per
share.
The carrying value of long-term debt approximates fair value at December 30,
1995 and June 29, 1996.
(7) LEASES
The Company leases facilities, vehicles and other equipment under long-term
operating leases with varying terms, the majority of which contain renewal
and/or purchase options. Certain transportation equipment leases call for
contingent rental payments based upon total miles. As of December 30, 1995 and
June 29, 1996, aggregate future minimum lease payments under noncancelable
operating leases were as follows (amounts in thousands):
<TABLE>
<CAPTION>
1996
1995 -----------
------- (UNAUDITED)
<S> <C> <C>
1996 (through December 28, 1996).............................. $24,861 $ 15,725
1997.......................................................... 20,937 25,906
1998.......................................................... 17,887 22,558
1999.......................................................... 13,163 17,549
2000.......................................................... 9,039 12,218
All years thereafter.......................................... 11,295 19,396
------ ------
Total future minimum lease payments................. $97,182 $ 113,352
====== ======
</TABLE>
Rent expense, including contingent rental expense, was approximately $7.8
million, $13.4 million and $30.6 million during the years ended December 25,
1993, December 31, 1994 and December 30, 1995, respectively, and $19.4 million
for the period ended June 29, 1996.
F-15
<PAGE> 79
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES
The income tax benefit (provision) before extraordinary charge, net of a
tax benefit of $0.5 million, for the years ended December 25, 1993, December 31,
1994 and December 30, 1995 consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------- ------ -------
<S> <C> <C> <C>
Current taxes:
Federal.............................................. $ 986 $ 256 $(1,236)
State................................................ 99 -- (408)
----- ----- -----
Total current................................ 1,085 256 (1,644)
----- ----- -----
Deferred taxes, excluding other components:
Federal.............................................. (553) 582 1,126
State................................................ (144) 236 264
----- ----- -----
Total deferred taxes, excluding other
components................................. (697) 818 1,390
----- ----- -----
Other:
Alternative minimum tax credit carryforwards......... 19 64 666
Utilization of operating loss carryforwards.......... 90 509 (497)
----- ----- -----
Total other.................................. 109 573 169
----- ----- -----
$ 497 $1,647 $ (85)
===== ===== =====
</TABLE>
The following table accounts for the difference between the actual tax
benefit and the amounts obtained by applying the statutory U.S. federal income
tax rate of 34 percent to the loss before income taxes for the years ended
December 25, 1993, December 31, 1994 and December 30, 1995 (amounts in
thousands):
<TABLE>
<CAPTION>
1993 1994 1995
---- ------ -----
<S> <C> <C> <C>
Tax benefit computed at statutory rate..................... $450 $1,370 $ 237
Increases in taxes due to:
State income taxes (net of federal tax benefit).......... (16) 198 (118)
Goodwill amortization.................................... (56) (61) (76)
Miscellaneous............................................ 119 140 (128)
---- ----- ----
Actual tax benefit (provision) before extraordinary charge,
net of tax benefit of $502............................... $497 $1,647 $ (85)
==== ===== ====
</TABLE>
Except for the effects of the reversal of net deductible temporary
differences, the Company is not aware of any factors which would cause any
significant differences between taxable income and pre-tax book income in future
years.
F-16
<PAGE> 80
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1994 and December 30, 1995 are presented below (amounts in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Acquisition related expenses................................... $ 1,094 $ 2,873
Accounts receivable, principally due to allowance for
doubtful accounts........................................... 1,664 1,046
Property, plant and equipment, principally due to differences
in depreciation............................................. 486 831
Inventories.................................................... 189 462
Self-insurance reserves........................................ 492 2,609
Rent expenses, principally due to differences in operating
lease expenditures.......................................... 248 323
Alternative minimum tax credit carryforwards................... 84 901
Benefit of net operating loss carryforwards.................... 497 --
Other accrued expenses......................................... 385 1,096
----- ------
Total deferred tax assets.............................. 5,139 10,141
Less valuation allowance....................................... -- --
----- ------
Total deferred tax assets, net.............................. $ 5,139 $10,141
===== ======
Deferred tax liabilities:
Computer software.............................................. $(1,068) $ (842)
Prepaid expenses............................................... (264) (167)
Acquisition related liabilities................................ (349) (771)
Other.......................................................... (121) (162)
----- ------
Total deferred tax liabilities......................... (1,802) (1,942)
----- ------
Net deferred tax assets................................ $ 3,337 $ 8,199
===== ======
</TABLE>
The net change in deferred tax assets for the year ended December 30, 1995,
included $3.1 million recorded as a result of the acquisition reserves
established in connection with the acquisition of NAD.
During the period ended June 29, 1996, the net change in deferred tax
assets included $4.4 million recorded as a result of the increase in the
acquisition reserves in connection with the acquisition of NAD. Additionally, a
deferred tax benefit of $11 million was recorded which consisted primarily of
future deductible temporary differences attributable to the SFAS 121 adjustments
and the accrual of restructuring reserves during the period ended June 29, 1996.
In order to fully realize the net deferred tax assets at December 30, 1995
and June 29, 1996, the Company will need to generate future taxable income of
approximately $18.5 million and $56.1 million, respectively. Management believes
that it is more likely than not that the existing net deductible temporary
differences will reverse during periods in which the Company will generate such
taxable income. The Company anticipates that increases in taxable income will
result primarily from (i) future projected revenue growth through the addition
of new restaurant chains and the expansion of 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.
At December 31, 1994, December 30, 1995 and June 29, 1996, other current
assets included income taxes receivable of approximately $1.3 million, $1.4
million and $1.6 million, respectively, which consisted primarily of
overpayments of tax liabilities and pending carryback refund claims.
F-17
<PAGE> 81
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 29, 1996, the Company had a net operating loss carryforward ("NOL")
of approximately $7.2 million. Management believes that it is more likely than
not that the Company will realize the benefit of the NOL's existing at June 29,
1996 before they expire in 2011.
United States income tax returns for fiscal years 1992 and 1993 are
currently under examination by the Internal Revenue Service. Assessments, if
any, are not expected to have a material adverse effect on the consolidated
financial position or results of operations of the Company as of December 30,
1995 and June 29, 1996.
(9) EMPLOYEE BENEFIT PLANS
(a) Defined Benefit Pension Plans
The Company has three noncontributory defined benefit pension plans
covering substantially all of its salaried and hourly employees excluding those
employees covered by multi-employer pension plans under collective bargaining
agreements. The pension benefits are based on years of service and participants'
compensation. The Company's funding policy is to contribute an amount not less
than the ERISA minimum funding requirement nor more than the maximum amount that
can be deducted for income tax purposes. The following table sets forth the
plans' funded status and the amounts recognized in the Company's consolidated
balance sheets at December 25, 1993, December 31, 1994 and December 30, 1995
(amounts in thousands).
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation............................. $ (490) $(1,530) $(4,795)
======= ======= =======
Accumulated benefit obligation........................ $(1,044) $(1,928) $(5,582)
======= ======= =======
Projected benefit obligation for service recorded to
date................................................ $(1,626) $(2,300) $(7,143)
Plan assets at fair value............................. 351 1,347 6,103
------- ------- -------
Projected benefit obligation in excess of plan
assets.............................................. (1,275) (953) (1,040)
Unrecognized amortization............................. 247 5 --
Unrecognized net gain................................. -- -- (390)
------- ------- -------
Unfunded accrued liability included in other
noncurrent liabilities.............................. $(1,028) $ (948) $(1,430)
======= ======= =======
</TABLE>
Approximately 88 percent of plan assets are invested in equity mutual
funds.
Net pension cost for 1993, 1994 and 1995 included the following components
(amounts in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Service cost -- benefits earned during the period............. $632 $781 $883
Interest cost on projected benefit obligation................. 58 136 404
Actual return on plan assets.................................. (7) (57) (663)
Net amortization and deferral................................. -- 10 301
---- ---- -----
Net pension cost.............................................. $683 $870 $925
==== ==== =====
</TABLE>
F-18
<PAGE> 82
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension costs under the Company's defined benefit pension plans are
actuarially computed on an annual basis. Actuarial assumptions used in
accounting for the defined benefit pension plans as of December 25, 1993,
December 31, 1994 and December 30, 1995 were:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Discount rates................................................. 7.25% 8.25% 7.25%
Rates of increase in compensation levels....................... 4.00% 4.00% 4.00%
Expected long-term rate of return on assets.................... 8.50% 8.50% 8.50%
</TABLE>
The Company's pension expense for contributions to the various
multi-employer pension plans under collective bargaining agreements was
approximately $0.1 million, $0.1 million, $0.9 million and $0.6 million for the
years ended December 25, 1993, December 31, 1994, December 30, 1995 and the
period ended June 29, 1996.
(b) Defined Contribution Plans
The Company sponsors various defined contribution plans which cover
substantially all full-time and part-time, salaried and hourly employees.
Depending on the plan, eligible employees may contribute up to 10, 12.5 or 15
percent of base compensation, and the Company matches 50 percent of the first 4
percent or 100 percent of the first 2.5 percent of eligible compensation.
Effective January 1, 1996, all of these plans were combined into one plan (the
"Associates' Savings Plan"). The Company also has a Money Purchase Plan which
covers those former NAD salaried employees not covered by a defined benefit
plan. Under this plan, the Company contributes 10 percent of eligible salary.
The amount of contribution expenses incurred by the Company for these plans were
approximately $0.7 million, $0.7 million, $2.2 million and $1.4 million for the
years ended December 25, 1993, December 31, 1994, December 30, 1995 and the
period ended June 29, 1996, respectively.
(c) Supplemental Executive Retirement Plan
The Company plans to adopt a supplemental executive retirement plan in 1996
to cover certain key executives of the Company. Accrued pension costs of
approximately $0.1 million related to this plan were recorded at December 30,
1995.
(10) STOCKHOLDERS' EQUITY
Under the ProSource, Inc. Employee Stock Purchase Plan (the "Stock Plan"),
at June 30, 1992 officers and key employees of the Company ("Management
Employees") purchased 408,100 shares of common stock at $10 per share. During
1993 and 1994, 125,600 and 6,900 shares of common stock were purchased by
Management Employees at $11 per share, respectively. During 1995, in connection
with the NAD acquisition, certain Management Employees purchased 208,500 shares
of common stock at $10 per share. In connection with the purchases of common
stock, each Management Employee entered into a Management Shareholders Agreement
with the Company and Onex.
The ProSource, Inc. Management Option Plan (1995) (the "1995 Option Plan")
was amended in conjunction with the acquisition of NAD. The 1995 Option Plan
provides certain Management Employees with options to purchase one-half the
number of shares of common stock purchased under the Employee Stock Purchase
Plan at the same price per share paid by such stockholder.
F-19
<PAGE> 83
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of outstanding stock options as of December 25, 1993, December
31, 1994, December 30, 1995 and June 29, 1996 is as follows:
<TABLE>
<CAPTION>
1996
OPTION PRICE 1993 1994 1995 -----------
-------------- ------- ------- ------- (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Outstanding, beginning of
year................... $10.00 - 11.00 204,050 253,650 237,450 327,700
Granted.................. 10.00 - 11.00 50,350 3,450 101,750 30,750
Exercised................ 10.00 - 11.00 -- -- -- --
Canceled................. 10.00 - 11.00 (750) (19,650) (11,500) (8,250)
-------------- -------- -------- -------- --------
Outstanding, end of
year................... $10.00 - 11.00 253,650 237,450 327,700 350,200
============== ======== ======== ======== ========
Exercisable.............. 10,200 9,300 41,500 43,700
======== ======== ======== ========
</TABLE>
In conjunction with the acquisition of NAD, the Company issued warrants to
Martin-Brower. At December 30, 1995 and June 29, 1996, the warrants were
exercisable for 283,425 shares of common stock at $12.35 per share during the
period commencing on April 1, 1997 and through March 31, 2000, and upon
consummation of certain transactions.
(11) COMMITMENTS 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 30, 1995 and June 29, 1996, such guarantees amounted
to approximately $2.9 million and $3.3 million, respectively.
At December 30, 1995 and June 29, 1996, the Company was also obligated for
$19 million and $18 million, respectively, in letters of credit issued on behalf
of the Company primarily as a guarantee of payment for obligations arising from
workers' compensation claims. At December 30, 1995 and June 29, 1996, the
Company had $6 million and $7 million, respectively, available in unused letters
of credit.
(12) LITIGATION
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 financial position of the Company.
(13) CONCENTRATIONS OF CREDIT RISK
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. BKC-owned and
franchisee-owned Burger King restaurants collectively accounted for 94 percent,
90 percent, 45 percent and 40 percent of the Company's sales in fiscal years
1993, 1994, 1995 and during the period ended June 29, 1996, respectively. Sales
to BKC-owned restaurants represented approximately 17 percent, 13 percent, 5
percent and 4 percent of sales for the years ended December 25, 1993, December
31, 1994, December 30, 1995 and the period ended June 29, 1996, respectively.
Amounts due from BKC at December 31, 1994, December 30, 1995 and June 29, 1996
were $6 million, $4.7 million and $7.1 million, respectively.
In addition, sales to Darden Restaurants, Inc. (owner of Olive Garden and
Red Lobster restaurants) accounted for 18 percent and 22 percent of Company
sales in fiscal year 1995 and during the period ended June 29, 1996,
respectively. Amounts due from Darden Restaurants, Inc. at December 30, 1995 and
June 29, 1996, were approximately $51.8 million and $39.1 million, respectively.
Sales to franchisor-owned and franchisee-owned Arby's restaurants accounted for
10 percent of Company sales in fiscal year 1995 and during the period ended June
29, 1996, respectively.
F-20
<PAGE> 84
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) SUBSEQUENT EVENT
In September 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission with respect to an initial public offering.
The net proceeds of the offering will be used to repay certain indebtedness of
the Company.
In October 1996, the Company changed its capital structure to 10,000,000
authorized shares of $.01 par value preferred stock, 50,000,000 authorized
shares of $.01 par value Class A Common Stock and 10,000,000 authorized shares
of $.01 par value Class B Common Stock.
In October 1996, the Company's Board of Directors declared a 100-to-1 stock
split effective as of the date of the commencement of the initial public
offering. The par value of each share is $.01. The Company's additional paid-in
capital account and the Class B Common Stock account have been restated to
retroactively reflect the stock split.
(15) UNAUDITED PRO FORMA ADJUSTMENTS AND PRO FORMA CONSOLIDATED BALANCE SHEET
The pro forma adjustments and pro forma consolidated balance sheet at June
29, 1996, reflect the issuance of 350,100 shares of Class B Common Stock upon
conversion of the convertible subordinated note payable to Onex.
F-21
<PAGE> 85
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
UNAUDITED CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash........................................................................... $ 698
Accounts receivable, less allowance for doubtful accounts of $1,893............ 96,034
Inventories.................................................................... 106,444
Prepaid expenses............................................................... 3,791
--------
Total current assets................................................... 206,967
Property, plant and equipment, net............................................... 29,133
Other assets..................................................................... 43
--------
$ 236,143
========
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable and accrued liabilities....................................... $ 95,898
Overdrafts..................................................................... 21,317
Current portion of long-term debt.............................................. 2,711
--------
Total current liabilities.............................................. 119,926
Long-term debt, less current portion............................................. 514
--------
120,440
--------
Divisional equity................................................................ 115,637
Cumulative translation adjustment................................................ 66
--------
115,703
--------
Commitments and contingent liabilities........................................... --
$ 236,143
========
</TABLE>
See accompanying notes to unaudited condensed combined financial statements.
F-22
<PAGE> 86
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
UNAUDITED CONDENSED COMBINED STATEMENT OF INCOME
AND CHANGES IN DIVISIONAL EQUITY
FOR THE THIRTY-NINE WEEKS ENDED MARCH 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Net sales...................................................................... $1,608,923
Other income................................................................... 1,081
----------
1,610,004
----------
Costs and expenses:
Cost of goods sold........................................................... 1,501,894
Selling, general and administrative.......................................... 99,218
Allocated charges from Martin-Brower......................................... 7,778
Interest..................................................................... 1,350
----------
1,610,240
----------
Loss before income tax benefit................................................. (236 )
Income tax benefit............................................................. 359
----------
Net income..................................................................... 123
Divisional equity at:
Beginning of period.......................................................... 37,327
Dividends paid............................................................... (2,750 )
Advances from Parent......................................................... 80,937
----------
End of period................................................................ $ 115,637
==========
</TABLE>
See accompanying notes to unaudited condensed combined financial statements.
F-23
<PAGE> 87
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
UNAUDITED CONDENSED COMBINED STATEMENT OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED MARCH 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Cash flows from operating activities:
Net income..................................................................... $ 123
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization............................................... 4,630
Change in assets and liabilities:
Accounts receivable....................................................... (32,159)
Inventories............................................................... (15,991)
Prepaid expenses.......................................................... (1,891)
Overdrafts................................................................ (20,763)
Accounts payable and accrued liabilities.................................. (4,321)
Other..................................................................... (10)
--------
Net cash used in operating activities.................................. (70,382)
--------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment............................ 1,132
Additions to property, plant and equipment..................................... (4,167)
--------
Net cash used in investing activities.................................. (3,035)
--------
Cash flows from financing activities:
Proceeds from (repayments of) borrowing, net................................... (4,353)
Borrowings from parent......................................................... 80,937
Dividends paid................................................................. (2,750)
--------
Net cash provided by financing activities.............................. 73,834
Effect of exchange rate changes on cash.......................................... 2
Net increase in cash................................................... 419
Cash at:
Beginning of period............................................................ 279
--------
End of period.................................................................. $ 698
========
</TABLE>
See accompanying notes to unaudited condensed combined financial statements.
F-24
<PAGE> 88
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 -- BASIS OF PRESENTATION:
The unaudited condensed combined balance sheet as of March 31, 1995, and
the unaudited condensed combined statements of income and changes in divisional
equity and cash flows for the 39 weeks ended March 31, 1995 include, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the Company's combined financial
position, results of operations, and cash flows. Operating results for the 39
weeks ended March 31, 1995 are not necessarily indicative of the results that
may be expected for the fiscal year ending July 1, 1995. These statements should
be read in conjunction with the combined financial statements and notes thereto
for the fiscal year ended July 1, 1994.
The unaudited condensed combined financial statements include the accounts
of (a) the National Accounts Division, a division of The Martin-Brower Company
(the "Company"), (b) NAD Distribution Systems, a division of Martin-Brower of
Canada, Ltd., a wholly owned subsidiary of the Company, and (c) BroMar Services,
Inc., a wholly owned subsidiary of the Company, collectively the "Division". The
Company is wholly owned by Dalgety, Inc. (the "Parent") and ultimately wholly
owned by Dalgety PLC, a company traded on the London and Australian stock
exchanges. All significant intradivisional transactions have been eliminated.
NOTE 2 -- RELATED PARTY TRANSACTIONS:
The Company has provided the Division with certain legal, treasury, audit,
insurance, facility, human resource management, regulatory and administrative
services. Charges for these services to the Division are based on allocations of
the Company's actual direct and indirect costs using varying allocation bases
(payroll, headcount, floor space, etc.) designed to estimate the actual cost
incurred by the Company to render these services to the Division. However, while
management believes that these charges are reasonable, there can be no assurance
that these allocations would approximate the costs incurred if the Division had
operated as an independent stand-alone entity. The allocation process is
consistent with the methodology used by the Company to allocate the cost of
similar service to its other division. The allocated cost of these services was
$7,778 for the period ended March 31, 1995 and is reflected in the combined
statement of income.
The Parent at the end of the fiscal year usually charges the Company for
interest and certain services, paid for by the Parent on behalf of the Company,
which is then allocated to the Division. No amounts have been allocated to the
Division for the period ended March 31, 1995.
The divisional equity account varies according to the working capital
requirements of the Division. The Division is charged interest on that portion
of the equity account deemed to represent advances from the Parent. Total
interest expense of $1,005 relating to such advances is included in the combined
statement of income for the period ended March 31, 1995. This interest is based
on interest rates incurred by the Parent.
NOTE 3 -- ACCOUNTS RECEIVABLE:
The Company has an agreement with two financial institutions to sell, on an
ongoing basis and with limited recourse, up to $50,000 of selected trade
accounts receivable. Recourse is limited principally to the substitution of
"eligible" receivables for "ineligible" receivables as defined in the agreement.
As of March 31, 1995, none of the sold receivables were allocated to the
Division by management.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES:
As of March 31, 1995, the Company had open letters of credit, some of which
secured guarantees to third parties, net of amounts reported as liabilities or
lease commitments, aggregating $13,369 available for the
F-25
<PAGE> 89
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Division and the Company's other operations. Commitment fees to banks associated
with open letters of credit vary from 3/8% to 5/8%.
The Division has various claims and legal proceedings outstanding. In the
opinion of management, the ultimate outcome of outstanding litigation and claims
will not have a material adverse effect on the financial position of the
Division.
NOTE 5 -- SUBSEQUENT EVENT:
On March 31, 1995, the Company sold substantially all of the assets and
certain liabilities of the Division to ProSource, Inc. in accordance with the
provisions within the Agreement for the Purchase and Sale of the National
Accounts Division of The Martin-Brower Company and Martin-Brower of Canada, Ltd.
(the "Purchase Agreement") dated November 10, 1994. The net book value of the
net assets sold was approximately $151,000 as of March 31, 1995.
F-26
<PAGE> 90
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of The Martin-Brower Company
We have audited the accompanying combined balance sheets of the National
Accounts Division of The Martin-Brower Company as of July 2, 1993 and July 1,
1994 and the related combined statements of income and changes in divisional
equity and of cash flows for the 52 week periods then ended. 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
in the United States of America. 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 combined financial statements audited by us present fairly,
in all material respects, the financial position of the National Accounts
Division at July 2, 1993 and July 1, 1994, and the results of its operations and
its cash flows for the 52 week periods then ended, in conformity with generally
accepted accounting principles in the United States of America.
As explained in Notes 1 and 3, the National Accounts Division is a division of
The Martin-Brower Company and has extensive transactions with related parties.
PRICE WATERHOUSE LLP
Chicago, Illinois
December 9, 1994
F-27
<PAGE> 91
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 2, 1993 JULY 1, 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................... $ 251 $ 279
Accounts receivables, less allowance for doubtful accounts of
$1,655 and $1,276, respectively................................. 47,584 63,875
Inventories........................................................ 80,962 90,453
Prepaid expenses................................................... 1,504 1,900
-------- --------
Total current assets....................................... 130,301 156,507
Property, plant and equipment, net (Note 5).......................... 31,191 30,730
Other assets......................................................... 236 29
-------- --------
$161,728 $187,266
======== ========
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable................................................... $ 73,015 $ 86,286
Accrued liabilities................................................ 12,121 13,933
Overdrafts......................................................... 34,294 42,080
Current portion of long-term debt (Note 6)......................... 710 6,932
-------- --------
Total current liabilities.................................. 120,140 149,231
Long-term debt, less current portion (Note 6)........................ 4,953 646
-------- --------
125,093 149,877
-------- --------
Divisional equity.................................................... 36,604 37,327
Cumulative translation adjustment.................................... 31 62
-------- --------
36,635 37,389
-------- --------
Commitments and contingent liabilities (Note 10)..................... -- --
$161,728 $187,266
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-28
<PAGE> 92
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
COMBINED STATEMENTS OF INCOME AND CHANGES IN DIVISIONAL EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------
JULY 2, 1993 JULY 1, 1994
------------ ------------
<S> <C> <C>
Net sales........................................................... $ 1,881,326 $ 2,029,055
Other income........................................................ 314 307
---------- ----------
1,881,640 2,029,362
---------- ----------
Costs and expenses:
Cost of goods sold................................................ 1,749,679 1,889,355
Selling, general and administrative............................... 113,093 121,924
Allocated charges from Martin-Brower.............................. 9,415 10,433
Interest.......................................................... 1,424 2,982
---------- ----------
1,873,611 2,024,694
---------- ----------
Income before provision for income taxes............................ 8,029 4,668
Provision for income taxes.......................................... 3,169 1,818
---------- ----------
Net income.......................................................... 4,860 2,850
Divisional equity at:
Beginning of year................................................. 44,271 36,604
Dividends paid.................................................... -- (2,844)
Advances from (payments to) Dalgety, Inc.......................... (12,527) 717
---------- ----------
End of year....................................................... $ 36,604 $ 37,327
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-29
<PAGE> 93
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------
JULY 2, 1993 JULY 1, 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 4,860 $ 2,850
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 5,843 6,026
Loss (gain) on sale of property, plant and equipment............... (120) 169
Change in assets and liabilities:
Accounts receivable............................................. 10,136 (16,291)
Inventories..................................................... (5,215) (9,491)
Prepaid expenses................................................ (649) (396)
Accounts payable................................................ (7,663) 13,271
Accrued liabilities............................................. 1,449 1,812
Overdrafts...................................................... 14,823 7,786
Other........................................................... 1,239 632
-------- --------
Net cash provided by operating activities............................ 24,703 6,368
-------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment................ 1,033 231
Additions to property, plant equipment............................. (8,504) (5,965)
-------- --------
Net cash used in investing activities................................ (7,471) (5,734)
-------- --------
Cash flow from financing activities:
Payment of capital lease obligations............................... (1,173) (551)
Proceeds from (repayments of) borrowings, net...................... (3,476) 2,072
Change in divisional equity........................................ (12,527) (2,127)
-------- --------
Net cash used by financing activities.............................. (17,176) (606)
-------- --------
Net increase in cash................................................. 56 28
Cash at:
Beginning of year.................................................. 195 251
-------- --------
End of year........................................................ $ 251 $ 279
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-30
<PAGE> 94
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 -- BASIS OF PRESENTATION, OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Basis of Presentation
The combined financial statements include the accounts of (a) the National
Accounts Division, a division of The Martin-Brower Company (the "Company"), (b)
NAD Distribution Systems, a division of Martin-Brower of Canada, Ltd., a wholly
owned subsidiary of the Company, and (c) BroMar Services, Inc., a wholly owned
subsidiary of the Company, collectively the "Division". The Company is wholly
owned by Dalgety, Inc. (the "Parent") and ultimately wholly owned by Dalgety
PLC, a company traded on the London and Australian stock exchanges. All
significant intradivisional transactions have been eliminated.
On November 10, 1994, the Company entered into a definitive agreement (the
"Purchase Agreement") to sell the Division to ProSource, Inc. ("ProSource"), a
subsidiary of Onex Corporation, a company traded on the Toronto and Montreal
stock exchanges. (See Note 12.)
The accompanying financial statements reflect the "carve-out" financial
position, results of operations and cash flows of the Division for the periods
presented. Certain general and administrative expenses incurred by the Company
have been allocated to the Division on bases described in Note 3 which, in the
opinion of management, are reasonable. However, such expenses are not
necessarily indicative of and it is not practicable for management to estimate,
the nature and level of expenses which might have been incurred had the Division
been operating as a separate company.
The financial information included herein does not necessarily reflect what
the financial position and results of operations of the Division would have been
had it operated as a stand-alone entity during the periods covered, and may not
be indicative of future operations or financial position.
The Company and the Division will have rights and obligations as negotiated
in connection with, or as reflected in, the Purchase Agreement which has been
executed between the Company and ProSource. Certain other rights and obligations
may arise as a result of a proposed service agreement between the Company and
ProSource. (See Note 12.)
Operations
The Division is a distributor of food and paper products to quick service
and specialty restaurant chains. One customer accounted for a 40 percent and 37
percent of the Division's combined sales in fiscal 1994 and 1993, respectively.
The Division's operations in Canada had sales and loss before taxes for
fiscal 1994 of $43,475 and $(35), respectively ($51,652 and $(113) for fiscal
1993). Net Canadian assets (liabilities) at July 2, 1993 and July 1, 1994 were
$(168) and $1,915, respectively, including net property, plant and equipment of
$267 and $176 in 1993 and 1994, respectively.
Significant Accounting Policies
A summary of significant accounting policies follows:
A. Fiscal Year: The Division's fiscal year consists of 52 or 53 weeks
ending on the Friday closest to June 30. Results for 1993 are for the 52 weeks
ended July 2, 1993 and for 1994 are for the 52 weeks ended July 1, 1994.
F-31
<PAGE> 95
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
B. Translation of Foreign Currency: The accounts of the Division's
Canadian operations are translated into U.S. dollars in accordance with
Statement of Financial Accounting Standards (FAS) No. 52 as follows:
<TABLE>
<S> <C>
Assets and liabilities Year end exchange rates
Revenues and expenses Average monthly exchange rates
</TABLE>
Translation gains and losses are included in the cumulative translation
adjustment component of divisional equity.
C. Inventories: Inventories, consisting of product for resale, are stated
at the lower of cost or market, cost being determined generally using the
last-in, first out (LIFO) method. Inventories would have been higher by
approximately $2,739 at July 2, 1993 and $1,757 at July 1, 1994 if the first-in,
first out (FIFO) method had been used. The Division's inventories are included
with the other inventories of the Company in a single LIFO pool. The calculation
of the effects of LIFO on the Division is based on the relative proportions of
inventory on a FIFO basis for the Company's operations at June 30, 1992, July 2,
1993 and July 1, 1994, respectively.
D. Property, Plant and Equipment: Property additions, major renewals and
betterments are included in asset accounts at cost. Interest charges incurred
during the period required to construct major properties are capitalized as part
of the project cost and amortized over the life of the asset. Certain corporate
assets of the Company have been allocated to the Division on various bases
which, in the opinion of management, are reasonable.
Depreciation is computed generally using the straight line method over the
estimated useful lives of the assets, ranging from 3 to 40 years. Amortization
of leasehold improvements and equipment under capital leases is computed using
the straight line method generally over the shorter of the useful lives or the
remaining lease terms.
E. Income Taxes: Provision has been made for income taxes in accordance
with FAS No. 109, "Accounting for Income Taxes." FAS 109 requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The Division's operations have been included with the Parent in a U.S.
consolidated federal income tax return. The Division's Canadian operations have
been included in Martin-Brower of Canada, Ltd.'s Canadian income tax return. For
financial reporting purposes, amounts provided for income taxes are determined
as if the Division were to file separate U.S. and Canadian income tax returns
and the U.S. federal and state and Canadian federal and provincial current and
deferred income tax balances are settled through the divisional equity account.
Differences resulting from the separate return method of allocating taxes are
reflected in the consolidated financial statements of the Parent. (See Note 7).
F. Medical Benefits for Retired Employees: The provisions of FAS 106,
"Employer's Accounting for Post-retirement Benefits Other than Pensions" have
not yet been adopted and the Division accounts for such costs on a cash basis.
(See Note 11).
G. Revenue Recognition: Distribution revenue is recognized upon receipt of
product by the customer.
F-32
<PAGE> 96
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during fiscal 1993 and 1994 for external interest expense was
$820 and $651, respectively. Capital lease obligations of $308 and $394 were
incurred in fiscal 1993 and 1994, respectively, primarily for transportation and
computer equipment.
NOTE 3 -- RELATED PARTY TRANSACTIONS:
The Company has provided the Division with certain legal, treasury, audit,
insurance, facility, human resource management, regulatory and administrative
services. Charges for these services to the Division are based on allocations of
the Company's actual direct and indirect costs using varying allocation bases
(payroll, headcount, floor space, etc.) designed to estimate the actual cost
incurred by the Company to render these services to the Division. However, while
management believes that these charges are reasonable, there can be no assurance
that these allocations would approximate the costs incurred if the Division had
operated as an independent stand-alone entity. The allocation process is
consistent with the methodology used by the Company to allocate the cost of
similar services to its other division. The allocated cost of these services
were $9,415 and $10,433 for fiscal 1993 and 1994, respectively, and are
reflected in the combined statements of income.
In fiscal 1994, the Parent charged the Company for interest and certain
services, paid for by the Parent on behalf of the Company in fiscal 1993 and
1994, $2,629 of which was allocated to the Division.
The divisional equity account varies according to the working capital
requirements of the Division. The Division is charged interest on that portion
of the equity account deemed to represent advances from the Parent. Total
interests expense of $786 and $869 relating to such advances are included in the
combined statements of income for fiscal 1993 and 1994, respectively. This
interest is based on interest rates incurred by the Parent.
NOTE 4 -- ACCOUNTS RECEIVABLE:
The Company has an agreement with two financial institutions to sell, on an
ongoing basis and with limited recourse, up to $75,000 of selected trade
accounts receivable. Recourse is limited principally to the substitution of
"eligible" receivables for "ineligible" receivables as defined in the agreement.
As of July 2, 1993 and July 1, 1994, $30,000 of the sold receivables were
allocated to the Division by management. Under accounting principles generally
accepted in the United States of America, these receivables are not included in
the Division's balance sheet.
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
JULY 2, 1993 JULY 1, 1994
------------ ------------
<S> <C> <C>
Land and land improvements................................... $ 1,907 $ 1,909
Buildings.................................................... 11,782 10,372
Leasehold improvements....................................... 6,847 7,280
Transportation equipment..................................... 4,323 4,247
Machinery and other equipment................................ 35,392 41,332
-------- --------
60,251 65,140
Less -- Accumulated depreciation and amortization............ (29,060) (34,410)
-------- --------
$ 31,191 $ 30,730
======== ========
</TABLE>
F-33
<PAGE> 97
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Depreciation expense, including amortization of assets held under
capitalized leases, was $5,843 and $6,026 in fiscal 1993 and 1994, respectively.
Certain property, plant and equipment is pledged, at July 2, 1993 and July
1, 1994, as security for long-term debt (see Notes 6 and 8).
NOTE 6 -- DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 2, 1993 JULY 1, 1994
------------ ------------
<S> <C> <C>
Capital lease obligations with interest rates ranging from 6% to 8%,
due through 1998................................................... $1,215 $ 1,058
Industrial development revenue bonds, with a fixed interest rate of
9.55%, due December 1, 1994, secured by certain land, buildings and
equipment with a net book value of approximately $3,584 at July 2,
1993 and $2,980 at July 1, 1994 (the Company settled this liability
before the due date)............................................... 4,200 4,200
Bank borrowings, with interest at a variable rate of approximately
8.25%, due through 1994, guaranteed by Dalgety PLC................. 248 2,320
------ -------
5,663 7,578
Less -- current portion.............................................. (710) (6,932)
------ -------
$4,953 $ 646
====== =======
</TABLE>
The carrying value of the Division's debt at July 2, 1993 and July 1, 1994
approximates fair value.
The aggregate annual principal installments of outstanding long-term debt
(exclusive of capital lease obligations reported in Note 8) scheduled for
payment during fiscal year ending June 30, 1995 are $6,520.
At July 1, 1994 the Company shares with its Parent a bank line of credit of
$20,000, of which $10,000 is available in U.S. funds and is available for the
Division and the Company's other operations. This line of credit is guaranteed
by Dalgety PLC. At July 1, 1994, $2,320 was outstanding and related to the
Division.
NOTE 7 -- INCOME TAXES:
Amounts provided are summarized as follows:
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------
JULY 2, 1993 JULY 1, 1994
------------ ------------
<S> <C> <C>
Current:
Federal.................................................... $2,392 $1,383
State...................................................... 529 234
Foreign.................................................... (54) (15)
------ ------
Current income tax expense................................... 2,867 1,602
Deferred:
Federal.................................................... 265 197
State...................................................... 37 19
------ ------
Total income tax expense..................................... $3,169 $1,818
====== ======
</TABLE>
F-34
<PAGE> 98
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Principal temporary differences between book and taxable income for the
above fiscal years consist of bad debt expense, fixed asset depreciation and
gain or loss on disposition, employee benefits, state income tax and other
expense accruals.
The effective income tax rate for fiscal 1993 (39.4%) and 1994 (38.9%) is
different from the federal statutory rate (34.5% and 35% respectively) as a
result of the following: state income taxes (4.6% and 3.5%, respectively) and
other significant items, including foreign operations, certain tax credits and
nondeductible meals and entertainment.
NOTE 8 -- LEASES:
The Division leases a portion of its transportation and other equipment and
several of its warehouses and office facilities. Leases of transportation
equipment generally expire over the next five years and are accounted for as
either capital or operating depending upon the lease terms. Certain
transportation equipment leases call for contingent rental payments based upon
mileage traveled. Most leases of facilities and other equipment are classified
as operating leases and are for various periods extending through fiscal 2007.
Future minimum lease payments under capital leases and operating leases
(with initial terms of one year or more) as of July 1, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING ON THE FRIDAY CAPITAL OPERATING
CLOSEST TO JUNE 30: LEASES LEASES
----------------------------------------------------------------- ------- ---------
<S> <C> <C>
1995............................................................. $ 484 $11,782
1996............................................................. 358 10,090
1997............................................................. 273 6,443
1998............................................................. 42 5,016
1999............................................................. -- 4,458
Thereafter....................................................... -- 3,057
------ -------
Total minimum lease payments..................................... 1,157 $40,846
Less -- Amount representing interest............................. (99)
------
Present value of net minimum lease payments...................... $ 1,058
======
</TABLE>
Minimum lease payments and contingent payments (based on usage) for capital
leases were as follows:
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------
JULY 2, 1993 JULY 1, 1994
------------ ------------
<S> <C> <C>
Minimum rentals.............................................. $551 $695
Contingent rental (based on usage)........................... 118 141
---- ----
$669 $836
==== ====
</TABLE>
Total rental expense for all operating leases were as follows:
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------
JULY 2, 1993 JULY 1, 1994
------------ ------------
<S> <C> <C>
Minimum rentals.............................................. $ 14,040 $ 15,000
Contingent rental (based on usage)........................... 2,995 3,045
------- -------
Rental expense............................................... $ 17,035 $ 18,045
======= =======
</TABLE>
F-35
<PAGE> 99
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The Division's property held under capital leases, included with owned
property in the combined balance sheet, consists of:
<TABLE>
<CAPTION>
JULY 2, 1993 JULY 1, 1994
------------ ------------
<S> <C> <C>
Transportation equipment..................................... $ 506 $ 577
Machinery and other equipment................................ 1,369 1,130
------ ------
1,875 1,707
Less -- Accumulated depreciation............................. (710) (686)
------ ------
$1,165 $1,021
====== ======
</TABLE>
NOTE 9 -- EMPLOYEE BENEFIT PLANS:
The Division provides retirement benefits for substantially all of its
employees through various Company-administered defined benefit and defined
contribution plans and plans administered under collective bargaining
agreements. Pension expense for the Division in fiscal 1993 and 1994 totalled
$2,670 and $3,039, respectively.
Defined Benefit Plan
The Company sponsors a non-contributory defined benefit pension plan for
hourly paid employees not covered by a collective bargaining agreement. Benefits
under the plan are based on participants' compensation over their entire years
of service. The Company's funding policy is to contribute annually the maximum
amount that can be deducted for federal income tax purposes.
Net periodic pension cost for the Division included the following
components:
<TABLE>
<CAPTION>
52 WEEKS ENDED
-------------------
JULY 2, JULY 1,
1993 1994
------- -------
<S> <C> <C>
Service cost -- benefits earned during the period................... $ 298 $ 392
Interest cost on projected benefit obligation....................... 200 236
Actual return on assets............................................. (141) (60)
Amortization of excess of plan assets over projected benefit
obligations, over 15 years from July 1985......................... (39) (39)
Amortization of prior service cost.................................. -- 22
Amortization of loss................................................ 31 40
Asset loss deferral................................................. (67) (129)
---- ----
Net periodic pension cost........................................... $ 282 $ 462
==== ====
</TABLE>
Actuarial assumptions used for the Company's defined benefit pension plan
for both fiscal years were:
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Discount rate......................................................... 8.5% 7.5%
Rate of increase in compensation levels............................... 6.0% 3.5%
Expected long-term rate of return on plan assets...................... 9.0% 8.0%
</TABLE>
F-36
<PAGE> 100
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The following table sets forth the funded status and the amounts recognized
in the Division's combined balance sheet for its portion of the Company's
defined benefit pension plan:
<TABLE>
<CAPTION>
JULY 2, JULY 1,
1993 1994
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation including vested benefits of
$1,664 and $2,394 in 1993 and 1994, respectively............... $(1,919) $(2,776)
Projected benefit obligation..................................... $(2,841) $(3,674)
Plan assets at fair value (primarily listed stocks and government
obligations)................................................... 2,444 2,552
----- -----
Projected benefit obligation greater than plan assets............ (397) (1,122)
Unrecognized net loss............................................ 769 937
Unrecognized prior service cost.................................. -- 306
Unrecognized excess of plan assets at fair value over projected
benefit obligation at July 1, 1985, being recognized over 15
years.......................................................... (271) (231)
----- -----
(Accrued) prepaid pension cost included in other assets.......... $ 101 $ (110)
===== =====
</TABLE>
Defined contribution plans
The Company sponsors a 401(k) plan for salaried employees and hourly
employees who participate in the Company's defined benefit pension plan. The
plan includes optional employee participation levels of up to 10% of eligible
earnings, subject to IRS limitations, with matching employer contributions of up
to 2% of eligible earnings. The employer contribution costs recognized by the
Division during fiscal 1993 and 1994 amounted to $387 and $429, respectively.
The Company also sponsors a money purchase plan for salaried employees
under which the Company makes contributions of 10% of eligible salary, with full
vesting, after two years of service. The Division's costs of these plans for
fiscal 1993 and 1994 amounted to $1,201 and $1,272, respectively.
Multi-employer pension plan
The Company contributes to various multi-employer pension plans under
collective bargaining agreements. The Company's share of liabilities for
unfunded benefits associated with these plans is not determinable. The
Division's pension expense for contributions to these plans was approximately
$800 and $876 in fiscal 1993 and 1994, respectively.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES:
At July 1, 1994, the Company had open letters of credit, some of which
secured guarantees to third parties, net of amounts reported as liabilities or
lease commitments (reported in Note 8), aggregating $25,823 available for the
Division and the Company's other operations. Commitment fees to banks associated
with open letters of credit vary from 3/8% to 5/8%.
The Division has various claims and legal proceedings outstanding. In the
opinion of management, the ultimate outcome of outstanding litigation and claims
will not have a material adverse effect on the financial position or results of
operations or cash flows of the Division.
F-37
<PAGE> 101
NATIONAL ACCOUNTS DIVISION
(A DIVISION OF THE MARTIN-BROWER COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 11 -- MEDICAL BENEFITS FOR RETIRED EMPLOYEES:
The Company has a post-retirement medical benefit plan that covers certain
employees who had met age and length of service requirements as of December 1,
1987. In fiscal 1993 and 1994, the Division paid medical claims expense of $59
and $24, respectively, for retired employees.
FAS 106, "Employers' Accounting for Post-retirement Benefits Other than
Pensions," would require the Division to begin accruing medical benefits for
retired employees by fiscal 1996. Furthermore, implementation of the standard
would require the recognition of a "transition obligation" (as defined in that
standard) based on the aggregate amount that would have been accrued in prior
years had the new standard been in effect for those years. That standard,
however, permits the Division to recognize the entire "transition obligation" in
the year of adoption or to amortize it over a period of years.
The Division estimates that the transition obligation approximates $482 as
of July 1, 1994. The Division has decided neither the timing nor method of
adoption of FAS 106.
NOTE 12 -- SUBSEQUENT EVENT:
On November 10, 1994, the Company signed the Purchase Agreement to sell
substantially all of the assets of the Division to ProSource for approximately
$140,000 and the assumption of the trade payables, subject to certain closing
conditions. The final net value to ProSource will vary depending on various
closing and post-closing adjustments, and retained liabilities.
The Company will retain all assets defined as "Excluded Assets", consisting
principally of cash and cash equivalents, certain insurance deposits, prepaid
items and refundable excise taxes as of the closing date. Liabilities to be
retained by the Company include primarily pre-closing federal and state income
taxes, post-retirement medical and life insurance benefits and other pre-closing
employee benefit obligations, pre-closing product liabilities,
incurred-but-not-reported medical and dental liabilities, workers' compensation
liabilities, vehicle accident liabilities, environmental liabilities and certain
other liabilities as specified in the Purchase Agreement.
The Company intends to enter into a service agreement with ProSource to
cover transition services to be provided by both parties after the closing. The
extent of the services provided and the rates to be charged have not been agreed
upon. Upon the planned service agreement, the Company would provide to ProSource
certain personnel and salary administration, accounting and treasury assistance,
print shop services and record storage space. ProSource would provide the
Company certain office space, computer processing, accounting and recordkeeping
services. Charges for the services to be rendered by the parties would be
determined on various bases including monthly fees, hourly rates and charges per
square foot. The services would be provided for periods up to one year, except
for recordkeeping which would continue for a period of seven years.
F-38
<PAGE> 102
PROSOURCE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed consolidated statements of
operations of ProSource, Inc., for the year ended December 30, 1995 and the six
months ended June 29, 1996 give effect to the pro forma events (as described
below), as if such events had occurred at the beginning of the periods presented
for results of operations data.
The pro forma events are (i) inclusion of the results of operations of the
National Accounts Division ("NAD") of The Martin-Brower Company for the three
months ended March 31, 1995 as if the acquisition were consummated on January 1,
1995 and (ii) reduction of interest expense for the periods presented assuming
the net proceeds of the offering were utilized to prepay, on January 1, 1995 and
January 1, 1996, balances outstanding under various debt instruments.
These unaudited pro forma condensed consolidated statements of operations
should be read in conjunction with the audited consolidated financial statements
of ProSource, Inc. The unaudited pro forma data are not necessarily indicative
of the results of operations of ProSource, Inc. that would have occurred if the
pro forma events had been in effect at the beginning of the periods presented,
nor are they necessarily indicative of future results of operations. The pro
forma adjustments are based upon available information and certain assumptions
set forth herein, included in the notes to the unaudited pro forma condensed
consolidated statements of operations.
F-39
<PAGE> 103
PROSOURCE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA,
ADJUSTMENTS AS ADJUSTED
FOR THE FOR THE PRO FORMA
ACQUISITION ACQUISITION ADJUSTMENTS
OF OF FOR THE PRO FORMA,
HISTORICAL NAD NAD OFFERING AS ADJUSTED
---------- -------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $3,461,837 $531,606(A) $3,993,443 $ -- $ 3,993,443
Cost of sales...................... 3,193,270 496,156(A) 3,689,426 -- 3,689,426
---------- -------- ---------- ------- ----------
Gross profit..................... 268,567 35,450 304,017 -- 304,017
Operating expenses................. 255,216 35,726(A) 290,942 -- 290,942
Restructuring charges.............. 711 -- 711 -- 711
---------- -------- ---------- ------- ----------
Earnings from operations......... 12,640 (276) 12,364 -- 12,364
Interest expense................... (14,678) (2,738)(B) (17,416) 5,014(C) (12,402)
Interest income.................... 1,339 69 1,408 -- 1,408
---------- -------- ---------- ------- ----------
Earnings (loss) before income
taxes and extraordinary
charge........................ (699) (2,945) (3,644) 5,014 1,370
Income tax (provision) benefit..... (85) 1,131(D) 1,046 (1,976)(D) (930)
---------- -------- ---------- ------- ----------
Earnings (loss) before
extraordinary charge.......... $ (784) $ (1,814) $ (2,598) $ 3,038 $ 440
========== ======== ========== ======= ==========
Per Share Data:
Earnings (loss) before
extraordinary charge per
share......................... $ (0.17) $ (0.58) $ 0.05
========== ========== ==========
Average outstanding shares (in
thousands).................... 4,491 4,491 8,217
========== ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
information.
F-40
<PAGE> 104
PROSOURCE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 29, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE PRO FORMA,
HISTORICAL OFFERING AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Net sales.............................................. $2,014,074 $ -- $ 2,014,074
Cost of sales.......................................... 1,859,000 -- 1,859,000
---------- ------- ----------
Gross profit......................................... 155,074 -- 155,074
Operating expenses..................................... 149,758 -- 149,758
Loss on impairment of long-lived assets................ 15,733 -- 15,733
Restructuring charges.................................. 10,866 -- 10,866
---------- ------- ----------
Loss from operations................................. (21,283) -- (21,283)
Interest expense....................................... (8,152) 2,437(E) (5,715)
Interest income........................................ 866 -- 866
---------- ------- ----------
Loss before income tax benefit....................... (28,569) 2,437 (26,132)
Income tax benefit..................................... 10,612 (1,220)(D) 9,392
---------- ------- ----------
Net earnings (loss).................................. $ (17,957) $ 1,217 $ (16,740)
========== ======= ==========
Per Share Data:
Net earnings (loss) per share........................ $ (3.39) $ (1.85)
========== ==========
Average outstanding shares used in calculation (in
thousands)........................................ 5,302 9,040
========== ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
information.
F-41
<PAGE> 105
PROSOURCE, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
A. Adjustment reflects the results of operations of the National Accounts
Division ("NAD") of The Martin-Brower Company for the three months ended
March 31, 1995 as if the acquisition were consummated on January 1, 1995 as
follows:
<TABLE>
<S> <C>
Net sales......................................................... $531,606
Cost of sales..................................................... 496,156
Operating expenses................................................ 35,139
</TABLE>
Operating expenses also include an additional three months of amortization
of goodwill and deferred loan fees in the amount of $587.
B. Adjustment reflects additional interest expense of $2,738 to finance the
acquisition and operations of NAD for three months as if the acquisition
were consummated on January 1, 1995. For purposes of this pro forma
calculation, the Company applied the average interest rate on debt used to
finance the acquisition to the assumed incremental outstanding debt balance
associated with the acquisition.
C. Adjustment represents the decrease in interest expense of $5,014 for the
year ended December 30, 1995, assuming the net proceeds of the offering were
utilized to prepay, on January 1, 1995, the balances outstanding under the
following debt instruments as follows:
<TABLE>
<CAPTION>
PRINCIPAL 1995 INTEREST
REPAYMENTS SAVINGS
---------- -------------
<S> <C> <C>
$15 million subordinated note payable to Onex, at 12%........ $ 15,000 $ 1,800
$10 million subordinated note payable to Martin-Brower,
discounted at 9%........................................... 8,826 794
Revolving credit facility, at 9.60%.......................... 22,604 2,170
------- ------
$ 46,430 $ 4,764
======= ======
</TABLE>
The adjustment also assumes that the $2.5 million convertible subordinated
note payable to Onex (which Onex intends to convert in connection with the
offering), plus accrued interest, was converted into shares of the Company's
common stock on January 1, 1995, resulting in interest savings of $250.
D. Adjustments reflect the estimated income tax effect of various pro forma
adjustments at 39%, which represents the Company's approximate marginal tax
rate.
E. Adjustment represents the decrease in interest expense of $2,437 for the six
months ended June 29, 1996, assuming the net proceeds of the offering were
utilized to prepay, on January 1, 1996, the balances outstanding under the
various debt instruments as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 1996
PRINCIPAL INTEREST
REPAYMENTS SAVINGS
---------- ----------
<S> <C> <C>
$15 million subordinated note payable to Onex, at 12%........ $ 15,000 $ 900
$10 million subordinated note payable to Martin-Brower,
discounted at 9%........................................... 9,418 415
Revolving credit facility, at 9.06%.......................... 22,012 997
------- ------
$ 46,430 $2,312
======= ======
</TABLE>
The adjustment also assumes that the $2.5 million convertible subordinated
note payable to Onex (which Onex intends to convert in connection with the
offering), plus accrued interest, was converted into shares of the Company's
common stock on January 1, 1996, resulting in interest savings of $125.
F-42
<PAGE> 106
INSIDE BACK COVER ARTWORK
Picture of a man sitting in a restaurant and drinking from a cup and a
Company truck in the background on the top left-hand side of the page. Picture
of a Company employee unloading a truck outside on the top right-hand side of
the page. Picture of a Company employee driving a chain of carts in a warehouse
on the bottom of the page.
<PAGE> 107
[PROSOURCE LOGO]
<PAGE> 108
LOGO
<PAGE> 109
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated (except for the Securities and
Exchange Commission registration fee, the National Association of Securities
Dealers, Inc. filing fee and The Nasdaq National Market filing fee) fees and
expenses (other than underwriting discounts and commissions) in connection with
the offering described in this registration statement:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.................... $ 19,827
National Association of Securities Dealers, Inc. filing fee............ 6,250
The Nasdaq National Market filing fee.................................. 42,500
Transfer Agent and Registrar fees...................................... 10,000
Blue Sky filing and counsel fees and expenses.......................... 20,000
Printing and engraving costs........................................... 275,000
Legal fees and expenses................................................ 425,000
Accounting fees and expenses........................................... 200,000
Miscellaneous.......................................................... 1,423
=========
Total........................................................ $1,000,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As authorized by Section 102(b)(7) of the Delaware General Corporation Law,
Article Eighth of the Company's Restated Certificate of Incorporation provides
that directors of the Company shall not be personally liable to the Company or
its stockholders for monetary damages for breaches of their fiduciary duty of
care as a director, except that such provision does not limit or eliminate the
liability of any director (i) for any breach of the director's duty of loyalty
to the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or knowing violation of law, (iii) in
respect of certain unlawful dividend payments or stock redemptions or
repurchases or (iv) for any transactions from which the director derived an
improper personal benefit. In addition, this provision does not limit directors'
liability under federal securities laws.
Section 145 of the Delaware Law provides, in summary, that directors and
officers of Delaware corporations are entitled, under certain circumstances, to
be indemnified against all expenses and liabilities (including attorney's fees)
incurred by them as a result of suits brought against them in their capacity as
a director or officer, if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, if they had no
reasonable cause to believe their conduct was unlawful; provided, that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the Company,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, they are fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Any such indemnification may be made by the Company only as authorized
in each specific case upon a determination by the stockholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct. Article 8 of the Company's Restated Certificate
of Incorporation entitles officers and directors of the Company to
indemnification to the fullest extent permitted by Section 145 of the Delaware
Law, as the same may be supplemented from time to time.
Reference is also made to the Company's Restated Certificate of
Incorporation, filed as Exhibit 3.1 hereto.
II-1
<PAGE> 110
Reference is also made to Section 7 of the Underwriting Agreement contained
in Exhibit 1.1 hereto, which provides certain indemnification rights to the
directors and officers of the Company in connection with the offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 30, 1993, the Company has not issued or sold any securities not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
except as follows:
(a) During 1993, the Company sold 125,600 shares of Common Stock in
the aggregate to certain directors, officers and management employees of
the Company at a purchase price equal to $11.00 per share.
(b) During 1994, the Company sold 6,900 shares of Common Stock in the
aggregate to certain officers and management employees of the Company at a
purchase price equal to $11.00 per share.
(c) On November 1, 1994, in connection with the acquisition of certain
assets and the assumption of certain liabilities of Malone Products, Inc.
("Malone") and as partial consideration therefor, the Company issued a
Subordinated Convertible Note in the principal amount of $0.5 million to
Malone (the "Malone Subordinated Note"). The Malone Subordinated Note is
convertible, in whole or in part, at any time into shares of Common Stock
at a conversion price equal to $20.00 per share, subject to adjustment.
(d) On March 31, 1995, in connection with the acquisition of
substantially all of the assets and the assumption of certain liabilities
of the National Accounts Division of The Martin-Brower Company
("Martin-Brower") and as partial consideration therefor, the Company
issued:
(i) a Stock Subscription Warrant to Martin-Brower for the purchase
of shares of Common Stock at an exercise price of $12.35 per share,
which was assigned a nominal value for purposes of such transaction;
(ii) a Subordinated Note Due March 31, 2002 in the principal amount
of $10 million to Martin-Brower;
(iii) a 12% Subordinated Note Due April 1, 2005 in the principal
amount of $15 million to Onex; and
(iv) a Convertible Subordinated Note Due April 1, 2005 in the
principal amount of $3.5 million to Onex (the "Onex NAD Note"). During
the year ended December 30, 1995, $2.1 million of principal under the
Onex NAD Note was repaid, resulting in an outstanding balance of $1.4
million at December 30, 1995. On February 1, 1996, Onex converted $0.8
million principal amount of the Onex NAD Note into 80,000 shares of the
Common Stock and the remaining balance on such note of approximately
$0.6 million plus accrued interest of $0.1 million was paid to Onex.
(e) In May 1995, the Company completed the sale of 208,500 shares of
Common Stock in the aggregate to certain directors, officers and management
employees of the Company at a purchase price equal to $10.00 per share.
(f) In January 1996, the Company completed the sale of 61,500 shares
of Common Stock in the aggregate to certain officers and management
employees of the Company at a purchase price equal to $10.00 per share.
The issuances and sales of the securities listed above were exempt from
registration under the Securities Act by virtue of Section 4(2) thereof and
Regulation D promulgated thereunder as transactions not involving a public
offering.
II-2
<PAGE> 111
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------- ----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Form of Restated Certificate of Incorporation of the Company(1)
3.2 Form of Amended and Restated By-Laws of the Company(1)
4.1 Form of Certificate for Class A Common Stock
5.1 Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP(1)
10.1 Form of Amended and Restated Management Shareholders Agreement among ProSource,
Inc., Onex DHC LLC and the individuals party thereto from time to time(1)
10.2 Form of Amended and Restated Director Shareholders Agreement among ProSource,
Inc., Onex DHC LLC and the individuals party thereto from time to time(1)
10.3 Stock Subscription Warrant, dated March 31, 1995, issued by ProSource, Inc. in
favor of The Martin-Brower Company to subscribe for 283,425 shares of Common
Stock(2)
10.4 Agreement, dated November 10, 1994, for the Purchase and Sale of the National
Accounts Division of The Martin-Brower Company and Martin-Brower of Canada, Ltd.,
among ProSource, Inc., The Martin-Brower Company and Martin-Brower of Canada,
Ltd.(2)
10.5 Purchase Agreement Amendment, dated February 24, 1995, among The Martin-Brower
Company, Martin-Brower of Canada, Ltd. and ProSource, Inc.(2)
10.6 Second Purchase Agreement Amendment, dated February 28, 1995, among The
Martin-Brower Company, Martin-Brower of Canada, Ltd. and ProSource, Inc.(2)
10.7 Third Purchase Agreement Amendment, dated March 31, 1995, among The Martin-Brower
Company, Martin-Brower of Canada, Ltd. and ProSource, Inc.(2)
10.8 Loan and Security Agreement, dated as of March 31, 1995, among ProSource Services
Corporation, BroMar Services, Inc., ProSource Distribution Services Limited, the
Financial Institutions party thereto and NationsBank of Georgia, N.A., The First
National Bank of Boston and Shawmut Capital Corporation, as Co-Agents, and
NationsBank of Georgia, N.A., as Administrative Agent(2)
10.9 Amendment No. 1, dated as of December 29, 1995, to Loan and Security Agreement,
among ProSource Services Corporation, BroMar Services, Inc., ProSource
Distribution Services Limited, the Financial Institutions party thereto and
NationsBank of Georgia, N.A., The First National Bank of Boston and Shawmut
Capital Corporation, as Co-Agents, and NationsBank of Georgia, N.A., as
Administrative Agent(2)
10.10 Amendment No. 2 and Waiver, dated as of March 28, 1996, to Loan and Security
Agreement, among ProSource Services Corporation, BroMar Services, Inc., ProSource
Distribution Services Limited, the Financial Institutions party thereto and
NationsBank, N.A. (South), The First National Bank of Boston and Fleet Capital
Corporation, as Co-Agents, and NationsBank, N.A. (South), as Administrative
Agent(2)
10.11 Amendment No. 3 and Consent, dated as of September 6, 1996, to Loan and Security
Agreement, among ProSource Services Corporation, BroMar Services, Inc., ProSource
Distribution Services Limited, the Financial Institutions party thereto and
NationsBank, N.A. (South), The First National Bank of Boston and Fleet Capital
Corporation, as Co-Agents, and NationsBank, N.A. (South), as Administrative Agent
</TABLE>
II-3
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------- ----------------------------------------------------------------------------------
<C> <S>
10.12 Amendment No. 4 and Consent, dated as of September 26, 1996, to Loan and Security
Agreement, among ProSource Services Corporation, BroMar Services, Inc., ProSource
Distribution Services Limited, the Financial Institutions party thereto and
NationsBank, N.A. (South), The First National Bank of Boston and Fleet Capital
Corporation, as Co-Agents, and NationsBank, N.A. (South), as Administrative Agent
10.13 Pledge Agreement, made as of March 31, 1995, by ProSource, Inc. in favor of
NationsBank of Georgia, N.A., as Administrative Agent(2)
10.14 Pledge Agreement, made as of March 31, 1995, by ProSource Services Corporation in
favor of NationsBank of Georgia, N.A., as Administrative Agent(2)
10.15 Subordination Agreement, dated as of March 31, 1995, made by ProSource Services
Corporation and Onex Corporation in favor of NationsBank of Georgia, N.A., as
Administrative Agent(2)
10.16 Unconditional Guaranty, made as of March 31, 1995, by ProSource, Inc. in favor of
NationsBank of Georgia, N.A., as Administrative Agent(2)
10.17 Subordinated Note, dated March 31, 1995, executed by ProSource, Inc. and payable
to the order of The Martin-Brower Company in the original principal amount of
$10,000,000(2)
10.18 Subordinated Note, dated March 31, 1995, executed by ProSource Services
Corporation and payable to the order of Onex Ohio Holdings, Inc. in the original
principal amount of $15,000,000(2)
10.19 Form of Distribution Agreement, dated as of June 30, 1992, between Burger King
Corporation and ProSource Services Corporation(2)
10.20 Form of Amendment Agreement, dated as of June 30, 1992, between Burger King
Corporation and ProSource Services Corporation(2)
10.21 Addendum to Forms of Distribution Agreement and Amendment Agreement(2)
10.22 Form of Amended and Restated Employment Agreement between ProSource Services
Corporation and David R. Parker(1)
10.23 Form of Amended and Restated Employment Agreement between ProSource Services
Corporation and Thomas C. Highland(1)
10.24 Employment Agreement, dated as of April 1, 1995, between ProSource Services
Corporation and Daniel Adzia(2)
10.25 Employment Agreement, dated July 1, 1992, between ProSource Services Corporation
and Paul A. Garcia de Quevedo(2)
10.26 Employment Agreement, dated as of July 1, 1995, between ProSource Services
Corporation and Dennis Andruskiewicz(2)
10.27 Employment Agreement, dated April 1, 1994, between ProSource Services Corporation
and John E. Foley(2)
10.28 Amended Management Option Plan (1995)(1)
10.29 1996 Stock Option Plan(1)
10.30 Truck Lease and Service Agreement, dated as of May 19, 1995, between Ryder Truck
Rental, Inc. and ProSource Services Corporation (3)
10.31 Lease Agreement, dated as of August 22, 1991, between Burger King Corporation
(subsequently assigned to ProSource Services Corporation) and Gelco Corporation,
doing business as GE Capital Fleet Services
10.32 Management Advisory Agreement, dated as of July 1, 1992, between OMI Partnership
Holdings Ltd., an affiliate of Onex Corporation, and ProSource Services
Corporation
</TABLE>
II-4
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------- ----------------------------------------------------------------------------------
<C> <S>
10.33 Form of Termination Agreement between OMI Partnership Holdings Ltd., an affiliate
of Onex Corporation, and ProSource Services Corporation
21.1 Subsidiaries of the Company(2)
23.1 Consent of KPMG Peat Marwick LLP(2)
23.2 Consent of Price Waterhouse LLP(2)
23.3 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in Exhibit
5.1)(1)
24.1 Powers of Attorney (included on signature page)
27.1 Financial Data Schedule(2)
</TABLE>
- ---------------
(1) To be filed by amendment.
(2) Previously filed.
(3) Confidential treatment has been requested for portions of this Exhibit.
(b) Consolidated Financial Statements Schedules
Schedule I -- Condensed Financial Information of Registrant
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
(1) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(2) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
II-5
<PAGE> 114
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Coral Gables, State of Florida on October 29, 1996.
PROSOURCE, INC.
By: /s/ DAVID R. PARKER
........................................
David R. Parker
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement on Form S-1 has been signed
by the following persons in the capacities and on the dates indicated. Each
person whose signature appears below hereby authorizes each of David R. Parker,
Thomas C. Highland, William F. Evans and Paul A. Garcia de Quevedo, as
attorney-in-fact, to sign and file on his or her behalf, individually and in
each capacity stated below, any pre-effective or post-effective amendment hereto
or any registration statement relating to the offering covered hereby filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ----------------------------------- -----------------
<C> <S> <C>
* Chairman of the Board of Directors October 29, 1996
...................................... (principal executive officer)
David R. Parker
* President, Chief Executive Officer October 29, 1996
...................................... and Director
Thomas C. Highland
* Vice-Chairman, Chief Marketing October 29, 1996
...................................... Officer and Director
Daniel J. Adzia
* Executive Vice President, Chief October 29, 1996
...................................... Financial Officer
William F. Evans (principal financial officer)
* Vice President, Controller October 29, 1996
...................................... (principal accounting officer)
Marcelino Iturrey
* Director October 29, 1996
......................................
Gerald W. Schwartz
* Director October 29, 1996
......................................
Anthony R. Melman
</TABLE>
II-6
<PAGE> 115
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ----------------------------------- -----------------
<C> <S> <C>
* Director October 29, 1996
......................................
Michael E. Treacy
* Director October 29, 1996
......................................
Michael Carpenter
* Director October 29, 1996
......................................
Anthony Munk
* Director October 29, 1996
......................................
C. Lee Johnson
* Director October 29, 1996
......................................
R. Geoffrey P. Styles
*By: /s/ DAVID R. PARKER
.................................
David R. Parker
individually and as attorney-in-fact
</TABLE>
II-7
<PAGE> 116
PROSOURCE, INC. (PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET INFORMATION
DECEMBER 31, 1994 AND DECEMBER 30, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 1,118 $ 939
Due from subsidiaries.................................................. -- 96
Other current assets................................................... 58 --
------- -------
Total current assets........................................... 1,176 1,035
Investment in subsidiaries............................................... 28,160 58,935
Deferred income taxes.................................................... 291 394
------- -------
Total assets................................................... $29,627 $60,364
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued liabilities.................................................... $ 10 $ 110
------- -------
Total current liabilities........................................... 10 110
Subordinated notes payable............................................... -- 9,418
Convertible subordinated notes payable................................... -- 1,415
Due to subsidiaries...................................................... 7,074 --
------- -------
Total liabilities.............................................. 7,084 10,943
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred Stock........................................................ -- --
Class A Common Stock................................................... -- --
Class B Common Stock................................................... 23 52
Additional paid-in-capital............................................. 23,504 51,838
Accumulated deficit.................................................... (984) (2,540)
Accumulated foreign currency translation adjustments................... -- 71
------- -------
Total stockholders' equity..................................... 22,543 49,421
------- -------
Total liabilities and stockholders' equity..................... $29,627 $60,364
======= =======
</TABLE>
See accompanying notes to condensed financial information.
S-1
<PAGE> 117
PROSOURCE, INC. (PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT) INFORMATION
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 31, 1994 AND DECEMBER 30, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
1993 ---------- ----------
---------- (53 WEEKS) (52 WEEKS)
(52 WEEKS)
<S> <C> <C> <C>
Revenues.................................................. $ -- $ -- $ --
Expenses.................................................. -- -- 3
Interest expense.......................................... (413) (571) (729)
Interest income........................................... 27 55 53
Equity in losses of subsidiaries.......................... (938) (3,513) (1,294)
------- ------- -------
Loss before income taxes................................ (1,324) (4,029) (1,973)
Income tax benefit........................................ 497 1,647 417
------- ------- -------
Net loss................................................ (827) (2,382) (1,556)
Retained earnings (deficit), beginning of year............ 2,225 1,398 (984)
------- ------- -------
Retained earnings (deficit), end of year.................. $ 1,398 $ (984) $ (2,540)
======= ======= =======
</TABLE>
See accompanying notes to condensed financial information.
S-2
<PAGE> 118
PROSOURCE, INC. (PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOW INFORMATION
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 31, 1994 AND DECEMBER 30, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
1993 ---------- ----------
---------- (53 WEEKS) (52 WEEKS)
(52 WEEKS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (827) $ (2,382) $ (1,556)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Undistributed losses of subsidiaries................. 441 2,062 914
Dividends received from subsidiaries................. -- 561 7,208
Deferred income taxes................................ (98) (193) (103)
Amortization of note discount........................ -- -- 592
Changes in operating assets and liabilities:
(Increase) decrease in other current assets........ (54) (4) 58
Increase in accrued liabilities.................... -- 10 100
------- ------- --------
Net cash provided by (used in) operating
activities.................................... (538) 54 7,213
------- ------- --------
Cash flows from investing activities:
Capital contributions to subsidiaries................... (6,497) (2) (38,826)
Advances to/from subsidiaries........................... 7,059 15 (7,170)
------- ------- --------
Net cash provided by (used in) investing
activities.................................... 562 13 (45,996)
------- ------- --------
Cash flows from financing activities:
Issuance of long-term debt.............................. -- -- 12,326
Repayments of long-term debt............................ -- -- (2,085)
Proceeds from issuance of common stock.................. 1,382 76 28,585
Payments to acquire and retire treasury stock........... (16) (415) (222)
------- ------- --------
Net cash provided by (used in) financing
activities.................................... 1,366 (339) 38,604
------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................... 1,390 (272) (179)
Cash and cash equivalents, beginning of year.............. -- 1,390 1,118
------- ------- --------
Cash and cash equivalents, end of year.................... $ 1,390 $ 1,118 $ 939
======= ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................... $ -- $ -- $ 41
======= ======= ========
Income taxes, net of refunds....................... $ 14 $ 4 $ 1
======= ======= ========
</TABLE>
See accompanying notes to condensed financial information.
S-3
<PAGE> 119
PROSOURCE, INC. (PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
DECEMBER 30, 1995
(DOLLARS IN THOUSANDS)
(1) BASIS OF PRESENTATION
The accompanying condensed financial information should be read in
conjunction with the ProSource, Inc. Consolidated Financial Statements.
Capitalized terms are as defined in the ProSource, Inc. Consolidated Financial
Statements.
(2) LONG-TERM DEBT
Total debt of the Registrant (Parent only) consists of two agreements at
December 30, 1995. A $10 million subordinated note is payable to The
Martin-Brower Company. Interest on this note is payable semiannually, with rates
ranging from zero to 13 percent, beginning March 31, 1998. The principal is
payable in full on March 31, 2002. This note has been discounted to reflect a
constant interest rate of 9 percent through its maturity.
A $3.5 million convertible subordinated note was payable to Onex, with
interest at prime rate (8.5 percent at December 30, 1995), compounded annually
and due, together with the principal, on April 1, 2005. During the year ended
December 30, 1995, the Parent paid $2.1 million of such note to Onex resulting
in an outstanding balance of $1.4 million at December 30, 1995. On February 1,
1996, Onex converted $0.8 million of the note into 80,000 shares of the Parent's
common stock and the remaining balance on the note of approximately $0.6 million
plus accrued interest was paid to Onex.
The subsidiaries' Loan and Security Agreements include certain restrictive
covenants which, among other things, limit the flow of funds to the Parent.
Substantially all of the subsidiaries' assets are pledged to secure the
revolving credit facility and term loans, as well as a pledge by the Parent of
all of the issued and outstanding common stock of the subsidiaries. In addition,
the Parent has guaranteed payment of all amounts due under the revolving credit
facility and term loan. See Note 6 of the Notes to Consolidated Financial
Statements for further discussion of the restrictions contained in this loan
agreement.
(3) SUBSEQUENT EVENT
In September 1996, the Parent filed a Registration Statement with the
Securities and Exchange Commission with respect to an initial public offering.
The net proceeds of the offering will be used to repay certain indebtedness of
the Parent and its subsidiaries.
In October 1996, the Parent changed its capital structure to 10,000,000
authorized shares of $.01 par value preferred stock, 50,000,000 authorized
shares of $0.01 par value Class A Common Stock and 10,000,000 authorized shares
of $.01 par value Class B Common Stock.
On October 1996, the Parent's board of directors declared a 100-to-1 stock
split effective as of the date of the commencement of the initial public
offering. The par value of each share is $.01. The Parent's additional paid-in
capital account and the Class B Common Stock accounts have been restated
retroactively to reflect the stock split.
S-4
<PAGE> 120
PROSOURCE, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 31, 1994 AND DECEMBER 30, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
BALANCE, December 31, 1992....................................................... $ 1,818
Additions charged to costs and expenses....................................... 766
Recoveries.................................................................... --
Write-offs.................................................................... (56)
-----
BALANCE, December 25, 1993....................................................... 2,528
Additions charged to costs and expenses....................................... 2,427
Recoveries.................................................................... 190
Write-offs.................................................................... (2,234)
-----
BALANCE, December 31, 1994....................................................... 2,911
Acquired allowance of NAD..................................................... 1,893
Additions charged to costs and expenses....................................... 1,845
Recoveries.................................................................... 153
Write-offs.................................................................... (4,217)
-----
BALANCE, December 30, 1995....................................................... $ 2,585
=====
</TABLE>
S-5
<PAGE> 121
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER NUMBER
- -------- ----------
<C> <S> <C>
1.1 Form of Underwriting Agreement...........................................
3.1 Form of Restated Certificate of Incorporation of the Company(1)..........
3.2 Form of Amended and Restated By-Laws of the Company(1)...................
4.1 Form of Certificate for Class A Common Stock.............................
5.1 Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP(1)................
10.1 Form of Amended and Restated Management Shareholders Agreement among
ProSource, Inc., Onex DHC LLC and the individuals party thereto from time
to time(1)...............................................................
10.2 Form of Amended and Restated Director Shareholders Agreement among
ProSource, Inc., Onex DHC LLC and the individuals party thereto from time
to time(1)...............................................................
10.3 Stock Subscription Warrant, dated March 31, 1995, issued by ProSource,
Inc. in favor of The Martin-Brower Company to subscribe for 283,425
shares of Common Stock(2)................................................
10.4 Agreement, dated November 10, 1994, for the Purchase and Sale of the
National Accounts Division of The Martin-Brower Company and Martin-Brower
of Canada, Ltd., among ProSource, Inc., The Martin-Brower Company and
Martin-Brower of Canada, Ltd.(2).........................................
10.5 Purchase Agreement Amendment, dated February 24, 1995, among The Martin-
Brower Company, Martin-Brower of Canada, Ltd. and ProSource, Inc.(2).....
10.6 Second Purchase Agreement Amendment, dated February 28, 1995, among The
Martin-Brower Company, Martin-Brower of Canada, Ltd. and ProSource,
Inc.(2)..................................................................
10.7 Third Purchase Agreement Amendment, dated March 31, 1995, among The
Martin-Brower Company, Martin-Brower of Canada, Ltd. and ProSource,
Inc.(2)..................................................................
10.8 Loan and Security Agreement, dated as of March 31, 1995, among ProSource
Services Corporation, BroMar Services, Inc., ProSource Distribution
Services Limited, the Financial Institutions party thereto and
NationsBank of Georgia, N.A., The First National Bank of Boston and
Shawmut Capital Corporation, as Co-Agents, and NationsBank of Georgia,
N.A., as Administrative Agent(2).........................................
10.9 Amendment No. 1, dated as of December 29, 1995, to Loan and Security
Agreement, among ProSource Services Corporation, BroMar Services, Inc.,
ProSource Distribution Services Limited, the Financial Institutions party
thereto and NationsBank of Georgia, N.A., The First National Bank of
Boston and Shawmut Capital Corporation, as Co-Agents, and NationsBank of
Georgia, N.A., as Administrative Agent(2)................................
10.10 Amendment No. 2 and Waiver, dated as of March 28, 1996, to Loan and
Security Agreement, among ProSource Services Corporation, BroMar
Services, Inc., ProSource Distribution Services Limited, the Financial
Institutions party thereto and NationsBank, N.A. (South), The First
National Bank of Boston and Fleet Capital Corporation, as Co-Agents, and
NationsBank, N.A. (South), as Administrative Agent(2)....................
10.11 Amendment No. 3 and Consent, dated as of September 6, 1996, to Loan and
Security Agreement, among ProSource Services Corporation, BroMar
Services, Inc., ProSource Distribution Services Limited, the Financial
Institutions party thereto and NationsBank, N.A. (South), The First
National Bank of Boston and Fleet Capital Corporation, as Co-Agents, and
NationsBank, N.A. (South), as Administrative Agent
</TABLE>
<PAGE> 122
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER NUMBER
- -------- ----------
<C> <S> <C>
10.12 Amendment No. 4 and Consent, dated as of September 26, 1996, to Loan and
Security Agreement, among ProSource Services Corporation, BroMar
Services, Inc., ProSource Distribution Services Limited, the Financial
Institutions party thereto and NationsBank, N.A. (South), The First
National Bank of Boston and Fleet Capital Corporation, as Co-Agents, and
NationsBank, N.A. (South), as Administrative Agent
10.13 Pledge Agreement, made as of March 31, 1995, by ProSource, Inc. in favor
of NationsBank of Georgia, N.A., as Administrative Agent(2)..............
10.14 Pledge Agreement, made as of March 31, 1995, by ProSource Services
Corporation in favor of NationsBank of Georgia, N.A., as Administrative
Agent(2).................................................................
10.15 Subordination Agreement, dated as of March 31, 1995, made by ProSource
Services Corporation and Onex Corporation in favor of NationsBank of
Georgia, N.A., as Administrative Agent(2)................................
10.16 Unconditional Guaranty, made as of March 31, 1995, by ProSource, Inc. in
favor of NationsBank of Georgia, N.A., as Administrative Agent(2)........
10.17 Subordinated Note, dated March 31, 1995, executed by ProSource, Inc. and
payable to the order of The Martin-Brower Company in the original
principal amount of $10,000,000(2).......................................
10.18 Subordinated Note, dated March 31, 1995, executed by ProSource Services
Corporation and payable to the order of Onex Ohio Holdings, Inc. in the
original principal amount of $15,000,000(2)..............................
10.19 Form of Distribution Agreement, dated as of June 30, 1992, between Burger
King Corporation and ProSource Services Corporation(2)...................
10.20 Form of Amendment Agreement, dated as of June 30, 1992, between Burger
King Corporation and ProSource Services Corporation(2)...................
10.21 Addendum to Forms of Distribution Agreement and Amendment Agreement(2)...
10.22 Form of Amended and Restated Employment Agreement between ProSource
Services Corporation and David R. Parker(1)..............................
10.23 Form of Amended and Restated Employment Agreement between ProSource
Services Corporation and Thomas C. Highland(1)...........................
10.24 Employment Agreement, dated as of April 1, 1995, between ProSource
Services Corporation and Daniel Adzia(2).................................
10.25 Employment Agreement, dated July 1, 1992, between ProSource Services
Corporation and Paul A. Garcia de Quevedo(2).............................
10.26 Employment Agreement, dated as of July 1, 1995, between ProSource
Services Corporation and Dennis Andruskiewicz(2).........................
10.27 Employment Agreement, dated April 1, 1994, between ProSource Services
Corporation and John E. Foley(2).........................................
10.28 Amended Management Option Plan (1995)(1).................................
10.29 1996 Stock Option Plan(1)................................................
10.30 Truck Lease and Service Agreement, dated as of May 19, 1995, between
Ryder Truck Rental, Inc. and ProSource Services Corporation (3)..........
10.31 Lease Agreement, dated as of August 22, 1991, between Burger King
Corporation (subsequently assigned to ProSource Services Corporation) and
Gelco Corporation, doing business as GE Capital Fleet Services
</TABLE>
<PAGE> 123
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER NUMBER
- -------- ----------
<C> <S> <C>
10.32 Management Advisory Agreement, dated as of July 1, 1992, between OMI
Partnership Holdings Ltd., an affiliate of Onex Corporation, and
ProSource Services Corporation
10.33 Form of Termination Agreement between OMI Partnership Holdings Ltd., an
affiliate of Onex Corporation, and ProSource Services Corporation
21.1 Subsidiaries of the Company(2)...........................................
23.1 Consent of KPMG Peat Marwick LLP(2)......................................
23.2 Consent of Price Waterhouse LLP(2).......................................
23.3 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in
Exhibit 5.1)(1)..........................................................
24.1 Powers of Attorney (included on signature page)..........................
27.1 Financial Data Schedule(2)...............................................
</TABLE>
- ---------------
(1) To be filed by amendment.
(2) Previously filed.
(3) Confidential treatment has been requested for portions of this Exhibit.
<PAGE> 1
EXHIBIT 1.1
_______________ SHARES
PROSOURCE, INC.
CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE
UNDERWRITING AGREEMENT
__________, 1996
<PAGE> 2
_____________, 1996
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Smith Barney Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
ProSource, Inc., a Delaware corporation (the "COMPANY"), proposes to
issue and sell to the several Underwriters named in Schedule I hereto (the
"UNDERWRITERS") ______________ shares of its Class A Common Stock, par value
$.01 per share (the "FIRM SHARES"). The Company also proposes to issue and sell
to the several Underwriters not more than an additional ______________ shares of
its Class A Common Stock, par value $.01 per share (the "ADDITIONAL SHARES") if
and to the extent that you, as Managers of the offering, shall have determined
to exercise, on behalf of the Underwriters, the right to purchase such shares of
common stock granted to the Underwriters in Section 2 hereof. The Firm Shares
and the Additional Shares are hereinafter collectively referred to as the
"SHARES." The shares of Class A Common Stock, par value $.01 per share and the
shares of Class B Common Stock, par value $.01 per share of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "COMMON STOCK."
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the
term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462
Registration Statement.
1. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
to and agrees with each of the Underwriters that:
2
<PAGE> 3
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
(ii) the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this paragraph 1(b)
do not apply to statements or omissions in the Registration Statement or the
Prospectus based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the Prospectus and is
duly qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole.
3
<PAGE> 4
(e) This Agreement has been duly authorized, executed and delivered by
the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and
non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene any
provision of applicable law or the certificate of incorporation or by-laws of
the Company or any agreement or other instrument binding upon the Company or any
of its subsidiaries that is material to the Company and its subsidiaries, taken
as a whole, or any judgment, order or decree of any governmental body, agency or
court having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any governmental
body or agency is required for the performance by the Company of its obligations
under this Agreement, except such as may be required and have been obtained
under the Federal securities laws or such as may be required by the securities
or Blue Sky laws of the various states in connection with the offer and sale of
the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto subsequent to the
date of this Agreement).
(k) There are no legal or governmental proceedings pending or, to the
Company's knowledge, threatened to which the Company or any of its subsidiaries
is a party or to which any of the properties of the Company or any of its
subsidiaries is subject that are required to be described in the Registration
Statement or the Prospectus and are not so described or any statutes,
regulations, contracts or other documents that are required to be described in
the Registration
4
<PAGE> 5
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(n) The Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in compliance with all terms and conditions
of any such permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(o) In the ordinary course of its business, the Company conducts a
periodic review of the effect of Environmental Laws on the business, operations
and properties of the Company and its subsidiaries, in the course of which it
identifies and evaluates associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for clean-up, closure
of properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, the Company has
reasonably concluded that such associated costs and liabilities would not,
singly or in the aggregate, have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
(p) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Securities Act with respect to any
5
<PAGE> 6
securities of the Company or to require the Company to include such securities
with the Shares registered pursuant to the Registration Statement, except in
each case, as described in the Prospectus. The Company has received waivers of
any such rights exercisable in connection with the Offering.
(q) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
(r) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company and its
subsidiaries have not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the ordinary course
of business; (2) the Company has not purchased any of its outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock; and (3) there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company and its
consolidated subsidiaries, except in each case as described in or contemplated
by the Prospectus (exclusive of any amendments or supplements thereto subsequent
to the date of this Agreement).
(s) The Company and its subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
subsidiaries, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its subsidiaries; and
any real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries, in each case except as described in or contemplated by the
Prospectus.
(t) No material labor dispute with the employees of the Company or any
of its subsidiaries exists, except as described in or contemplated by the
Prospectus, or, to the knowledge of the Company, is imminent.
(u) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any such subsidiary has been refused any
6
<PAGE> 7
insurance coverage applied for; and neither the Company nor any such subsidiary
has any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business at a
cost that would not materially and adversely affect the condition, financial or
otherwise, or the earnings, business or operations of the Company and its
subsidiaries, taken as a whole, except as described in or contemplated by the
Prospectus.
(v) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, and
neither the Company nor any such subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material adverse
change in the condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus.
(w) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (3) access to assets is
permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(x) The Company and its subsidiaries own or possess, license, or can
acquire on reasonable terms, all material intellectual property and know-how
(including trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks and
trade names currently employed by them in connection with the business now
operated by them, and neither the Company nor any of its subsidiaries has
received any notice of infringement of or conflict with asserted rights of
others with respect to any of the foregoing which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would result in
any material adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company and its subsidiaries, taken as a
whole.
7
<PAGE> 8
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to sell
to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedule I hereto
opposite its name at $______ a share (the "PURCHASE PRICE").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to _______________
Additional Shares at the Purchase Price. If you, on behalf of the Underwriters,
elect to exercise such option, you shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the Underwriters and the date
on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of the Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Shares to be sold hereunder, (B) the issuance by the Company of
shares of Common Stock (i) upon the exercise of an option or warrant or the
conversion of a security described in the Prospectus or (ii) to Onex Corporation
or an affiliate thereof ("ONEX") in
8
<PAGE> 9
consideration for the agreement by Onex to relinquish its rights under a
management agreement as described in the Prospectus, or (C) the issuance by the
Company in the ordinary course of business of options to purchase Common Stock
pursuant to employee benefit plans described in the Prospectus.
3. TERMS OF PUBLIC OFFERING. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
4. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be made to
the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on __________, 1996, or at such
other time on the same or such other date, not later than _________, 1996, as
shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "CLOSING DATE."
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than _______, 1996, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to as
the "OPTION CLOSING DATE."
The Firm Shares and Additional Shares shall be registered in such
names and in such denominations as you shall request in writing not later than
one full business day prior to the Closing Date or the Option Closing Date, as
the case may be. The Firm Shares and Additional Shares shall be delivered to you
on the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
9
<PAGE> 10
5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Company to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 10:00 a.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, there shall not have occurred any change, or any
development involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company and its
subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive
of any amendments or supplements thereto subsequent to the date of this
Agreement) that, in your judgment, is material and adverse and that makes it, in
your judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of the
Company, to the effect set forth in clause (a)(i) above and to the effect that
the representations and warranties of the Company contained in this Agreement
are true and correct as of the Closing Date and that the Company has complied
with all of the agreements and satisfied all of the conditions on its part to be
performed or satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP, outside counsel for the
Company, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus and
is duly qualified to transact business and is in good standing in
Florida;
(ii) each of ProSource Services Corporation, BroMar Services, Inc.,
ProSource Investments, Inc. and PSC Services of Florida, Inc. has
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<PAGE> 11
been duly incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, has
the corporate power and authority to own its property and to conduct
its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in the respective states set
forth on Appendix A hereto;
(iii) the authorized capital stock of the Company conforms as to legal
matters to the description thereof contained under the caption
"Description of Capital Stock" in the Prospectus;
(iv) the shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid
and non-assessable;
(v) the Shares have been duly authorized and, when issued and delivered
in accordance with the terms of this Agreement, will be validly issued,
fully paid and non-assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights;
(vi) this Agreement has been duly authorized, executed and delivered by
the Company;
(vii) (A) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of (1) applicable law or the
certificate of incorporation or by-laws of the Company, (2) any
agreement or other instrument binding upon the Company or any of its
subsidiaries that is filed as an exhibit to the Registration Statement
or listed on the attached officer's certificate or (3) any judgment,
order or decree of any governmental body, agency or court having
jurisdiction over the Company or any subsidiary known to such counsel,
and (B) no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement,
except such as may be required and have been obtained under the Federal
securities laws or such as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and sale of
the Shares;
(viii) the statements (A) in the Prospectus under the captions "Certain
Transactions," "Description of Capital Stock", and "Shares Available
for Future Sale" and (B) in the Registration Statement in Items
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<PAGE> 12
14 and 15, in each case insofar as such statements constitute summaries
of the legal matters, documents or proceedings referred to therein,
fairly present the information called for with respect to such legal
matters, documents and proceedings and fairly summarize the matters
referred to therein in all material respects;
(ix) (A) to the best of such counsel's knowledge, after due inquiry
solely of the Chairman of the Board, Chief Financial Officer and
Treasurer of the Company, such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company or
any of its subsidiaries is a party or to which any of the properties of
the Company or any of its subsidiaries is subject that are required to
be described in the Registration Statement or the Prospectus and are
not so described and such counsel does not know of any statutes or
regulations that are required to be described in the Registration
Statement or the Prospectus and are not so described and (B) to the
knowledge of such counsel, there are no contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required;
(x) the Company is not and, immediately after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended;
(xi) (A) such counsel is of the opinion that the Registration Statement
and Prospectus (except for financial statements and schedules and other
financial and statistical data included therein as to which such
counsel need not express any opinion) comply as to form in all material
respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder, and (B) nothing has come to
such counsel's attention that causes it to believe that (except for
financial statements and schedules and other financial and statistical
data as to which such counsel need not express any belief) the
Registration Statement and the prospectus included therein at the time
the Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that (except for financial statements and
schedules and other financial and statistical data as to which such
counsel need not express any belief) the Prospectus contains any untrue
statement of a material fact or omits to state a material fact
necessary in
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<PAGE> 13
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of Davis Polk & Wardwell, counsel for the Underwriters, dated the
Closing Date, covering the matters referred to in subparagraphs (v), (vi),
(viii) (but only as to the statements in the Prospectus under "Description of
Capital Stock" and "Underwriters") and (xi) of paragraph (c) above.
With respect to subparagraph (xi) of paragraph (c) above, Kaye,
Scholer, Fierman, Hays & Handler, LLP and Davis Polk & Wardwell may state that
their opinion and belief are based upon their participation in the preparation
of the Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are without
independent check or verification, except as specified.
The opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP described
in paragraph (c) above shall be rendered to the Underwriters at the request of
the Company and shall so state therein.
(e) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to the Underwriters, from KPMG
Peat Marwick LLP, independent public accountants, containing statements and
information of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus; provided
that the letter delivered on the Closing Date shall use a "cut-off date" not
earlier than the date hereof.
(f) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you on the one hand, and each of the shareholders of
the Company and Malone Products, Inc. on the other hand, relating to sales and
certain other dispositions of shares of Common Stock or certain other
securities, delivered to you on or before the date hereof, shall be in full
force and effect on the Closing Date.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the issuance of the Additional Shares.
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<PAGE> 14
6. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, three signed copies of the
Registration Statement (including exhibits thereto) and for delivery to each
other Underwriter a conformed copy of the Registration Statement (without
exhibits thereto) and to furnish to you in New York City, without charge, prior
to 10:00 A.M. New York City time on the business day next succeeding the date of
this Agreement and during the period mentioned in paragraph (c) below, as many
copies of the Prospectus and any supplements and amendments thereto or to the
Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement or the
Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to which
you reasonably object, and to file with the Commission within the applicable
period specified in Rule 424(b) under the Securities Act any prospectus required
to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public offering
of the Shares as in the opinion of counsel for the Underwriters the Prospectus
is required by law to be delivered in connection with sales by an Underwriter or
dealer, any event shall occur or condition exist as a result of which it is
necessary to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to comply
with applicable law, forthwith to prepare, file with the Commission and furnish,
at its own expense, to the Underwriters and to the dealers (whose names and
addresses you will furnish to the Company) to which Shares may have been sold by
you on behalf of the Underwriters and to any other dealers upon request, either
amendments or supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be misleading or
so that the Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-month
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<PAGE> 15
period ending ________, 1997 that satisfies the provisions of Section 11(a) of
the Securities Act and the rules and regulations of the Commission thereunder.
(f) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel and
the Company's accountants in connection with the registration and delivery of
the Shares under the Securities Act and, subject to the last sentence of this
paragraph (f), all other fees or expenses in connection with the preparation and
filing of the Registration Statement, any preliminary prospectus, the Prospectus
and amendments and supplements to any of the foregoing, including all printing
costs associated therewith, and the mailing and delivering of copies thereof to
the Underwriters and dealers, in the quantities hereinabove specified, (ii) all
costs and expenses related to the transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon, (iii) the
cost of printing or producing any Blue Sky memorandum in connection with the
offer and sale of the Shares under state securities laws and all expenses in
connection with the qualification of the Shares for offer and sale under state
securities laws as provided in Section 6(d) hereof, including filing fees and
the reasonable fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky
memorandum, (iv) all filing fees and disbursements of counsel to the
Underwriters incurred in connection with the review and qualification of the
offering of the Shares by the National Association of Securities Dealers, Inc.,
(v) all fees and expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all costs
and expenses incident to listing the Shares on the Nasdaq National Market, (vi)
the cost of printing certificates representing the Shares, (vii) the costs and
charges of any transfer agent or registrar , (viii) the costs and expenses of
the Company relating to investor presentations on any "road show" undertaken in
connection with the marketing of the offering of the Shares, including, without
limitation, expenses associated with the production of road show slides and
graphics, fees and expenses of any consultants engaged in connection with the
road show presentations with the prior approval of the Company, travel and
lodging expenses of the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with the road
show with the prior approval of the Company, and (ix) all other costs and
expenses incident to the performance of the obligations of the Company hereunder
for which provision is not otherwise made in this Section. It is understood,
however, that except as provided in this Section, Section 7 entitled "Indemnity
and Contribution", and the last paragraph of Section 9 below, the Underwriters
will pay all of their costs and expenses, including fees and
15
<PAGE> 16
disbursements of their counsel, stock transfer taxes payable on resale of any of
the Shares by them and any advertising expenses connected with any offers they
may make.
7. INDEMNITY AND CONTRIBUTION. (a) The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein; provided, however, that
the foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities, unless such failure is the result of
noncompliance by the Company with Section 6(a) hereof.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
such Underwriter, but only with reference to information relating to such
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
16
<PAGE> 17
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to paragraph (a) or (b) of this Section 7, such person (the
"INDEMNIFIED PARTY") shall promptly notify the person against whom such
indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated, in the case of
parties indemnified pursuant to paragraph (a) of this Section 7, and by the
Company, in the case of parties indemnified pursuant to paragraph (b) of this
Section 7. The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(d) To the extent the indemnification provided for in paragraph (a) or
(b) of this Section 7 is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
each indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
17
<PAGE> 18
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
Underwriters on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other hand in connection
with the offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by the Company and the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in the
table on the cover of the Prospectus, bear to the aggregate Public Offering
Price of the Shares. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 7 are several in proportion to the respective number of
Shares they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in paragraph (d) of this Section 7. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was
18
<PAGE> 19
not guilty of such fraudulent misrepresentation. The remedies provided for in
this Section 7 are not exclusive and shall not limit any rights or remedies
which may otherwise be available to any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by or on behalf of the Company, its officers or directors or
any person controlling the Company and (iii) acceptance of and payment for any
of the Shares.
8. TERMINATION. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses (a)(i) through (iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
9. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which
19
<PAGE> 20
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase on such date; provided that in no event shall the number of Shares that
any Underwriter has agreed to purchase pursuant to this Agreement be increased
pursuant to this Section 9 by an amount in excess of one-ninth of such number of
Shares without the written consent of such Underwriter. If, on the Closing Date,
any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and
the aggregate number of Firm Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you and the Company for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. If, on the
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
Additional Shares or (ii) purchase not less than the number of Additional Shares
that such non-defaulting Underwriters would have been obligated to purchase in
the absence of such default. No provision of, or any action taken under, this
paragraph shall relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
10. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of New York.
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<PAGE> 21
12. HEADINGS. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
21
<PAGE> 22
Very truly yours,
PROSOURCE, INC.
By:
------------------------------
Name:
Title:
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner
& Smith Incorporated
Smith Barney Inc.
Acting severally on behalf of themselves and
the several Underwriters named herein.
By Morgan Stanley & Co. Incorporated
By:
----------------------------------
Name:
Title:
22
<PAGE> 23
SCHEDULE I
Number of Firm
Shares to Be
Underwriter Purchased
- ----------------------------------------------------- -------------------
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Smith Barney Inc.
-------------------
Total..................................... ===================
<PAGE> 24
EXHIBIT A
[FORM OF LOCK-UP CONTRACT]
____________, 1996
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner
& Smith Incorporated
Smith Barney Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that you, as Representatives of the
several Underwriters, propose to enter into an Underwriting Agreement (the
"UNDERWRITING AGREEMENT") with ProSource, Inc., a Delaware corporation (the
"COMPANY") providing for the public offering (the "PUBLIC OFFERING") by the
several Underwriters, including yourselves, of ___ shares (the "SHARES") of
Class A Common Stock, par value $.01 per share of the Company (collectively with
the Class B Common Stock, par value $[____] per share of the Company, the
"COMMON STOCK").
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during
the period commencing on the date hereof and ending 180 days after the date of
the final prospectus relating to the Public Offering (the "PROSPECTUS"), (1)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any such securities are
now owned by the undersigned or are hereafter acquired), or (2) enter into any
swap or other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (1) or (2) above is to be settled by delivery of
Common Stock or such other
<PAGE> 25
securities, in cash or otherwise. The foregoing sentence shall not apply to the
sale of any Shares to the Underwriters pursuant to the Underwriting Agreement or
to any Permitted Transferee (as defined below). In addition, the undersigned
agrees that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters, it will not, during the period
commencing on the date hereof and ending 180 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock. "Permitted Transferee" shall mean
(i) any pledgee of Common Stock as security for indebtedness existing on the
date hereof incurred in connection with financing the purchase of such Common
Stock, and any pledgee of such Common Stock in connection with any refinancing
of such indebtedness and (ii) in the case of Onex Corporation or an affiliate of
Onex Corporation, any entity controlling, controlled by or under common control
with Onex Corporation or such affiliate, provided that such other entity agrees
to be bound by the terms of this agreement.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
----------------------------------
(Name)
----------------------------------
(Address)
Accepted as of the date first set forth above:
MORGAN STANLEY & CO. INCORPORATED
By:
----------------------------------------
A-2
<PAGE> 26
APPENDIX A
<TABLE>
<CAPTION>
STATE OF
NAME OF CORPORATION INCORPORATION STATES IN WHICH QUALIFIED TO DO BUSINESS
- ------------------------------- ------------- ----------------------------------------------
<S> <C> <C> <C> <C>
ProSource Services Corporation Delaware Alabama Iowa New Mexico
Alaska Kansas New York
Arizona Kentucky North Carolina
Arkansas Louisiana North Dakota
California Massachusetts Ohio
Colorado Michigan Oklahoma
Delaware Minnesota Oregon
Florida Mississippi South Carolina
Georgia Missouri Tennessee
Illinois Nebraska Texas
Indiana Nevada Utah
New Jersey Virginia
BroMar Services, Inc. Delaware Illinois
ProSource Investments, Inc. Delaware Delaware
PSC Services of Florida, Inc. Delaware Illinois
Ohio
</TABLE>
<PAGE> 1
EXHIBIT 4.1
CLASS A COMMON CLASS A COMMON
PROSOURCE
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE CLASS A
COMMON STOCK, $.01 PAR VALUE PER SHARE, OF
ProSource, Inc.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid until countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
Corporate Seal Logo
/s/ Paul A. Garcia de Quevedo /s/ David R. Parker
SECRETARY CHAIRMAN OF THE BOARD
COUNTERSIGNED AND REGISTERED:
THE BANK OF NEW YORK
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
- ----------------------------------------------------------
AMERICAN BANK NOTE COMPANY OCT 21, 1996 dw
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807 046943fc-A
(310)989-2333
(FAX) (310) 426-7450 600-19X Proof /s/ RG REV 1
- -----------------------------------------------------------
<PAGE> 2
The Corporation will furnish without charge to each stockholder who so
requests a statement of the rights, privileges, restrictions, voting powers,
limitations and qualifications of the several classes of stock or series
thereof of the Corporation. Such request may be made to the Corporation or the
Transfer Agent.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT______ Custodian______
TEN ENT - as tenants by the certificate (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ________________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
/____________________________________/
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDE ZIP CODE OF ADDRESSEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated_______________________
_________________________________________________
NOTICE: The signature to this assignment must
correspond with the name as written upon the face
of the certificate in every particular without
alteration or enlargement or any change whatever.
The signature of the person executing this power
must be guaranteed by an Eligible Guarantor
institution such as a Commercial Bank, Trust
Company, Securities Broker/Dealer, Credit Union,
or a Savings Association participating in a
Medallion program approved by the Securities
Transfer Association, Inc.
- ---------------------------------------------------------------
AMERICAN BANK NOTE COMPANY OCT 21, 1996 dw
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807 046943bk-A/B
(310) 989-2333
(FAX) (310) 426-7450 600-19X Proof /s/ RG REV 1
- ---------------------------------------------------------------
<PAGE> 1
EXHIBIT 10.11
[Execution Copy]
AMENDMENT NO. 3 AND CONSENT
dated as of September 6, 1996
to
LOAN AND SECURITY AGREEMENT
dated as of March 31, 1995
THIS AMENDMENT NO. 3 AND CONSENT dated as of September 6, 1996 is made
between PROSOURCE SERVICES CORPORATION, a Delaware corporation (PROSOURCE),
BROMAR SERVICES, INC., a Delaware corporation (BROMAR), and PROSOURCE
DISTRIBUTION SERVICES LIMITED, a Canadian corporation (PROSOURCE CANADA and
together with ProSource and BroMar, the BORROWERS), the financial institutions
party from time to time to the Loan Agreement referred to below (the LENDERS),
NATIONSBANK, N.A. (SOUTH) (successor by merger to NationsBank of Georgia,
N.A.), a national banking association (NATIONSBANK). THE FIRST NATIONAL BANK OF
BOSTON, a national banking association (BANK OF BOSTON), and FLEET CAPITAL
CORPORATION (successor by merger to Shawmut Capital Corporation), a Rhode
Island corporation (FLEET), as co-agents (each in that capacity a CO-AGENT and
collectively the CO-AGENTS) and NATIONSBANK, N.A. (SOUTH), as administrative
agent for the Lenders (in that capacity, together with any successors in that
capacity, the ADMINISTRATIVE AGENT).
Preliminary Statements
The Borrowers, the Lenders, the Co-Agents and the Administrative Agent
are parties to a Loan and Security Agreement dated as of March 31, 1995, as
amended by Amendment No. 1 dated as of December 29, 1995 and Amendment No. 2
and Waiver dated as of March 28, 1996 (as so amended and as otherwise
heretofore amended, the LOAN AGREEMENT; terms defined therein and not otherwise
defined herein being used herein as therein defined).
The Borrowers have requested certain modifications to the provisions of
the Loan Agreement. The Lenders and the Administrative Agent have agreed to
such requests, upon and subject to all the terms, conditions and provisions of
this Amendment.
NOW, THEREFORE, in consideration of the Loan Agreement, the Loans made
by the Lenders and outstanding thereunder, the mutual promises hereinafter set
forth and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
Section 1. Amendments to Loan Agreement. The Loan Agreement is hereby
amended, subject to the provisions of Section 3 hereof, by
<PAGE> 2
(a) setting forth as at the end of such Fiscal Quarter a
reasonably detailed schedule of charges to the Acquisition Reserve and
the Restructuring Reserve recorded during such Fiscal Quarter and the
calculations required to establish whether or not the Borrowers were in
compliance with the requirements of SECTIONS 12.1, 12.2, 12.5, 12.10,
12.11 AND 12.16;
(d) amending Section 12.1 Financial Ratios by amending
subsections (a) thereof in its entirety to read as follows:
[SECTION 12.1. Financial Ratios. Permit:]
(a) Consolidated Minimum Net Worth. Consolidated Net Worth (i)
on and as of the Effective Date to be less than $48,000,000, (ii) at
any time during Fiscal Year 1995 to be less than the greater of
$43,000,000 or actual Consolidated Net Worth as of the Effective Date
minus $5,000,000, or (iii) at any time during any Fiscal Year indicated
below to be less than the actual Consolidated Net Worth as of the last
day of the preceding Fiscal Year minus the amount shown opposite such
Fiscal Year:
FISCAL YEAR PERMITTED DECREASE
----------- ------------------
1996 The amount, not to exceed the sum of
$5,000,000 and up to $16,800,000, as such
amount may be adjusted pursuant to Section
11.1(e) hereof (being the after-tax impact
of the sum of maximum Restructuring
Charges and Asset Impairment Charges,
which tax impact will be determined based
on the Borrowers' effective tax rate for
the period in which such charges are
recorded or reserves are established, all
in accordance with GAAP)
1997 and thereafter $4,000,000
PROVIDED, that as of the last day of Fiscal Year 1997 and of each
succeeding Fiscal Year, Consolidated Net Worth shall be at least $1.00
greater than Consolidated Net Worth as of the last day of the
immediately preceding Fiscal Year.
(e) amending Section 12.16 Limitations on Acquisition Reserves
in its entirety to read as follows:
SECTION 12.16 Limitation on Acquisition Reserve. The Acquisition
Reserve shall not exceed $20,000,000 as of the Effective Date, nor
$16,000,000 as of December 31, 1995 or any date thereafter, nor shall
the Acquisition Reserve reflect
-3-
<PAGE> 3
charges against it made during Fiscal Year 1996 of more than $10,000,000
nor during Fiscal Year 1997 of more than $5,000,000 plus unused permitted
charges against such reserve for Fiscal Year 1996.
(f) amending Article 12 by adding thereto a new Section 12.17
Limitations on Restructuring Reserve to read in its entirety as follows:
SECTION 12.17 Limitation on Restructuring Reserve. The Restructuring
Reserve shall not reflect charges against it made (a) during Fiscal Year
1996 of more than $2,700,000 or (b) during Fiscal Year 1997 of more than
$4,125,000 plus unused permitted charges against such reserve for Fiscal
Year 1996.
Section 2. Consent and Waiver. The Lenders hereby (a) consent to the
Borrowers' recording the Asset Impairment Charges and Restructuring Charges (of
up to $26,650,000 in total) in Fiscal Year 1996, and (b) waive any Default or
Event of Default that would otherwise result from such recording, PROVIDED that
on the date on which the action described in foregoing clause (a) is taken, and
after giving effect to this Amendment, no Default or Event of Default shall have
occurred and be continuing.
Section 3. Effectiveness of Amendment. Sections 1 and 2 of this
Amendment shall become effective as of December 31, 1995 upon receipt by the
Administrative Agent not later than September 10, 1996 of (a) at least ten
copies of this Amendment duly executed and delivered by each Borrower, the
Co-Agents and each Lender, and (b) a confirmation duly executed and delivered by
the Guarantor of its Unconditional Guaranty and the Pledge Agreement in the form
attached to this Amendment.
Section 4. Effect of Amendment. From and after the effectiveness of
this Amendment, all references in the Loan Agreement and in any other Loan
Document to "this Agreement," "the Loan Agreement," "hereunder," "hereof" and
words of like import referring to the Loan Agreement, shall mean and be
references to the Loan Agreement as amended by this Amendment. Except as
expressly amended hereby, the Loan Agreement and all terms, conditions and
provisions thereof remain in full force and effect and are hereby ratified and
confirmed. The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of any Lender or the Administrative Agent under any of the Loan
Documents, nor constitute a waiver of any provision of any of the Loan
Documents.
Section 5. Counterpart Execution; Governing Law.
(a) Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same agreement.
-4-
<PAGE> 4
(b) Governing Law. This Amendment shall be governed by and construed
in accordance with the laws of the State of Georgia.
-5-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
BORROWERS:
PROSOURCE SERVICES CORPORATION
[Corporate Seal]
Attest: By: /s/ William F. Evans
---------------------------
William F. Evans
By: /s/ Paul A. Garcia de Quevedo Executive Vice President
-----------------------------
Paul A. Garcia de Quevedo
Secretary
BROMAR SERVICES, INC.
[Corporate Seal]
Attest: By: /s/ William F. Evans
---------------------------
William F. Evans
By: /s/ Paul A. Garcia de Quevedo Executive Vice President
-----------------------------
Paul A. Garcia de Quevedo
Secretary
PROSOURCE DISTRIBUTION SERVICES
LIMITED
[Corporate Seal]
Attest: By: /s/ William F. Evans
---------------------------
William F. Evans
By: /s/ Paul A. Garcia de Quevedo Executive Vice President
-----------------------------
Paul A. Garcia de Quevedo
Secretary
(Signatures continued on following three pages)
-6-
<PAGE> 6
ADMINISTRATIVE AGENT:
NATIONSBANK, N.A. (SOUTH)
By: /s/ Jeffrey L. Guldner
------------------------------
Jeffrey L. Guldner
Vice President
CO-AGENTS AND LENDERS:
NATIONSBANK, N.A. (SOUTH),
as a Lender and Co-Agent
By: /s/ Jeffrey L. Guldner
------------------------------
Jeffrey L. Guldner
Vice President
THE FIRST NATIONAL BANK OF BOSTON,
as a Lender and Co-Agent
By: /s/ S.J. Mulholland
------------------------------
Name: S.J. Mulholland
Title: Division Executive
FLEET CAPITAL CORPORATION, as a Lender
and Co-Agent
By: /s/ John Getz
------------------------------
Name: John Getz
Title: Senior Vice President
-7-
<PAGE> 7
THE BANK OF NOVA SCOTIA, as a Lender
By: /s/ Frank F. Sandler
------------------------------
Name: Frank F. Sandler
Title: Relationship Manager
By:
------------------------------
Name:
Title:
BANKAMERICA BUSINESS CREDIT, INC., as
a Lender
By: /s/ Margaret E. Lambka
------------------------------
Name: Margaret E. Lambka
Title: Vice President
THE CIT GROUP/BUSINESS CREDIT, INC.,
as a Lender
By: /s/ Robert Bernier
------------------------------
Name: Robert Bernier
Title: Vice President
HELLER FINANCIAL, INC., as a Lender
By: /s/ Jeffrey A. Schumacher
------------------------------
Name: Jeffrey A. Schumacher
Title: Assistant Vice President
SANWA BUSINESS CREDIT CORPORATION,
as a Lender
By: /s/ Peter L. Skavla
------------------------------
Name: Peter L. Skavla
Title: Vice President
-8-
<PAGE> 8
NATIONAL CITY COMMERCIAL FINANCE,
INC., as a Lender
By: /s/ Lee K. Mosby
-----------------------------
Name: Lee K. Mosby
Title: Vice President
-9-
<PAGE> 1
EXHIBIT 10.12
[Execution Copy]
AMENDMENT NO. 4 AND CONSENT
dated as of September 26, 1996
to
LOAN AND SECURITY AGREEMENT
dated as of March 31, 1995
THIS AMENDMENT NO. 4 AND CONSENT dated as of September 26, 1996 made
between PROSOURCE SERVICES CORPORATION, a Delaware corporation (PROSOURCE),
BROMAR SERVICES, INC., a Delaware corporation (BROMAR), and PROSOURCE
DISTRIBUTION SERVICES LIMITED, a Canadian corporation (PROSOURCE CANADA and
together with ProSource and BroMar, the BORROWERS), the financial institutions
party from time to time to the Loan Agreement referred to below (the LENDERS),
NATIONSBANK, N.A. (SOUTH) (successor by merger to NationsBank of Georgia,
N.A.), a national banking association (NATIONSBANK), THE FIRST NATIONAL BANK OF
BOSTON, a national banking association (BANK OF BOSTON), and FLEET CAPITAL
CORPORATION (successor by merger to Shawmut Capital Corporation), a Rhode
Island corporation (FLEET), as co-agents (each in that capacity a CO-AGENT and
collectively the CO-AGENTS) and NATIONSBANK, N.A. (SOUTH), as administrative
agent for the Lenders (in that capacity, together with any successors in that
capacity, the ADMINISTRATIVE AGENT).
Preliminary Statements
The Borrowers, the Lenders, the Co-Agents and the Administrative Agent
are parties to a Loan and Security Agreement dated as of March 31, 1995, as
amended by Amendment No. 1 dated as of December 29, 1995, Amendment No. 2 and
Waiver dated as of March 28, 1996 and Amendment No. 3 and Consent dated as of
September 6, 1996 (as so amended and as otherwise heretofore amended, the LOAN
AGREEMENT; terms defined therein and not otherwise defined herein being used
herein as therein defined).
The Borrowers have requested that the interest rates applicable to
Loans outstanding under the Loan Agreement be modified and the certain other
modifications to the Loan Agreement and the Lenders and the Administrative
Agent have agreed to such requests, upon and subject to all the terms,
conditions and provisions of this Amendment.
NOW, THEREFORE, in consideration of the Loan Agreement, the Loans made
by the Lenders and outstanding thereunder, the mutual promises hereinafter set
forth and other good and valuable consideration the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
<PAGE> 2
Section 1. Amendments to Loan Agreement. The Loan Agreement is hereby
amended, subject to the provisions of Section 2 hereof, by
(a) amending Section 1.1 Definitions thereof by
(i) amending the definition APPLICABLE L/C FEE by deleting therefrom
the phrase "of determination" appearing therein and substituting therefor
the phrase "of issuance or renewal thereof";
(ii) amending the definition EURODOLLAR RATE MARGIN in its entirety to
read as follows:
EURODOLLAR RATE MARGIN means 2.00% from September 1, 1996 to August 31,
1997. From and after September 1, 1997, the EURODOLLAR RATE MARGIN shall be
adjusted in accordance with of the pricing matrix attached to this
Agreement as SCHEDULE 1.1B - PRICING MATRIX, each adjustment to be
effective as of the first day of the calendar month in which each quarterly
Compliance Certificate delivered on or after September 1, 1997 is delivered
pursuant to the provisions of SECTION 11.3, based upon the Total Debt to
EBITDA Ratio reflected in each such Compliance Certificate. If the
Borrowers fail or refuse to deliver any Compliance Certificate in
accordance with the provisions of SECTION 11.3, the Administrative Agent
may, and at the direction of the Majority Lenders shall, increase the
EURODOLLAR RATE MARGIN for the relevant quarterly period to the EURODOLLAR
RATE MARGIN for the next higher pricing interval above the EURODOLLAR RATE
MARGIN then in effect.
(iii) amending the definition PRIME RATE MARGIN in its entirety to
read as follows:
PRIME RATE MARGIN means -0-% from September 1, 1996 to September 1,
1997. From and after September 1, 1997, the PRIME RATE MARGIN shall remain
-0-% except that (i) if any quarterly Compliance Certificate delivered in
accordance with SECTION 11.3 after September 1, 1997 reflects a Total Debt
to EBITDA Ratio greater than 5.0 to 1, the PRIME RATE MARGIN shall be
increased to 0.25% or (ii) if the Borrowers fail or refuse to deliver any
Compliance Certificate in accordance with the provisions of SECTION 11.3,
the Administrative Agent may, and at the direction of the Majority Lenders
shall, increase the PRIME RATE MARGIN to 0.25% for the applicable
quarterly period, all as shown on SCHEDULE 1.1B -- PRICING MATRIX.
(b) further amending Section 1.1 Definitions by adding thereto in
appropriate alphabetical order the following new definition:
IPO means (i) the completion in compliance with all Applicable Laws of
an initial public offering of the common stock of the Parent, (ii) the
contribution of at least $43,000,000 in cash (less, if the Seller Note is
outstanding following completion
-2-
<PAGE> 3
of the IPO, any amount applied by the Parent to repay the Seller Note in
its entirety, up to the lesser of $10,000,000 and the sum of the
principal amount outstanding under and accrued and unpaid interest on
the Seller Note) by the Parent to ProSource from the net proceeds of
such offering and (iii) the application by ProSource of such cash
contribution first to the repayment of outstanding Subordinated Debt of
the Borrowers issued to Onex Ohio Holdings, Inc. and then, to the extent
of the balance of such contribution, to the repayment of Revolving
Credit Loans.
(c) amending Section 5.3 Administrative Agent Fee in its
entirety to read as follows:
SECTION 5.3. Administrative Agent Fee. For administration and
other services performed by the Administrative Agent in connection with
its continuing administration of this Agreement, the Borrowers shall
pay to the Administrative Agent, for its own account and not for the
account of the Co-Agents or the Lenders, an annual fee, payable on the
Effective Date in an amount equal to $250,000, on the first Anniversary
Date in an amount equal to $200,000, and on each Anniversary Date
thereafter (other than any Anniversary Date that is also the Termination
Date), in an amount equal to $125,000, so long as any Secured Obligation
remains outstanding or the Revolving Credit Facility shall not have been
terminated. The fee payable pursuant to this SECTION 5.3 shall be fully
earned by the Administrative Agent on the date payment thereof is due
and shall not be subject to refund or rebate.
(d) amending Section 5.4 Unused Facility by amending the
PROVISO therein in its entirety to read as follows:
PROVIDED, HOWEVER, that from and after September 1, 1997, such fee shall
be subject to adjustment in accordance with the pricing matrix attached
hereto as SCHEDULE 1.1B - PRICING MATRIX, each such adjustment to become
effective upon receipt by the Administrative Agent of the quarterly
Compliance Certificate delivered in connection with financial statements
provided pursuant to SECTION 11.1(C) and shall be based upon the Total
Debt to EBITDA Ratio derived from the information contained in such
financial statements.
(e) amending Section 11.3 Officer's Certificate by inserting
in subsection (a) thereof after the phrase "calculations required to establish"
the phrase "the Total Debt to EBITDA Ratio as of the end of such Fiscal Quarter
and"; and
(f) further amending the Loan Agreement by deleting
therefrom Schedule 1.1B - Pricing Matrix attached thereto and substituting
therefor the schedule bearing the same title attached to this Amendment as
Annex 1.
Section 2. Consent and Waiver. The Lenders hereby (a)
consent to the repayment by ProSource of all amounts owing by it under the
Parent Subordinated Note in the original principal amount of $15,000,000 payable
to Onex Ohio Holdings, Inc., which
-3-
<PAGE> 4
amount, as of the date of this Amendment, is $15,000,000, (b) consent to the
issuance by ProSource to the Parent of additional shares of common stock of
ProSource in exchange for and in satisfaction of amounts owing by ProSource
under the Parent Subordinated Note in the original principal amount of
$2,500,000 owing to the Parent, which amount, as of the date of this Amendment,
is approximately $3,668,000, and (c) waive any Default or Event of Default that
would otherwise result from such Restricted Payment or issuance of shares,
PROVIDED that the IPO has been completed prior to or contemporaneously with the
actions described in the foregoing clauses (a) and (b) and that such actions
are completed not later than December 31, 1996 and, PROVIDED FURTHER, that on
the date or dates on which each such action described in foregoing clauses (a)
and (b) is taken, and after giving effect to this Amendment, no Default or
Event of Default shall have occurred and be continuing.
Section 3. Effectiveness of Amendment. Sections 1 and 2 of this
Amendment shall become effective as of September 26, 1996 upon receipt by the
Administrative Agent not later than September 26, 1996 of (a) at least ten
copies of this Amendment duly executed and delivered by each Borrower, the
Co-Agents and each Lender, (b) a certificate of the President of ProSource or
of the Financial Officer as to the continuing accuracy of the representations
and warranties of the Borrowers set forth in the Loan Agreement and of the
Schedules to the Loan Agreement, having attached thereto any revised Schedules
necessary to permit such certification, (c) a confirmation duly executed and
delivered by the Guarantor of its Unconditional Guaranty and the Pledge
Agreement in the form attached to this Amendment, and (d) an amendment and
restructuring fee in an amount equal to $250,000 for the ratable benefit of the
Lenders.
Section 4. Effect of Amendment. From and after the effectiveness of
this Amendment, all references in the Loan Agreement and in any other Loan
Document to "this Agreement," "the Loan Agreement," "hereunder," "hereof" and
words of like import referring to the Loan Agreement, shall mean and be
references to the Loan Agreement as amended by this Amendment. Except as
expressly amended hereby, the Loan Agreement and all terms, conditions and
provisions thereof remain in full force and effect and are hereby ratified and
confirmed. The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of any Lender or the Administrative Agent under any of the Loan
Documents, nor constitute a waiver of any provision of any of the Loan
Documents.
Section 5. Counterpart Execution: Governing Law.
(a) Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which taken together shall constitute but one and the
same agreement.
(b) Governing Law. This Amendment shall be governed by and construed
in accordance with the laws of the State of Georgia.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the
date first above written.
BORROWERS:
PROSOURCE SERVICES CORPORATION
[Corporate Seal]
Attest: By: /s/ William F. Evans
------------------------------------
William F. Evans
By: /s/ Paul A. Garcia de Quevedo Executive Vice President
---------------------------------
Paul A. Garcia de Quevedo
Secretary
BROMAR SERVICES, INC.
[Corporate Seal]
Attest: By: /s/ William F. Evans
------------------------------------
By: /s/ Paul A. Garcia de Quevedo William F. Evans
--------------------------------- Executive Vice President
Paul A. Garcia de Quevedo
Secretary
PROSOURCE DISTRIBUTION SERVICES
LIMITED
[Corporate Seal]
Attest: By: /s/ William F. Evans
------------------------------------
By: /s/ Paul A. Garcia de Quevedo William F. Evans
--------------------------------- Executive Vice President
Paul A. Garcia de Quevedo
Secretary
(Signatures continued on following three pages)
-5-
<PAGE> 6
ADMINISTRATIVE AGENT:
NATIONSBANK, N.A. (SOUTH)
By: /s/ Jeffrey L. Guldner
-----------------------------
Jeffrey L. Guldner
Vice President
CO-AGENTS AND LENDERS:
NATIONSBANK, N.A. (SOUTH),
as a Lender and Co-Agent
By: /s/ Jeffrey L. Guldner
-----------------------------
Jeffrey L. Guldner
Vice President
THE FIRST NATIONAL BANK OF BOSTON,
as a Lender and Co-Agent
By: /s/ Thomas R. Sommerfield
-----------------------------
Name: Thomas R. Sommerfield
Title: Division Executive
FLEET CAPITAL
CORPORATION
as a Lender and Co-Agent
By: /s/ John W. Getz
-----------------------------
Name: John W. Getz
Title: SVP
-6-
<PAGE> 7
<PAGE> 8
THE BANK OF NOVA SCOTIA, as a Lender
By: /s/ Frank F. Sandler
------------------------------------
Name: Frank F. Sandler
Title: Relationship Manager
BANKAMERICA BUSINESS
CREDIT, INC.,
as a Lender
By: /s/ Margaret E. Lambka
------------------------------------
Name: Margaret E. Lambka
Title: Vice President
THE CIT GROUP/BUSINESS
CREDIT, INC.,
as a Lender
By: /s/ Robert Berner
-----------------------------------
Name: Robert Berner
Title: Vice President
HELLER FINANCIAL, INC.,
as a Lender
By: /s/ Salvatore Salzillo
-----------------------------------
Name: Salvatore Salzillo
Title: AVP
SANWA BUSINESS CREDIT
CORPORATION
as a Lender
By: /s/ John J. McKenna
------------------------------------
Name: John J. McKenna
Title: First Vice President
-7-
<PAGE> 9
NATIONAL CITY
COMMERCIAL FINANCE,
INC., as a Lender
By: /s/ Lee K. Mosby
----------------------------------
Name: Lee K. Mosby
Title: Vice President
-8-
<PAGE> 1
2. OPERATION OF VEHICLES:
A. The Vehicles will be used and operated by Customer only in the
normal and ordinary course of Customer's business, not in violation of any laws
or regulations, and Customer will indemnify and hold Ryder harmless from any
claim or loss or damage arising out of such violation.
B. Except as otherwise agreed to by Customer and Ryder, each
Vehicle will be promptly returned by Customer to Ryder's facility specified on
Schedule A or to the Ryder location servicing a re-domiciled Vehicle at the end
of its lease term unless Customer purchases the Vehicle as provided for
hereafter.
3. MAINTENANCE AND REPAIRS TO VEHICLES:
A. Ryder agrees to provide at its sole cost and expense: (1)
Lubricants, tires, tubes and all other operating supplies necessary for the
Vehicles; (2) Maintenance and repairs including all labor and parts required to
keep the Vehicles in good operating condition; (3) Exterior washing, as
specified on the appropriate Schedule A, and (4) Road service for mechanical or
tire failure, and road service towing, except for any expenses of towing any
mired Vehicle when not in Ryder's possession or on Ryder's premises.
B. Customer agrees that only Ryder or parties authorized by Ryder
will make any repairs or adjustment to Vehicles. When repairs are necessary,
Customer will promptly notify Ryder. Ryder will not be responsible for the cost
of repairs or services not authorized by Ryder. Customer must submit acceptable
vouchers for such repairs or services. Emergency repairs costing less than
$50.00 required while a Vehicle is enroute on dispatch can be authorized by
Customer without prior Ryder approval.
C. Customer agrees to return each Vehicle to Ryder for ordinary
maintenance and service at the facility stated on Schedule A at such scheduled
times as agreed to by the parties. Ryder agrees to notify Customer at the end
of each week that certain Vehicle(s) will be due for service during the coming
week by providing a listing of those Vehicle(s) and due date and time.
4. FUEL:
A. When Ryder is designated on the Schedule A:
1) Ryder will provide fuel for Vehicles from its own or
other designated facilities. The charge for fuel will vary over time and be
billed to Customer in addition to all other charges on the Schedule A.
Ryder Truck Rental, Inc.'s charge for fuel to ProSource Distribution
Services is currently composed of (i) the charge for fuel from Ryder Truck
Rental, Inc.'s distributor, Ryder Energy Distribution Corporation; (ii) all
applicable taxes; and (iii) a pumping charge of [Confidential Treatment
requested by ProSource, Inc.] per gallon.
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<PAGE> 2
ProSource Distribution Services acknowledges and agrees that future additions
or deletions of specific components of the fuel charge, and increases or
decreases of the amount of any given component of the fuel charge, may occur.
Ryder shall endeavor to provide ProSource Distribution Services with reasonable
notice prior to implementation of any additions or deletions of specific
components of the fuel charge, or increases or decreases of the amount of any
given component of the fuel charge, provided that the implementation of such
additions or deletions, or increases or decreases, are within Ryder Truck
Rental, Inc.'s exclusive control.
If Ryder changes its standard Truck Lease & Service Agreement to a
pumping charge of less than [Confidential Treatment requested by ProSource,
Inc.] per gallon, Ryder will notify ProSource to discuss the change in position.
2) If the Customer purchases fuel from sources other than
Ryder's facilities or other Ryder designated facilities, Customer will be
responsible for the charges for all such fuel.
3) Ryder will, where permitted by law, and where requested
by Customer, apply for fuel tax permits, prepare and file fuel tax returns, and
pay the taxes imposed upon the purchase and consumption of fuel by Customer
provided: (a) Customer provides Ryder weekly with all documentation necessary
to prepare the fuel tax returns and will reimburse Ryder for all charges
incurred or credits disallowed as a result of untimely or improper furnishing
of such documents, and (b) Customer will reimburse Ryder all such fuel taxes
paid on Customer's behalf in excess of those which would have been payable had
the fuel consumed been purchased in the state of consumption.
4) Ryder will compute and advise Customer quarterly of
fuel tax credits and debits and notify Customer of opportunities to reduce tax
liabilities.
5. LICENSES:
A. Ryder agrees to pay for the state motor vehicle license for the
licensed weight shown on Schedule A, personal property taxes and Vehicle
inspection fees for each Vehicle in the state of domicile, and Federal Heavy
Vehicle Use Tax, all at the rates and method of assessment in effect on the
date of execution of each Schedule A. Customer will be responsible for any
increases or changes in assessment of these items thereafter. Ryder will
compute and pay all third structure taxes, billing lessee for actual taxes paid.
B. Where not prohibited by law, Ryder will apply for vehicle
licenses and pro-rate or state reciprocity plates at Customer's request and
cost, which services are involved in the lease rate.
The cost to be paid by Customer for licenses will be the actual cost
paid to governmental authorities by Ryder.
C. Customer agrees to pay for any special license cost or pay any
taxes resulting from the operation and use of the Vehicles including mileage
taxes, ton mileage taxes, highway or
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<PAGE> 3
bridge tolls. Ryder shall have the right to settle any claim or lien involving
any Vehicle as a result of Customer's failure to pay any such taxes.
Notwithstanding the foregoing, Ryder agrees to contact Customer in writing
prior to payment, giving Customer the opportunity to contest any such claim or
lien, provided however, Customer will reimburse Ryder for any cost, damages, or
expenses resulting from Customer's actions, but only after resolution of the
dispute.
6. SUBSTITUTION:
Unless specifically excluded on a Schedule A, Ryder agrees to furnish a
substitute vehicle, due to a Vehicle's temporary mechanical or electronic
inoperable condition, [Confidential Treatment requested by ProSource, Inc.] for
any Vehicle listed on such Schedule A from Ryder's rental fleet or from another
source if there is not an available Vehicle in its rental fleet, other than
those excepted below, the substitute to be as nearly as practicable the same
size and type as the Vehicle. The substitute will be furnished to Customer
where the Vehicle was disabled and will be returned by Customer to the Ryder
facility that provided it. Ryder will not furnish a substitute for any Vehicle
that is out of service for any ordinary maintenance and service time, so long
as the ordinary maintenance and service time does not exceed the time
reasonably allocated by Ryder and agreed to by Customer, or is out of service
for repair of any form of physical damage resulting from causes including fire,
collision, upset, loss, theft or from Customer's violation of any provisions of
this Agreement, or is out of service for repair or maintenance of special
equipment for which Ryder is not responsible; provided, however, that in the
event the Vehicle is out of service due to physical damage, fire collision,
upset, loss or theft which occurs while the Vehicle is in Ryder's sole care,
custody and control on and/or off Ryder's premises, Ryder shall furnish a
substitute for that Vehicle as long as it is out of service for that cause.
Ryder further agrees that, in cases where a Ryder substitute is not available,
Ryder will find and rent a substitute vehicle. [Confidential Treatment
requested by ProSource, Inc.] A substitute vehicle, while in Customer's
service, will be subject to all the terms and conditions of this Agreement.
While a Vehicle is out of service because of damage resulting from any form of
physical damage, Ryder will rent Customer a replacement vehicle, if available,
at a rate not higher than the charge for the inoperable Vehicle. With respect
to the inoperable Vehicle, if Ryder cannot complete repairs to said Vehicle
within 30 days, from written receipt of authorization to repair, Customer will
only be responsible for fixed charges incurred by Ryder, including but not
limited to depreciation, interest and legalization costs to said Vehicle until
such Vehicle is returned to service. Irrespective of whether or not Customer
rents a vehicle from Ryder while a Vehicle is out of service for repair of
physical damage, the charges applicable to it will not abate.
7. EXTRA VEHICLES:
Ryder agrees to rent to Customer from Ryder's rental fleet when
available and, upon Customer's request, vehicles to be
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<PAGE> 4
used in addition to those Vehicles covered by this Truck Lease and Service
Agreement. Such vehicles will be charged to Customer at the [Confidential
Treatment requested by ProSource, Inc.] lease and mileage rate of [Confidential
Treatment requested by ProSource, Inc.]. Customer and Ryder agree to set a
table of rates on a calendar year basis, such rates to remain in effect for a
period of 12 months, for each domicile location. Table of Rates will include a
monthly, weekly and mileage rate. The daily rate will be equal to the weekly
lease rate divided by five (5) days.
8. DRIVERS:
A. Customer agrees that each Vehicle will only be operated by a
properly licensed driver, at least 21 years of age, who is the employee of or
an independent contractor retained by Customer, and that Customer will not
knowingly allow or abet the operation of the Vehicle by a driver in possession
of or under the influence of alcohol or any drug which may impair the driver's
ability. Customer agrees to reimburse Ryder in full for loss or damage to
Vehicles, if Vehicles are operated by drivers under age 21 years of age. Upon
receipt of a written complaint from Ryder specifying and reasonably
substantiating any reckless, careless or abusive handling of a Vehicle or any
other incompetence by or of any driver, and requesting the driver's removal as
an operator of Vehicles, Customer will promptly investigate Ryder's request and
may decide whether or not to remove the driver even though Ryder has requested
a driver's removal. However, if Customer does not promptly remove the driver
for any reason whatsoever, (1) Customer will, notwithstanding any other
provisions of this Agreement reimburse Ryder in full for any loss and expense
sustained by Ryder for damage to any Vehicle when being operated by such
individual and Customer will indemnify and hold Ryder harmless from any claims
or causes of action for death or injury to persons or loss or damage to
property arising out of the use or operation of any Vehicle by such individual
notwithstanding that Ryder may be designated on applicable Schedule A as
responsible for furnishing and maintaining Liability Insurance provided,
however, that Customer shall only release, indemnify and hold Ryder harmless
to the extent that Ryder has no current knowledge of those material defects
with the Vehicle operated by such driver which contribute to the accident in
which such death, injury, loss or damage occur and has not negligently
maintained such Vehicles; and (2) Ryder may, at its election and at any time
thereafter upon thirty (30) days notice to Customer, (a) terminate any
Liability Insurance coverage extended by Ryder, and (b) with respect to each
Vehicle, increase the amount of Customer's physical damage responsibility to an
amount equal to the agreed value calculated in accordance with Paragraph 12D as
of the time of damage or loss.
B. Ryder agrees to provide Customer assistance when requested in
qualifying professional drivers, and developing and implementing a driver
education and safety program, including assisting with Customer's quarterly
safety meetings, providing accident investigation assistance and assist as
required in providing professional driver instruction.
C. Customer agrees that the Vehicles will not be operated in a
reckless or abusive manner, or off an improved road, or on a flat tire, or
improperly loaded, or loaded beyond the manufacturer's recommended maximum
gross weight, or to transport any property or material deemed extra hazardous
by reason of being poisonous, inflammable, explosive or fissionable.
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<PAGE> 5
Notwithstanding any other provision of this Agreement, and irrespective of
which party is responsible for physical damage to Vehicles pursuant to
Paragraph 11B, Customer agrees to reimburse in full for damage to any Vehicle
or substitute vehicle, including expenses, resulting from a violation of this
provision, except to the extent that such damages are the result of Ryder's
negligence. Customer will be responsible for all expenses of towing any mired
Vehicle when not in Ryder's possession or on Ryder's premises.
9. CHARGES:
A. [Confidential Treatment requested by ProSource, Inc.] Customer
agrees to pay Ryder for all charges set forth on the applicable Schedule A(s)
and all other charges which become payable under the terms of this Agreement,
within [Confidential Treatment requested by ProSource, Inc.] days of receipt of
Ryder's invoice. Unless Ryder is notified that any change is incorrect within
180 days of the date of any invoice, that invoice will be conclusively presumed
to be correct. Customer reserves the right to short pay inaccurate invoices,
provided, however, that Customer gives Ryder notice of the dispute to promptly
negotiate disputed invoices or charges in good faith and be bound by the
vehicle's manufacturer or other supplier of materials and services to whom
disputes may be referred.
B. Mileage will be determined by an electronic odometer reading or
Customer's electronic recorder. If the odometer and recorder fail to function,
Customer will promptly report it to Ryder. The mileage for the period in which
the failure existed may then be determined at Ryder's option from (1)
Customer's trip records or (2) average amount of fuel consumed, divided by
miles per gallon for the previous thirty (30) day period.
C. Customer will provide Ryder with reasonable financial
information on a confidential basis, as requested by Ryder in order for Ryder
to make an informed ongoing decision regarding Customer's creditworthiness.
10. ADJUSTMENT:
A. The charges set forth on the applicable Schedule A(s) attached
to this Agreement are based on Ryder's current cost of labor, parts and
supplies. These costs may fluctuate after the date of execution of this
Agreement. Customer agrees that for each rise or fall of 1% in the Revised
Consumer Price Index for Urban Wage Earners and Clerical Workers 1982-1984 base
period, published by U.S. Bureau of Labor Statistics, above or below the base
index figure on Schedule A, charges for each Vehicle will be adjusted upward or
downward as follows:
[Confidential Treatment requested by ProSource, Inc.] of the Fixed
Charge and Mileage Charge; provided, however, adjustments to the Fixed Charges
and mileage charges due to fluctuations in the Revised Consumer Price Index
shall be limited on a per vehicle basis to [Confidential Treatment requested by
ProSource, Inc.] of the Fixed Charge and [Confidential Treatment requested by
ProSource, Inc.] of the Mileage Charge annually.
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<PAGE> 6
B. Adjustments [Confidential Treatment requested by ProSource,
Inc.] will be based on the original charges stated in a Schedule A (and not on
current charges in effect any given time) and will be effective with respect to
the Vehicles on a Schedule A each January 1st, commencing on the first January
1st that is at least twelve months after the date of that Schedule A, based on
the latest index published prior to such effective date. If the Revised Consumer
Price Index for Urban Wage Earners and Clerical Workers is discontinued,
another mutually acceptable cost adjustment index will be chosen.
C. Customer agrees to pay for (1) any sales, use, gross receipts
of similar tax now or hereafter imposed upon the use of the Vehicle or on the
rental or other charges accruing hereunder; (2) any increase in license or
registration fees; Federal Heavy Vehicle Use Taxes, vehicle inspection fees,
fuel tax permits and personal property taxes; and (3) any new or additional tax
or governmental fees, other than those imposed on income, adopted after the
date of the execution of the applicable Schedule A.
11. INSURANCE:
A. Liability Insurance Responsibility
1) A standard policy of automobile liability insurance
(hereafter "Liability Insurance") with limits specified on each Schedule A will
be furnished and maintained by the party designated on Schedule A at its cost,
written by a company satisfactory to Ryder and Customer, covering the party
designated on Schedule A as the insured, with the other party as the additional
insured for ownership, maintenance, use and operation of the Vehicles and any
substitute vehicles. Such policy will provide that the coverage is primary and
not additional or excess coverage over insurance otherwise available to either
party and that it cannot be cancelled or materially altered without thirty (30)
days prior written notice to both parties. The party designated will furnish to
the other, certificates to evidence compliance with this provision.
2) Upon not less than thirty (30) days prior written
notice to Customer, Ryder may terminate Liability Insurance coverage maintained
by Ryder, and Customer will be obligated to procure and maintain Liability
Insurance in the limits set forth on Schedule A as of the effective date of
termination and the charges will be adjusted accordingly.
3) If Customer is obligated to procure and maintain
Liability Insurance and fails to do so, or fails to promptly furnish Ryder the
required evidence of insurance, Customer agrees to indemnify and hold Ryder
harmless up to the amount of the required insurance coverage from and against
any claims or causes of action for death or injury to persons or loss or damage
to property arising out of or caused by the ownership, maintenance, use or
operation of the affected Vehicle(s) or substitute vehicle(s), and Ryder is
authorized but not obligated to procure such Liability Insurance without
prejudice to any other remedy Ryder may have, and Customer will pay Ryder, as
additional rental, the amount of the premium paid by Ryder.
If Ryder is obligated to procure and maintain Liability Insurance and
fails to do so, or fails to promptly furnish Customer the required evidence of
insurance, Ryder agrees to indemnify and
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<PAGE> 7
hold Customer harmless up to the amount of the required insurance coverage from
and against any claims or causes of action for death or injury to persons or
loss or damage to property arising out of or caused by the ownership,
maintenance, use or operation of the affected Vehicle(s) or substitute
vehicle(s).
4) Customer agrees to release, indemnify and hold Ryder
harmless from and against any claims or causes of action for death or injury to
persons or loss or damage to property in excess of the limits of Liability
Insurance, whether provided by Ryder or Customer, arising out of or caused by
the ownership, maintenance (except to the extent due to Ryder's negligence in
failing to properly maintain any Vehicle or substitute vehicle), use or
operation of any Vehicle or substitute vehicle, and any such claims or causes
of action which Ryder may be required to pay as a result of any statutory
requirements of insurance or as result of the insolvency of Customer's
insurance company and for which Ryder would not otherwise, pursuant to the
terms hereof, be required to pay.
Ryder agrees to release, indemnify and hold Customer harmless from and
against any claims or causes of action for death or injury to persons or loss or
damage to property in excess of the limits of Liability Insurance, whether
provided by Ryder or Customer, to the extent due to Ryder's negligence in
failing to properly maintain any Vehicle or substitute vehicle.
5) Ryder will, where required and not prohibited by law,
at Customer's request, file evidence of automobile liability insurance required
by federal or state governmental authorities when Ryder is designated as
responsible for Liability Insurance.
6) Customer further agrees to release, indemnify and hold
Ryder harmless for death or injury to Customer, Customer's employees, drivers
or agents, arising out of the ownership, maintenance (except to the extent due
to Ryder's negligence in failing to properly maintain any Vehicle or substitute
vehicle), use or operation of any Vehicle or substitute vehicle.
Ryder agrees to release, indemnify and hold Customer
harmless for death or injury to Ryder, Ryder's employees, drivers or agents,
arising out of the ownership, maintenance, use or operation of any Vehicle or
substitute vehicle, except to the extent due to Customer's negligence.
B. Physical Damage Responsibility:
The party designated on Schedule A will pay for loss or damages
to any Vehicle or substitute vehicle subject to the following:
1) The party designated on Schedule A will be responsible
for and pay for all loss (including theft) or damage to any Vehicle or
substitute vehicle, including related expenses arising from any cause and
regardless of how or where, including either party's premises, the loss or
damage occurred, except to the extent due to the other party's negligence. Each
party will be responsible and
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<PAGE> 8
pay for all loss (including theft) or damage to any Vehicle or substitute
vehicle to the extent due to such party's negligence.
2) Customer agrees to furnish Ryder with evidence of
physical damage insurance coverage reasonably acceptable to Ryder with Ryder
listed as a named insured or endorsed as a loss payee.
C. Notice of Accident
Customer agrees to promptly notify Ryder of any accident,
collision, loss (including theft), or damage involving a Vehicle or substitute
vehicle; to cause the driver to make detailed report in person at Ryder's
office as soon as practicable; and to render all other assistance reasonably
requested by Ryder and the insurer in the investigation, defense, or
prosecution of any claims or suits.
D. Cargo Insurance Responsibility
1. Customer agrees to release, indemnify and otherwise
hold Ryder harmless from and against all liability for loss or damage to any
goods or other property in or carried on any Vehicle or substitute vehicle
whether such loss or damage occurs in a Ryder facility or elsewhere and whether
such loss or damage is caused by the negligence of Ryder.
2. Customer agrees to reimburse Ryder for loss of any
tools, tarpaulins, spare tires, or other similar equipment furnished by Ryder,
except to the extent that such loss or damage is caused by the negligence of
Ryder.
E. Vehicle Theft or Destruction
If a Vehicle is lost or stolen and remains so for thirty (30)
days after Ryder has been notified, the lease as to such Vehicle will then
terminate provided all charges for the Vehicle have been paid to that date and
provided any amounts due Ryder pursuant to paragraph 11B have been paid. Ryder
will not be obligated to provide a substitute vehicle during this thirty (30)
day period. If a Vehicle is, in Ryder's reasonable opinion damaged beyond
repair, Ryder or Customer will notify each other within (48) forty eight hours
after either party has been advised of the loss. Upon receipt of authorized
insurance carrier's notice that the Vehicle has been damaged beyond repair,
with respect to the inoperable Vehicle, Customer shall only be responsible for
fixed charges incurred by Ryder, including but not limited to depreciation,
interest and legalization costs. Provided all charges for the Vehicle have been
paid to the date of destruction and provided any amounts due Ryder pursuant to
Paragraph 11B hereof have been paid, the lease as to such Vehicle will then
terminate.
12. TERMINATION:
A. Either party may terminate the lease of any Vehicle prior to
expiration of its term at any time after the first anniversary date as
indicated on the Schedule A by giving to the other party at least sixty (60)
days prior written notice.
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[Confidential Treatment requested by ProSource, Inc.] If termination is
effected by Ryder, Customer will have the right, but not the obligation, to
purchase in accordance with Paragraph 12D any or all Vehicles with respect to
which termination notice has been given on the termination date(s). If
termination is effected by Customer, Customer will at Ryder's option purchase
in accordance with Paragraph 12D any or all Vehicles with respect to which
termination notice has been given on the termination date(s); subject, however,
to any contrary conditions stated on the applicable Schedule A.
B. If Customer or Ryder becomes insolvent, files a voluntary
petition in bankruptcy, makes an assignment for the benefit of creditors, is
adjudicated a bankrupt, permits a receiver to be appointed for its business, or
permits or suffers a material disposition of its assets, the lease of Vehicles
will terminate at the other party's option. Upon termination by Ryder, Ryder
may at its option demand that Customer purchase the Vehicle(s) within ten (10)
days in accordance with Paragraph 12D. Upon termination by Customer, Customer
may at its option purchase the Vehicle in accordance with Paragraph 12D.
C. Breach or Default
1) If Customer breaches or is in default of any provision
of this Agreement and that breach or default is not cured within ten (10) days
after written notice has been mailed to Customer for the nonpayment of any money
due, and thirty (30) days after written notice has been mailed to Customer, for
any other breach or default, Ryder may immediately, without further notice or
demand, take possession of the Vehicles. In such event, Ryder will be entitled
to enter upon any premises where the Vehicles may be and remove them and refuse
to redeliver them to the Customer until such breach or default is cured without
any of such actions being deemed an act of termination and without prejudice to
the other remedies Ryder may have under this Agreement and at law. Customer will
continue to be liable for all charges accruing during the period the Vehicles
are retained by Ryder.
2) In the event Ryder takes possession of any Vehicle and
there is any property in or upon the Vehicle which belongs to or is in the
custody or control of Customer, Ryder may take possession of such items and
either hold them for Customer until Customer claims them or place them in
public storage for Customer at Customer's expense.
3) If Customer's breach or default continues for ten (10)
days after written notice has been mailed to Customer for the non-payment of
any money due, or thirty (30) days after written notice has been mailed to
Customer for any other breach or default, Ryder may terminate this Agreement.
Upon termination, Ryder may demand that Customer purchase within ten (10) days
of termination any or all Vehicles in accordance with Paragraph 12D without
prejudice to other remedies Ryder may have under this Agreement and at law.
D. In the event Customer (pursuant to Paragraph 12A or 12B)
decides or is required to purchase any Vehicle, or should Ryder (pursuant to
Paragraph 12C) demand of Customer that it
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<PAGE> 10
purchase any Vehicle, Customer agrees to purchase each such Vehicle for cash
within the time provided for in this Agreement for its Original Value as shown
on Schedule A, less the total depreciation which accrued for such Vehicle in
accordance with Schedule A. Additionally, Customer agrees to pay Ryder for the
amount of any unreimbursed, unexpired licenses, applicable taxes, including
personal property taxes and Federal Heavy Vehicle Use Taxes and other prepaid
expenses previously paid by Ryder for the Vehicle pro-rated to the date of sale
and will be responsible for any sales or use tax arising from the purchase.
Customer will have no obligation or right to purchase any Vehicle as to which
the term on Schedule A has expired. Ryder agrees that for all such Vehicles
purchased, all necessary preventive maintenance and repair services will have
been performed in accordance with Ryder's preventive maintenance program and
the terms of the Agreement, and that legible copies of all "Hard Cards" will
be provided.
13. DOMICILE CHANGES:
Customer shall have the right at any time to change the domicile
location or to transfer any of the Vehicles listed on a Schedule A of this
Agreement to another of Ryder's maintenance locations in proximity to the
Customer's Vehicle domicile. Notice of the change in domicile location shall be
in writing to Ryder no less than thirty (30) days prior to the domicile change
and without the need, other than the notice, for the execution of a formal
amendment other than by notation of the change of the domicile location and any
change of the charges for Vehicle (to be mutually determined by Ryder and
Customer), on the respective Schedule A, or, if necessary, the signing of an
additional Schedule A. The domicile location change shall presume, without
exception by Ryder, that the Vehicles meet the minimum standards of
acceptability without the need of an inspection or evaluation.
14. ASSIGNMENT, NOTICES, PARAGRAPH HEADINGS, GENERAL PROVISIONS:
This Agreement shall be binding on the parties hereto, their
successors, legal representatives and assigns. Neither party shall have the
right to assign this Agreement or any interest therein without the prior
written consent of the other party, which consent shall not unreasonably be
withheld. All notices provided for herein shall be in writing and mailed to
Ryder and/or Customer as required at the respective addresses designated in
writing by either party.
AS TO RYDER: Ryder Truck Rental, Inc.
3600 N.W. 82nd Ave.
Miami, Florida 33166
Attn: President, Commercial Leasing Services
AS TO CUSTOMER: ProSource Services Corporation
550 Biltmore Way, 10th floor
Coral Gables, Florida 33134
Attn: Vice President, Operations Support
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This Agreement shall not be binding upon either party until executed by
a duly authorized representative, and shall constitute the entire agreement and
understanding between the parties, concerning the Vehicles serviced and
maintained hereunder, notwithstanding any previous writings or oral
undertakings, and its terms shall not hereafter be construed as altered an any
oral agreement. Any alterations, additions, or modifications of the terms of
this Agreement shall be accomplished only by written endorsement executed by
both parties. Paragraph headings in this Agreement do not constitute any part
of this Agreement and shall not be considered in the interpretation of this
Agreement. As of the date hereof, all vehicles leased by Ryder under any Truck
Lease and Service Agreement or other vehicle lease agreement between Ryder and
Customer and the related Schedules A, including, but not limited to, the Truck
Lease and Service Agreement between Ryder and Customer dated as of January 1,
1993 and the Truck Lease and Service Agreement and applicable Schedules A
originally between Ryder and The Martin Brower Company dated September 9, 1971,
which were partially assigned to Customer pursuant to an Assignment Agreement
dated as of February 28, 1995 (collectively as "Other Truck Lease and Service
Agreements), are hereby transferred to, incorporated within, made subject to,
and exclusively governed by this Agreement. The terms of this Agreement will
supersede any Other Truck Lease and Service Agreements.
15. ATTORNEY'S FEES AND COSTS:
In the event of litigation involving this Agreement, reasonable
attorneys' fees and court costs incurred (including appellate court fees and
cost, if any) to enforce the provisions of this Agreement shall be awarded to
the prevailing party.
16. GOVERNING LAW AND FORUM:
A. This agreement shall become valid when executed by the last party.
The parties agree that this Agreement shall be deemed to be made and entered
into in the State of Florida and shall be governed and construed under and in
accordance with the laws of the State of Florida.
B. The parties agree that the U.S. District Court for the southern
District of Florida, or if such court lacks jurisdiction, the Eleventh Judicial
Circuit (or its successors) in and for Dade County, Florida, shall be the venue
and exclusive proper forum in which to adjudicate any controversy arising
directly or indirectly, in connection with this Agreement, and the parties
further agree that in the event of litigation arising out of or in connection
with this Agreement in these courts, they will not contest or challenge the
jurisdiction of these courts.
17. NON-WAIVER:
The failure of either party to exercise any right or option provided
under this Agreement or the failure of either party to insist upon strict
compliance with the terms of this Agreement, shall not constitute a waiver of
any terms and conditions of this Agreement with respect to any other or
subsequent breach of either party's rights at any time thereafter to require
strict compliance with the terms and conditions of this Agreement.
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18. LIMITATIONS OF LIABILITIES:
Neither party shall be liable to the other for lost profits or
indirect, incidental or consequential damages which are a result of its failure
to delay in its performance.
19. FORCE MAJEURE:
Both parties' obligations under this Agreement shall be suspended to
the extent performance of such obligations are prevented by a national
emergency, wars, hurricanes, riots, fires, federal, state, or local laws,
rules, regulations, shortages (local or national), or fuel allocations program,
or other cause beyond such party's control whether existing now or hereafter.
In the event that Ryder is involved in a labor dispute, or is otherwise unable
to perform its maintenance obligations, Ryder shall provide the maintenance of
any and all Vehicles at alternative site(s) which are within reasonable
proximity to the site(s) at which maintenance for the particular Vehicle would
ordinarily be performed; provided, however, that in the event Ryder is unable
to provide the maintenance required pursuant to this Agreement, Customer's
obligation to pay shall be pro-rated accordingly, based on the extent of the
services not performed.
RYDER TRUCK RENTAL, INC. PROSOURCE SERVICES CORPORATION
("Ryder") ("Customer")
By: /s/ D. D. Denny By: /s/ John P. Gainor
------------------------ ----------------------------
Name Dwight D. Denny Name John P. Gainor
----------------------- ---------------------------
Title President - CL&S Title Vice President Operations
---------------------- --------------------------
Date May 25, 1995 Date June 3, 1995
----------------------- ---------------------------
<PAGE> 13
[RYDER LOGO]
SCHEDULE NO. ____________________
PAGE ____________ of ____________
LEASE DATED _____________________
FORM OF
SCHEDULE A TO TRUCK LEASE AND SERVICE AGREEMENT
between Ryder Truck Rental, Inc. (Ryder) and _______________________ (CUSTOMER)
LOCATION NAME _____________________________
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
VEHICLE DESCRIPTION
----------------------------------------
VEHICLE DATE OF TERM
IN YR & MAKE MODEL & TYPE SERIAL NUMBER
NO. DELIVERY YRS
(1) (2) (3) (4) (5) (6)
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
MAX. GCW DEPREC. FIXED REFRIG.
GVW/ and/or ORIGINAL ------- ESTIMATED CHARGE MILEAGE MAINT.
LICENSED MONTH ANNUAL PER RATE RATE
WEIGHT VALUE AMOUNT MILES MONTH PER MILE PER
HOUR
(7) (8) (9) (10) (11) (12) (13)
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------
</TABLE>
<PAGE> 14
1. It is agreed that the Original Value, Monthly Depreciation and Fixed Charges
per month are based upon manufacturer's quoted price as of the date of
execution by Customer of this Schedule A. In the event manufacturer's quoted
prices increase prior to the Date of Delivery of the Vehicle(s), Customer
agrees that for each $50 increase in price (or fraction thereof), the
following shall be increased accordingly:
<TABLE>
<CAPTION>
ORIGINAL VALUE MONTHLY DEPRECIATION FIXED CHARGE PER MONTH
--------------- -------------------- ----------------------
<S> <C> <C>
$50.00 $ $
</TABLE>
The amounts in columns 8, 9 and 11 of this Schedule A will be adjusted
on Date of Delivery.
<TABLE>
<CAPTION>
2. Liability Insurance Limits: Check only one block and complete the appropriate blank(s)
----------------------------------------------------------
<S> <C> <C> <C> <C>
Responsibility [ ] Ryder [ ] Customer [ ] Combined Single Limits $________ per occurrence
[ ] Bodily Injury $________ per person
Bodily Injury $________ per occurrence
</TABLE>
<TABLE>
<S> <C> <C>
Liability
Deductible: $________ per occurrence. If liability deductible option is selected (when Ryder extends Liability
Insurance) Customer agrees that Ryder shall have the sole right to conduct accident
investigation and administer claims handling and settlements and Customer shall
adhere to and accept Ryder's conclusions and decisions.
3. Physical Damage Responsibility by: Ryder [ ] $________ deductible Customer [ ]
Property Damage $________ per occurrence
</TABLE>
4. Fuel provided by: [ ] Ryder [ ] Customer
5. Domicile of the Vehicle(s) by city: _______-________________________________
6. Service and maintenance location of Vehicles listed on this schedule: ______
<TABLE>
<S> <C>
7.The base index of _________ will be used to compute the Revised Consumer Price Index for Urban Wage Earners
1967 base period. and Clerical Workers.
Personal Property Tax ________
8. Allowances/year: License Fee __________ Federal Heavy Vehicle Use Tax ________
Fuel/Road/Mile permit charges totaling $________ for each Vehicle listed on the Schedule
shall be included in Customer's Fixed Rental Charge for the states of: ______________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
If Ryder's total cost for fuel permits in these states in any calendar year is more or less
than the amount included in Customer's Fixed Rental Charge, Customer shall pay the additional
amount or receive a credit from Ryder accordingly. Charges incurred by Ryder for fuel permits
in states not listed shall be billed to Customer in addition as incurred.
</TABLE>
9. Original identification cost: $________________. If this amount varies by
$50.00 or more in price over the original estimated cost, the original
value, monthly depreciation and fixed charge per month will be adjusted as
indicated in (1) above.
10. Washing provided by: ________________________________ Power Unit
(Ryder/Customer)
___________ Trailers ____________________ times
per year.
11. Estimated Annual Mileage: If the Estimated Annual Mileage (Column 10), of
this Schedule A in any year beginning on the Date of Delivery of the
Vehicle(s) is (i) under 125,000 miles and is exceeded by 20% or (ii) 125,000
miles or over and is exceeded by 10%, the parties will negotiate in good
faith a one time charge to the Fixed Charge Per Month (Column 11),
Depreciation Month Amount (Column 9) and the Term (Column 3) for each
Vehicle affected.
12. Trailer Mileage: The Fixed Charge Per Month is based on the assumption that
each Vehicle will be operated for ____________________miles per twelve (12)
month calendar period ("Obligation Period"). If the number of miles actually
operated during the Obligation Period exceed the Rated Mileage, the Customer
agrees to promptly pay the Mileage Rate set forth on the Schedule A per
mile multiplied by the number of miles in excess of the Rated Mileage. Ryder
agrees to invoice Customer for any excess amount due at the end of each
Obligation Period and Customer will pay this amount in accordance with
Paragraph 8A of the Agreement. Customer will not be entitled to any credit
or carry forward if the number of miles actually operated during the
Obligation Period is less than the Rated Mileage.
This schedule A is a part of the Truck Lease and Service Agreement between the
parties hereto.
RYDER TRUCK RENTAL, INC. __________________________________
(CUSTOMER)
By ____________________ By ________________________
Name/Title ____________________ Name/Title _________________________
Date ____________________ Date _________________________
Witness ____________________ Witness __________________________
<PAGE> 1
(LOGO) EXHIBIT 10.31
GE CAPITAL
Fleet Services
_____________________________________________________________________________
Fleet # 8107
LEASE AGREEMENT Client #
_____________________________________________________________________________
This Lease Agreement (herein the "Agreement") is made and entered into as of
August 22, 1991 by and between Gelco Corporation, a Minnesota corporation,
doing business as GE Capital Fleet Services (herein the "LESSOR"), and Burger
King Distribution Services, a Division of Burger King Corporation, a Florida
corporation (herein the "LESSEE").
(1) LEASE OF VEHICLES: SEE ADDENDUM.
Upon delivery and acceptance of each vehicle, LESSEE agrees that
LESSEE's obligation to pay rent and other amounts hereunder with respect to
such Vehicle shall be unconditional, and LESSEE shall not be entitled to any
reduction of, or set-off against, such amounts whatsoever (provided, however,
that any payment by LESSEE shall not predjudice LESSEE's right to claim
adjustment or reimbursement) nor shall this Lease terminate or the obligations
of LESSEE be affected by reason of any defect in, damage to or loss of
possession, use or destruction of any Vehicle from whatsoever cause, unless
such obligations have been terminated pursuant to the express terms hereof.
(2)(a) TERM OF AGREEMENT: The term of this Agreement shall be indefinite
commencing on the date hereof, and continuing until terminated in the manner set
forth in this Agreement. Notwithstanding the termination of this Agreement, all
Vehicles then leased by LESSEE, shall continue to be subject to the terms,
conditions and covenants contained in this Agreement, until each of such terms,
conditions and covenants has been fulfilled and no such termination shall affect
rights or obligations in existence prior to the effective date of termination.
(b) VEHICLE LEASE TERM: SEE EXHIBIT O.
(3) LESSEE'S OPERATION OF VEHICLES: LESSEE shall use the Vehicles
primarily in the United States for business purposes and in a safe and lawful
manner and shall comply with all federal, state, county and municipal statutes,
ordinances and regulations which may be applicable to the leasing, use or
operation of the Vehicles. In addition, LESSEE shall prepare and furnish to
LESSOR all documents, returns or forms legally required to be prepared by
LESSEE. LESSEE shall be solely responsible for any fines or penalties assessed
for violations of any statute, ordinance, bylaw or regulation of any duly
constituted governmental authority, as a result of the use or operation of the
Vehicles by any of LESSEE's employees, agents, sublessees or subcontractors.
LESSEE agrees to operate only those Vehicles which have insurance coverage as
provided herein and to comply with all conditions of insurance related to the
Vehicles, to maintain the Vehicles and all accessories and equipment thereof in
safe and good mechanical condition and running order at all times during the
term of this Agreement and to furnish all supplies, accessories, and other
essentials required for the use or operation of the Vehicles. In no event will
the Vehicles to be used to transport any hazardous substances, except as may be
transported in separate packages or containers by Vehicles in the ordinary
course of LESSEE's business, provided that such transportation is not subject
to labeling or placarding under the Hazardous Mateials Transportation Act.
(4) LESSOR DISCLAIMER: FOR AND DURING THE TERM OF ANY VEHICLE LEASE,
LESSOR HEREBY ASSIGNS TO LESSEE ALL MANUFACTURER'S WARRANTIES APPLICABLE TO THE
VEHICLES. THERE ARE NO WARRANTIES OR OTHER RIGHTS PROVIDED BY THE LESSOR OTHER
THAN THE MANUFACTURER'S WARRANTIES ASSIGNED TO LESSEE COPIES OF WHICH LESSEE
ACKNOWLEDGES HAVING PREVIOUSY RECEIVED. LESSOR MAKES NO REPRESENTATION OR
WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, WITH RESPECT TO ANY VEHICLE,
INCLUDING ITS DESIGN, OPERATION OR CONDITION, MERCHANTABILITY, OR ITS FITNESS
FOR A PARTICULAR PURPOSE. LESSEE ACKNOWLEDGES THAT LESSOR IS NOT THE
MANUFACTURER, DESIGNER OR A DISTRIBUTOR OF THE VEHICLE. LESSOR SHALL HAVE NO
LIABILITY WHATSOEVER FOR ANY FAILURE OF OR DELAY IN DELIVERY OF THE VEHICLE OR
FOR THE BREACH OF ANY REPRESENTATION OR WARRANTY MADE BY THE MANUFACTURER.
LESSOR MAKES NO REPRESENTATION AS TO THE TREATMENT BY LESSEE OF THIS LEASE FOR
FINANCIAL STATEMENT OR TAX PURPOSES.
<PAGE> 2
(5) COSTS AND EXPENSES, FEES AND CHARGES: LESSEE covenants that it will pay
all costs expenses, charges and taxes (other than federal income or state income
taxes) incurred in connection with the titling, registration, delivery,
purchase, sale, rental, installation, use or operation of the Vehicles during
the term of this Agreement in addition to the rental herein provided. If LESSOR
incurs or is compelled to pay any of such costs LESSEE shall, upon demand from
LESSOR, promptly reimburse LESSOR for same. If LESSOR is required to pay any
fines, tickets, penalties or other charges related to a violation by LESSEE of
any local, state or federal law or regulation, LESSEE shall, upon demand,
promptly reimburse LESSOR for same and pay an additional charge of $15.00 for
the administrative expenses incurred by LESSOR processing each fine, ticket,
penalty or other such charge on behalf of LESSEE.
(6) REGISTRATION PLATES, ETC.: LESSEE shall at its own expense, obtain all
registration plates and other plates, permits or licenses required to be
obtained in the name of LESSOR except for the initial registration plates which
LESSOR shall obtain at LESSEE's expense. LESSOR shall issue to LESSEE, for such
purpose, powers of attorney and/or other necessary authority. Both LESSOR and
LESSEE covenant and agree to cooperate and to furnish any and all information
or documentation which may be reasonably necessary to enable compliance with
the provision of this Section or any local, state or federal law or regulation.
(7) RENTAL CHARGES: LESSEE will pay LESSOR and LESSOR will accept as payment
from LESSEE, as rental for the Vehicles, charges in accordance with the
Exhibits to this Agreement. All payments of rental shall be in United States
legal tender.
Time is of the essance. All charges are due and payable upon receipt of
invoice but not earlier than the first (1st) day of the month for which the
rentals are due. LESSEE shall pay to LESSOR a late payment penalty in the
amount of one percent (1%) or the highest legal interest rate, whichever is
less, per month or fraction thereof of any invoice the payment of which is not
in the possession of the LESSOR on or before the twenty-fifth (25th) day from
the date of such invoice for if such 25th day falls on a weekend or holiday,
then the immediately preceding business day).
Any Vehicle delivered and accepted or sold after the fifteenth (15th) day of
any month will be treated as a delivery or sale as of the first (1st) day of
the following month, and any Vehicle delivered and accepted or sold on or prior
to the fifteenth (15th) day of any month will be treated as a delivery and
acceptance or sale as of the first (1st) day of such month; provided, however,
that in the event LESSEE elects to terminate all or any material percentage of
the Vehicles at the same time, such disposition shall be treated as a
disposition on the last day of such month.
In the event a lapse of time shall occur between the delivery to LESSOR of
part of any Vehicle, such as a chassis, and delivery of any other part, such as
a body, tank, etc., and it shall become necessary for LESSOR to advance funds
to pay for such incomplete Vehicle, LESSOR, in such event, may pay for such
incomplete Vehicle, and either (i) bill LESSEE immediately or (ii) charge
LESSEE for interim financing at a rate of one percent (1%) over the prime rate
which shall be payable by LESSEE at the time of delivery and acceptance of the
complete Vehicle. For purposes of the foregoing, "Prime Rate" shall be defined
to mean the highest rate quoted as the "Prime Rate" in the column entitled
"Money Rates" published in the Wall Street Journal on the Delivery Date. All
incomplete Vehicles thus acquired shall, with the exception of the payment of
rentals, be subject to the terms and conditions of this Agreement.
LESSEE agrees to carefully review each billing or other statement provided by
LESSOR. All statements rendered by LESSOR shall be presumed correct and
accurate and in the case of billing statements constitute an account stated
between LESSOR and LESSEE unless, within thirty (30) days after receipt
thereof, LESSEE shall deliver written objection thereto specifying any errors
in the statement. In such event, LESSOR's sole liability and LESSEE's exclusive
remedy shall be to make appropriate adjustments in LESSEE's account. All
charges are based upon LESSOR's standard operating routines computer systems
capabilities, and existing business policy. Additional services and special
handling required by LESSEE will be subject to separate negotiation. Nothing
contained in this Agreement shall prevent LESSOR from obtaining compensation
from manufactures, suppliers or other vendors.
(8) SURRENDER AND DISPOSITION OF VEHICLES:
(a) LESSEE shall have the right, at any time after the first twelve (12)
months of the Vehicle Lease Term for any Vehicles leased hereunder, upon 15
days written notice thereof to LESSOR, to surrender for disposition with or
without replacement any one (1) or more of the Vehicles. Upon such election
LESSEE shall, at its own expense, surrender the Vehicles at such place as may
be mutually agreed upon between LESSEE and LESSOR not to exceed 1,000 miles.
Such surrender shall include all license plates, registration certificates,
documents of title and odometer certifications and other documentation
necessary to effect the sale of the Vehicle. LESSOR shall sell such Vehicles
within a reasonable time after the date of surrender of possession unless
otherwise mutually agreed. The surrender of any Vehicle shall not be effective
until LESSOR (i) takes actual possession of such Vehicle or (ii) five business
days after receipt of written notice, whichever shall first occur.
(b) LESSOR shall, and LESSEE may, solicit from prospective purchasers in
the wholesale vehicle market cash bids for such Vehicles on an AS IS, WHERE IS
BASIS, WITHOUT RECOURSE OR WARRANTY. Such Vehicles shall be sold in a
commercially reasonable manner for cash payable in full upon delivery. Without
limiting the generality of the foregoing, LESSOR shall have the right to sell
such Vehicles to any dealer or broker or at any wholesale automobile auction,
including companies affiliated with LESSOR in an amount not less than the
highest bid received by LESSOR and LESSEE. In the event LESSOR sells any
vehicle owned by LESSEE or any third party, LESSEE shall indenmify LESSOR from
all liabilities directly or indirectly related to such sale and pay LESSOR a
fee of $40.00 per vehicle.
(c) SEE ADDENDUM.
(d) SEE EXHIBIT O AND ADDENDUM.
<PAGE> 3
(9) INSURANCE: LESSEE will purchase and mantain in force during the time
this Agreement is in effect, insurance policies in at least the amounts listed
below, covering the Vehicles between the time of delivery and acceptance thereof
to LESSEE and surrender to LESSOR. Said insurance shall be written by an
insurance company or companies rated B+ or better in the A.M. Best Insurance
guide insuring LESSEE against any loss, damage claims, suits actions or
liability, and by endorsement naming LESSOR as an Additional Named Insured and
Loss Payee; provided, however, so long as LESSEE is not in default hereunder,
LESSOR agrees to immediately assign the proceeds to LESSEE to effect repairs to
or replacement of the Vehicle. Such endorsement or endorsements shall provide in
each case that said insurance company or companies shall give to LESSOR at least
thirty (30) days' notice in writing of proposed cancellation, modification, or
alteration of any said insurance.
TYPE AMOUNT
Public Liability and Property Damage $1,000,000 Combined Single
(comprehensive automobile liability) Limit (per occurrence)
Collision, Fire and Theft (ALL RISK) Not less than LESSOR's Unamortized
Book Value
The above insurance should also include the following in amounts not
less than the applicable minimum legal requirements: (a) uninsured/underinsured
motorist coverage and (b) no fault protection. Prior to the date that any
vehicle is placed in service by LESSEE, LESSEE shall furnish LESSOR with a
certificate of insurance or other evidence thereof acceptable to LESSOR.
Policies covering the aforementioned fire and theft and collision insurance
shall bear endorsements to the effect that proceeds thereof shall be payable to
LESSOR and/or LESSEE as their interests may appear. LESSEE, in the event of
Default, hereby appoints LESSOR as LESSEE's attorney-in-fact to receive payment
of and endorse all checks and other documents and to take any other actions
necessary to pursue insurance claims and recover payments if LESSEE fails to do
so. If LESSEE fails to pursue claims and reorder payments within a reasonable
time, any direct out-of-pocket expense of LESSOR in adjusting or collecting
insurance shall be borne by LESSEE. In the event a Vehicle is involved in any
material accident involving personal injuries or property damages exceeding
$5,000.00, LESSEE shall immediately notify LESSOR and provide (i) copies of all
reports provided to an insurance carrier or governmental agency and (ii) copies
of any legal papers relating to the accident.
(10) INDEMNIFICATION BY LESSEE: LESSEE COVENANTS AND AGREES TO
INDEMNIFY, SAVE HARMLESS AND DEFEND LESSOR, ANY EMPLOYEE OF LESSOR, AND ANY
PARENT, SUBSIDIARY OR AFFILIATE OF LESSOR, AGAINST ANY AND ALL LIABILITY, CLAIMS
FOR LOSS, DAMAGE, OR INJURY AND FROM AND AGAINST ANY SUITS, ACTIONS, OR LEGAL
PROCEEDINGS OF ANY KIND BROUGHT AGAINST LESSOR FOR OR ON ACCOUNT OF ANY
PERSON(S), OR LEGAL ENTITY, OR ON ACCOUNT OF ANY INJURIES RECEIVED OR SUSTAINED
BY ANY PERSON(S) OR LEGAL ENTITY IN ANY MANNER, DIRECTLY OR INDIRECTLY CAUSED
BY, INCIDENT TO, OR GROWING OUT OF, WHOLLY OR IN PART, THE USE, OPERATION OR
MAINTENANCE OF THE VEHICLES BETWEEN THE TIME OF DELIVERY THEREOF TO LESSEE AND
THE TIME OF SURRENDER THEREOF BY LESSEE TO LESSOR FOR DISPOSITION. PROVIDED,
HOWEVER, THAT IN THE EVENT LESSOR SELLS ANY VEHICLE TO LESSEE OR ANY EMPLOYEE OF
LESSEE, LESSEE'S COVENANTS OF INDEMNITY SHALL CONTINUE as to the condition of
the Vehicle at the time of the sale and any implied warranties related to such,
sale. LESSOR shall not sell tractors or trailers to LESSEE'S employees. LESSEE
further agrees to take upon itself the settlement of all such claims and the
defense of any suit or suits, or legal proceedings of any kind brought to
enforce such claim or claims, and to pay all judgments entered into such suit or
suits and all costs, attorneys' fees or other expenses. LESSEE shall not
stipulate any judgments on LESSOR's behalf in order to consumate any settlement
without LESSOR's prior consent.
LESSEE FURTHER COVENANTS AND AGREES TO HOLD LESSOR HARMLESS FROM ANY
LOSS, DAMAGE, THEFT OR DESTRUCTION OF THE VEHICLES FROM THE DATE OF DELIVERY
AND ACCEPTANCE OF THE VEHICLES BY LESSEE TO THE DATE OF SURRENDER OF POSSESSION
OF THE VEHICLE.
The foregoing LESSEE's covenants of indemnity do not encompass any gross
negligence or willful misconduct by LESSOR, but are otherwise absolute and
unconditional and shall continue in full force and effect notwithstanding the
termination of this Agreement, for events which occur prior to the surrender of
a Vehicle by LESSEE to LESSOR for disposition.
THE PROVISIONS OF THIS SECTION COMPREHEND, BUT WITHOUT LIMITATION,
LIABILITY AND CLAIMS, HOWSOEVER ARISING, WHETHER BY REASON OF NEGLIGENCE, BREACH
OF WARRANTY, DEFECT IN MANUFACTURE OR MAINTENANCE OR OTHERWISE, AND EVEN THOUGH
STRICT LIABILITY BE CLAIMED, LESSOR shall not seek amounts from LESSEE which
have already been paid by LESSEE's insurance provider.
(11) LESSOR-LESSEE RELATIONSHIP: This is an agreement of lease only. It
is agreed that this is not an agreement of partnership or employment of LESSOR
or of any of LESSOR's employees by LESSEE and that LESSOR is an independent
contractor. Except as may be specifically provided in an executed Power of
Attorney, neither LESSEE nor any employee of LESSEE shall have any authority to
act on behalf of LESSOR or be deemed to be the agent, servant or employee of
LESSOR. Nothing herein contained shall give or convey to LESSEE any right, title
or interest in and to any Vehicle leased hereunder except as LESSEE and LESSEE
shall have no option to purchase any Vehicle. In the event that, contrary to the
intention of the parties hereto, this Lease is deemed to be other than a lease.
LESSEE hereby grants LESSOR a security interest in the Vehicles and all
proceeds, accessions, chattel paper, equipment and general intangibles related
thereto to secure all of LESSEE's obligations hereunder. At LESSOR's request,
LESSEE agrees to execute any financing statements or other instruments necessary
or expedient for filing, recording or perfecting the interest and title of
LESSOR.
<PAGE> 4
(12) STATEMENTS AND RIGHTS OF INSPECTION: LESSOR shall have the right
to inspect any Vehicle and the records of LESSEE pertaining to LESSEE's Vehicles
at any reasonable time upon reasonable notice at LESSOR's expense.
The creditworthiness of Burger King Corporation is a material condition
to this Agreement. LESSEE shall porvide LESSOR with Burger King Corporation's
annual audited statements.
(13) DEFAULT BY LESSEE: SEE ADDENDUM.
(14) ASSIGNMENTS: SEE ADDENDUM.
(15) SUBSIDIARIES, PARENTS AND AFFILIATES: This Agreement shall not
apply to present or future parents, subsidiaries or affiliates of LESSEE
without the consent of LESSOR and LESSEE, except as may be permitted by the
assignment provisions in (14)(b) herein.
(16) MODIFICATIONS: This Agreement contains the entire understanding of
the parties and merges all oral understandings herein. Any modifications,
changes, or amendments may be made only in writing subscribed by LESSEE and
LESSOR. Failure of either party to enforce any right granted herein shall not
be deemed a waiver of such right.
(17) EXECUTION AND GOVERNING LAW: THIS AGREEMENT SHALL NOT BECOME
EFFECTIVE AS OF THE DATE ON PAGE 1 HEREOF AFTER EXECUTION BY AN AUTHORIZED
REPRESENTATIVE OF THE LESSOR AND LESSEE. THE LAWS OF THE STATE OF MINNESOTA
SHALL GOVERN ALL QUESTIONS OR DISPUTES, WHETHER SOUNDING IN TORT OR CONTRACT,
RELATING TO THE INTERPRETATION, PERFORMANCE, VALIDITY, ENFORCEMENT, OR EFFECT
OF THIS AGREEMENT, WITHOUT REGARD TO CHOICE OF LAW PRINCIPLES THEREOF.
(18) SEVERABILITY: If any portion of this Agreement shall be found to
be illegal, invalid or contrary to public policy, the same may be modified or
stricken by a Court of competent jurisdiction to the extent necessary to allow
the Court to enforce such provision in a manner which is as consistent with the
original intent of the provision as possible. The striking or modification by
the Court of any provision shall not have the effect of invalidating the
Agreement as a whole.
(19) WAIVER OF JURY TRIAL: BOTH PARTIES TO THIS AGREEMENT HEREBY WAIVE
ANY AND ALL RIGHT TO ANY TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING
DIRECTLY OR INDIRECTLY HEREUNDER.
(20) MISCELLANEOUS: This Agreement is for the benefit of and may only
be enforced by the respective parties and their successors and permitted
assignees and is not for the benefit of and may not be enforced by any third
party. This Agreement is the product of negotiations between the parties. Each
provision hereof shall be read and interpreted in accordance with its common
and ordinary meaning and no ambiguity in language shall be read or interpreted
in favor of or against either party.
(21) ODOMETER DISCLOSURE STATEMENT: Federal law (and State law, if
applicable) requires that the Lessee disclose the mileage to the Lessor in
connection with the transfer of ownership of the leased vehicle. Failure to
complete an odometer disclosure form or making a false statement may result in
fines and/or imprisonment.
(22) ADDENDUM AND EXHIBITS: THE ADDENDUM AND EXHIBITS A, B, C, L AND O
ARE ATTACHED HERETO AND INCORPORATED HEREIN BY REFERENCE.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by duly authorized representatives.
Gelco Corporation dba Burger King Distribution Services, a Division of
GE Capital Fleet Services Burger King Corporation
(LESSOR) ------------------------------------------------
(LESSEE)
BY: /s/ A.J. Maijla By: /s/ Thomas C. Higland
------------------------- ---------------------------------
Title: Vice President Title: President
---------------------- ------------------------------
Date: August 22, 1991 Date: August 22, 1991
----------------------- -------------------------------
Attest: /s/ Shirley Gifft Attest: Michael B. Marvin
--------------------- ----------------------------
Assistant Secretary
Address: Three Capital Drive Principal Place of Business
-------------------- & Mailing Address 17777 Old Cutter Road
-----------------------
Eden Prarie, MN 55344 Miami, Florida 33157
- ---------------------------- -----------------------------------------
<PAGE> 5
FORM OF
EXHIBIT A
BURGER KING DISTRIBUTION SERVICES
BOOK
UNIT YEAR MAKE MODEL VIN VALUE
- --------------------------------------------------------------------------------
FINAL SUMS
----------------------------------------------------------------------
<PAGE> 6
<TABLE>
<CAPTION>
<S> <C>
GE CAPITAL
[LOGO] Fleet Services
________________________________________________________________________________________
FORM OF Client # ___________________
LEASE EXHIBIT B Fleet # ____________________
________________________________________________________________________________________
AMORTIZATION RATES
Effective:_____________________________ Date of Master Lease: ___________________
This Exhibit B is a part of and subject to the Lease Agreement by and between the
undersigned. The term Vehicle(s) as used herein shall have the same meaning as the terms
Vehicle(s) have when used in the Lease Agreement and related Exhibits. If more than one
amortization is selected by Lessee, such selection shall be indicated on the
Vehicle Order.
LESSOR's Capitalized cost of each Vehicle shall be amortized at an equal rate per
month from the date in service of such Vehicle by LESSOR pursuant to the amortization
period selected by LESSEE from among the following:
Term in Months and Percentage Per Month
Automobles Term / / 36 / / 40 / / 44 / / 48 / / 50 / / _____ / / _____
% ______ ______ ______ ______ ______ / / _____ / / _____
Light Trucks Term / / 36 / / 40 / / 44 / / 48 / / 50 / / 60 / / _____ / / _____
% ______ ______ ______ ______ ______ ______ / / _____ / / _____
Medium Duty Trucks Term / / 48 / / 60 / / 72 / / 84 / / _____ / / _____
% ______ ______ ______ ______ / / _____ / / _____
Heavy Duty Trucks Term / / 60 / / 72 / / 84 / / 96 / / _____ / / _____
% ______ ______ ______ ______ / / _____ / / _____
Other Reefer
Trailers Term / / 36 / / 40 / / 44 / / 48 / / 50 / / 60 / / _____ / / _____
% ______ ______ ______ ______ ______ ______ / / _____ / / _____
______________
The Capitalized Cost of a Vehicle is computed by adding together the following amounts:
(i) The Manufacturer's invoice price of the Vehicle including sales tax, if
applicable;
(ii) The invoice price of any additions or modifications to the Vehicle(s) made
pursuant to LESSEE's request;
(iii) Charges in accordance with the following schedule:
MAKE MARK-UP CHARGES
All Domestic Vehicles ...................................................
All Cadillac, Lincoln, Corvette ............................ Individually Negotiated
Light trucks ............................................................
Vehicles requiring immediate delivery (out of stock), including
pool vehicles or vehicles purchased/ordered direct from
dealers .......... $_____ or _____ % of the capitalized value*; whichever is greater
Foreign vehicles (including vehicles imported by domestic
manufacturers) .. $_____ or _____ % of the capitalized value*; whichever is greater
Non-vehicular Equipment .................................... Individually Negotiated
Medium and Heavy Duty Trucks and Trailers and Tractors...... Individually Negotiated
Vehicles delivered to Alaska and Hawaii .................... Individually Negotiated
Other ...................................................................
Other ...................................................................
Other ...................................................................
* Capitalized value shall be the sum of items (i) and (ii) above
Gelco Corporation dba Burger King Distribution Services, a
GE CAPITAL FLEET SERVICES Division of Burger King Corporation
________________________________________
(LESSOR) (LESSEE)
By: ____________________________________ By: _____________________________________
Title: _________________________________ Title: __________________________________
Date: __________________________________ Date: ___________________________________
</TABLE>
<PAGE> 7
Client #_______
Fleet #________
FORM OF
EXHIBIT C
FIXED RATE BASED ON TREASURY NOTES - FOR TRAILERS ONLY, FOR LEASE AGREEMENT
LEVEL PAYMENTS OVER AGREED PERIODS DATED AUGUST 22, 1991
_______________________________________________________________________________
RENTAL CHARGES EFFECTIVE DATE: VEHICLES ON ROAD ON OR AFTER _____________
This Exhibit C is part of and subject to the Lease Agreement between the
undersigned (the "Agreement"). The terms used herein shall have the same
meaning as the terms in the Agreement and related Exhibits except as to terms
specifically defined herein. The following terms are used herein:
"Treasury Note Rate" shall mean the yield listed on Page 217 of the Telerate
Treasury Yield Rate in effect on the fifteenth (15th) day of the month
preceding the Delivery Date (or if such day falls on a weekend or holiday, then
the immediately preceding business day), for the current "on-the-run" Treasury
Notes maturing in ___ years. If for any reason the Telerate Treasury Yield
Recap ceases publication or is otherwise unavailable, then reference shall be
made to the Wall Street Journal. The rate shall be the yield which most closely
approximates par for the appropriate maturity.
"Average Unamortized Book Value" shall mean one-half of the sum of the
Unamortized Book Value at (1) the beginning of the first month of an Agreed
Period and (2) the beginning of the last month of an Agreed Period.
"Monthly Interest Rate" shall mean the Treasury Note Rate ____________________
________________________ divided by 12.
"Agreed Period(s)" shall mean an initial period of ___ months and, if
applicable, a period equal to the remaining months in the amortization term.
LESSEE will pay LESSOR and LESSOR will accept as payment from LESSEE, as rental
for each Vehicle, charges in accordance with Exhibit A. Such rentals shall be
based upon Lessor's Capitalized Cost of each Vehicle as specified in Exhibit B,
and shall be the sum of the folowing:
(1) An amortization charge per Vehicle, payable monthly, computed using
the amortization rate provided for on Exhibit B and selected by
LESSEE; plus
(2) A sum, equal to ___% of the Capitalized Cost per Vehicle per month,
payable monthly, throughout the Lease Term of each Vehicle as
LESSOR's management fee; and
(3) An interest charge, payable monthly, determined by multiplying the
Average Unamortized Book Value for each Agreed Period by the
Monthly Interest Rate. Upon disposition of a Vehicle, LESSEE shall
pay to LESSOR deficit interest in an amount equal to the difference
between actual simple interest and the averaged interest billed by
LESSOR as regards such Vehicle.
GE CAPITAL FLEET SERVICES (LESSOR) PROSOURCE SERVICES CORPORATION (LESSEE)
By: ______________________________ By: ___________________________________
Title: ___________________________ Title: ________________________________
Date: ____________________________ Date: _________________________________
<PAGE> 8
GE CAPITAL
[LOGO] Fleet Services
_______________________________________________________________________________
FORM OF
EXHIBIT L
LESSEE CERTIFICATION
PURSUANT TO INTERNAL REVENUE CODE AS AMENDED
_______________________________________________________________________________
The undersigned ("LESSEE") hereby acknowledges that all Vehicles subject to
that certain Lease Agreement by and between LESSEE and Gelco Corporation, dba
GE Capital Fleet Services ("LESSOR"), are included in this Certification.
1. LESSEE certifies under penalty of perjury that it intends the Vehicles
leased pursuant to the Lease Agreement to be used more than fifty
percent (50%) in the trade or business of the LESSEE; and
2. LESSEE has been advised by LESSOR that, LESSOR and not LESSEE, will be
treated as the owner of the property subject to the Lease Agreement for
Federal Income Tax purposes.
Burger King Distribution Services, a Division of
Burger King Corporation
_________________________________________________
(LESSEE)
By: _____________________________________________
Title: __________________________________________
Date: ___________________________________________
<PAGE> 9
{LOGO} GE Capital
Fleet Services
_______________________________________________________________________________
Fleet # _________
Client # _________
Master #__________
FORM OF EXHIBIT O -- OPERATING LEASE
_______________________________________________________________________________
This Exhibit amends and modifies that certain Lease Agreement
(hereinafter "Agreement") by and between the undersigned.
For the purposes of this Exhibit, and the Agreement, the following
definitions shall apply:
NET PROCEEDS -- The amount by which the proceeds realized from the sale
of a Vehicle surrendered for sale exceeds the reasonable costs and expenses
incurred by LESSOR in readying such Vehicle for and effectuating such sale,
but excluding Contingent Rentals, if any, paid by Lessee to Lessor.
CONTINGENT RENTALS -- Reasonable costs incurred or assessed by LESSOR
to repair or recondition Vehicles that are surrendered for sale with excessive
wear and tear.
GUARANTEED RESIDUAL -- That portion of the Unamortized Book Value of a
Vehicle at the time of surrender guaranteed by LESSOR as determined herein.
RENEWAL PERIOD(S) -- The month-to-month periods beginning at the end of
the minimum lease term during which LESSEE may continue to lease a particular
Vehicle.
The parties hereby agree to amend the terms of the Agreement in
accordance with the following:
Section (2)(b) of the Agreement is hereby deleted and replaced with the
following:
(2)(b) VEHICLE LEASE TERM: The minimum lease term for each Vehicle
shall be twelve (12) months commencing the date the Vehicle is delivered to
and accepted by LESSEE, after which LESSEE shall be deemed to have elected to
renew the Agreement for such Vehicle on a month-to-month basis unless notice of
surrender of such Vehicle is provided to LESSOR. However, in no event shall
the lease term for any Vehicle extend beyond fifty (50) months for automobiles,
seventy-two (72) months for light trucks, ninety-six (96) months for medium
and heavy duty trucks and tractors and 120 months for reefer trailers, unless a
different maximum lease term is set forth on any other Exhibit to the
Agreement.
Section (8)(d) of the Agreement is hereby deleted and replaced with the
following:
(8)(d) In the event the Net Proceeds upon sale are in excess of
the Unamortized Book Value of the Vehicle, as of the applicable date
under the Agreement, such excess shall be paid to LESSEE, promptly
after consummation of the sale; provided, however, if LESSEE is in
default of the Agreement with respect to any Vehicle on lease, such
excess shall be first applied in reduction of any payment in default
and the balance of such excess shall be paid to LESSEE. In the event
said Net Proceeds upon sale are less than the Unamortized Book Value of
the Vehicle as of the applicable date under the Agreement, but equal
to or more than the Guaranteed Residual, then LESSEE shall reimburse
LESSOR for the difference between said Net Proceeds and said
Unamortized Book Value. In the event said Net Proceeds are less than
the Guaranteed Residual, LESSOR shall be responsible for the
difference between said Guaranteed Residual and the Net Proceeds; and
LESSEE shall reimburse LESSOR for the difference between the
Guaranteed Residual value and said Unamortized Book Value.
(e) SEE ADDENDUM
(f) (i) The Guaranteed Residual to be used in the event the
Vehicle is sold at the end of the minimum lease term is
16% of the Capitalized Cost of the Vehicle.
(ii) The Guaranteed Residual to be used in the event the
Vehicle is sold at the end of a Renewal Period is __%
of the Unamortized Book Value of the Vehicle as of
the end of the month preceding such Renewal Period.
SEE ADDENDUM.
<PAGE> 10
3. This Amendment is effective as of for all Vehicles
on lease at that date and all Vehicles placed in service thereafter. Except as
amended by this Exhibit, all other terms and conditions of the Agreement are
ratified and confimed and remain in full force and effect.
Gelco Corporation dba Burger King Distribution Services,
GE Capital Fleet Services (LESSOR) A Division of Burger King Corporation
_____________________________________
(LESSEE)
By: _______________________________ By: _________________________________
Title: ____________________________ Title: ______________________________
Date: _____________________________ Date: _______________________________
<PAGE> 11
ADDENDUM TO LEASE AGREEMENT
This is an Addendum to the Lease Agreement dated the 22nd day of August, 1991,
the ("Agreement") between Gelco Corporation, d/b/a/ GE Capital Fleet Services,
as LESSOR and Burger King Distribution Services, a Division of Burger King
Corporation, as LESSEE.
The parties hereby agree to the following amendments to the Agreement:
The first paragraph of Section (1) of the Agreement is hereby deleted and
replaced with the following:
(1) LEASE OF VEHICLES: LESSOR hereby agrees to lease to LESSEE and
LESSEE hereby agrees to hire from LESSOR certain automobiles, trucks, tractors,
trailers or equipment (herein "Vehicle(s)") from time to time during the term of
this Agreement. Whenever LESSEE desires to lease Vehicles, LESSEE shall submit
to LESSOR an assignment of LESSEE's Vehicle Purchase Agreement in writing in
connection with LESSEE's initial order of 72 tractors and 59 trailers on a
form acceptable to LESSOR and LESSEE, or a Vehicle Requisition in writing and
pursuant to a form acceptable to LESSOR, or by electronic or telephonic means.
Upon receipt of such Vehicle Purchase Agreement or Vehicle Requisition, LESSOR
shall confirm and accept such request in a similar manner, order the Vehicles
if not previously ordered by LESSEE, and upon receipt of an invoice therefore,
pay the manufacturer for the invoice amount of the Vehicles. LESSEE's lease and
acceptance of any Vehicles ordered by it shall take effect on the terms and
conditions specified in this Agreement and the Exhibits attached hereto
immediately upon delivery of each Vehicle to its designated location by LESSOR
or its designated agent to and acceptance by LESSEE or its designated agent,
provided that the Vehicle conforms to LESSEE's specifications (herein "Delivery
Date"). LESSEE's acceptance of a Vehicle shall constitute a warranty by LESSEE
that the party accepting such Vehicle has the authority to do so on behalf of
LESSEE, and that the Vehicle conforms to LESSEE's Vehicle Purchase Agreement or
Vehicle Requisition, provided, however, LESSEE's acceptance hereunder shall not
be construed as a waiver of LESSEE's rights against the manufacturer or a
waiver of the warranties of the manufacturer. LESSEE shall take delivery of a
Vehicle within five (5) business days of notice to LESSEE that such Vehicle is
available for delivery. In the event the purchase of any Vehicle is cancelled
by LESSEE, LESSEE agrees to reimburse LESSOR for all reasonable and necessary
expenses incurred by LESSOR as a result of such cancellation.
Section (8) (c) of the Agreement is hereby deleted and replaced with the
following:
Section (8) (c) If LESSEE, after written notice to LESSOR of surrender
of a Vehicle for disposition, elects to continue to operate and retain
possession of the Vehicle, then the rentals and other obligations in the
Agreement shall continue until the Vehicle is sold by LESSOR, provided that the
maximum lease terms set forth in Section (2)(b) herein are not exceeded, and the
unamortized cost will continue to decline at the same rate until the sale is
concluded. If LESSEE elects to surrender possession of the Vehicle to LESSOR
then the rentals and other obligations under the Agreement shall cease except
for the terms contained in Section (8) herein and the unamortized cost to be
applied to the sale will be the unamortized cost at the date of surrender of
possession of the Vehicle to LESSOR.
<PAGE> 12
The rentals shall be subject to retroactive upward or downward
adjustment based upon the proceeds received from such sale as set forth below.
Section (8)(d)(e) of the Agreement as amended by Exhibit O is hereby deleted
and replaced with the following:
(8)(d)(e) If the LESSOR determines that there has been excessive wear
and tear of the Vehicle surrendered and the LESSEE disagrees that the Vehicle
has suffered excessive wear and tear, it shall be submitted to a manufacturer's
factory authorized representative or independent appraiser agreed upon between
the parties to determine if the Vehicle has sustained excessive wear and tear
based on the mileage, age and test results, whose determination shall be final
and the costs of such inspection will be split between LESSOR and LESSEE. The
manufacturer's factory authorized representative or independent appraiser shall
also determine the extent of the excessive wear and tear to the Vehicle and the
range and cost of available repairs. LESSOR and LESSEE agree to negotiate in
good faith to determine the reasonable and necessary repairs to be effected to
the Vehicle in order to effect a sale of the Vehicle. The cost of effecting
such agreed repairs shall be the amount of Contingent Rentals billed to LESSEE.
Contingent Rentals are deemed to be additonal rental charges and shall be paid
by LESSEE in accordance with the provision of this Agreement.
Add the following paragraph at the end of Section (8)(d) of the Agreement as
amended by Exhibit O:
In the event of a total loss of the Vehicle by fire, damage or theft
and the Vehicle is not repaired or replaced applying the Insurance Proceeds
(including the salvage proceeds, if any), the Agreement with respect to such
Vehicle will be terminated and the Insurance Proceeds shall be applied in
accordance with the terms and conditions contained in Section (8)(d) herein,
except that such Insurance Proceeds shall be applied the same as the Net
Proceeds upon a sale of the Vehicle under Section (8)(d) herein. If the
Insurance Proceeds are less than the unamortized book value of the Vehicle,
LESSEE will be liable for the deficit.
<PAGE> 13
Add the following 2 paragraphs at the end of Section (10) of the Agreement:
In the event of a total loss of the Vehicle by fire, damage or theft
and the Vehicle is not repaired or replaced applying the Insurance Proceeds
(including the salvage proceeds, if any), the Agreement with respect to such
Vehicle will be terminated and the Insurance Proceeds shall be applied in
accordance with the terms and conditions contained in Section (8)(d) herein,
except that such Insurance Proceeds shall be applied the same as the Net
Proceeds upon a sale of the Vehicle under Section (8)(d) herein. If the
Insurance Proceeds are less than the unamortized book value of the Vehicle,
LESSEE will be liable for the deficit.
Notwithstanding the foregoing, LESSEE's covenants of indemnity shall
only apply where there is no valid and collectible insurance coverage provided
by LESSEE, applicable to such indemnity obligations of LESSEE.
Section (13) of the Agreement is hereby deleted and replaced with the following
(13)(a) and (13)(b):
(13)(a) DEFAULT BY LESSEE: In the event LESSEE, after five (5) days'
written notice from LESSOR, shall fail to make the payments as herein provided
or after twenty (20) days' written notice, shall fail to perform any of its
covenants under this Agreement, or in the event LESSEE or any quarantor (a)
shall make a general assignment for the benefit of creditors, or suffer a
receiver or trustee to be appointed of all or substantially all of its assets,
or file or suffer to be filed any petition under any bankruptcy or insolvency
law of any jurisdiction which is not dismissed within sixty (60) days; or (b) is
in default under any other Agreement it may have with the LESSOR; or (c) shall
deliver or make any representation or warranty made herein, or in any document
delivered to LESSOR in connection herewith which shall prove to be false or
misleading in any material respect; then in such event LESSOR may, at its
option, in addition to any other remedies which may be available to it at law or
in equity:
(i) terminate this Agreement with respect to any or all of the
Vehicles hereunder, in which event such Vehicles shall immediately
be delivered, at LESSEE's cost and expense, to a location or
locations specified by LESSOR not in excess of 1,000 miles and
recover from LESSEE all unpaid rentals due and other charges due
prior to the termination and repossession of such Vehicles by
LESSOR, together with all reasonable costs and expenses, including
reasonable attorneys' fees, incurred by LESSOR in connection with
terminating this Agreement and repossessing such Vehicles. LESSEE
shall thereafter be released from any further liability under this
Agreement except with respect to the LESSEE's indemnity covenants
in connection with events that occurred prior to the termination
and repossession of the Vehicles and LESSOR shall be entitled to
retain any and all proceeds from the sale or other disposition of
the Vehicles; or
<PAGE> 14
(ii) repossess any or all Vehicles hereunder without terminating this
Agreement and charge LESSEE with any deficiency between the amount due from
LESSEE and the amount realized by leasing such Vehicles until they can be
sold by LESSOR in accordance with the terms and conditions contained in
Section (8) in mitigation of LESSEE's damages, while retaining its right
to collect the full rental due for the period prior to termination and
repossession, and all reasonable costs and expenses, including reasonable
attorneys' fees, incurred in connection with terminating this Agreement
and repossessing said Vehicles.
In addition to LESSEE's obligations to LESSOR under either subparagraph (i)
or (ii) above, LESSOR shall be entitled to receive from LESSEE a minimum of
twelve (12) months management fee on Vehicles in service for less than twelve
(12) months at the date of default.
In case of failure by LESSEE to comply with any provision of this
Agreement, LESSOR shall have the right, but not the obligation, at its option,
to effect such compliance as in LESSOR's sole discretion is appropriate, in
whole or in part, and all reasonable costs and expenses of LESSOR incurred in
effecting such compliance shall be immediately due and payable. LESSOR's
effecting such compliance shall not in any way be deemed to constitute a waiver
of any default by LESSEE.
(13) (b) DEFAULT BY LESSOR: In the event LESSOR, after five (5) days'
written notice from LESSEE, shall fail to make any payments as herein provided
or after twenty (20) days' written notice, shall fail to perform any of its
covenants under this Agreement, or in the event LESSOR (a) shall make a general
assignment for the benefit of creditors, or suffer a receiver or trustee to be
appointed of all or substantially all of its assets or file or suffer to be
filed any petition under any bankruptcy or insolvency law of any jurisdiction
which is not dismissed within sixty (60) days or (b) deliver or make any
representation or warranty made herein, or in any documents delivered to LESSEE
in connection herewith which shall prove to be false or misleading in any
material respect; then in such event LESSEE may, at its option, in addition to
any other remedies which may be available to it at law or in equity:
(i) terminate this Agreement with respect to any or all of the Vehicles
hereunder, in which event any terminated Vehicles shall be delivered, at
LESSEE's cost and expense within a reasonable period of time, to a location
or locations specified by LESSOR not in excess of 1,000 miles to LESSOR,
and pay to LESSOR all unpaid rentals and other charges due to the date of
termination and surrender of such Vehicles, and LESSEE shall be entitled to
recover from LESSOR all reasonable costs and expenses, including reasonable
attorneys' fees, incurred by LESSEE in connection with the termination of
this Agreement and surrender of such Vehicles. LESSEE shall thereafter be
released from any further liability under this Agreement except with
respect to the LESSEE's indemnity covenants in connection with events that
occurred prior to the termination and repossession of the Vehicles and
LESSOR shall be entitled to retain all proceeds from the sale or other
disposition of the Vehicles; or
<PAGE> 15
(ii) so long as LESSEE is entitled to continue in possession of
the Vehicles under the terms of this Lease, it may elect to continue
the Agreement with respect to any or all of the Vehicles until it has
acquired replacement vehicles and then terminate the Agreement with
respect to such Vehicles in accordance with the terms contained in
(i) above.
In case of failure by LESSOR to comply with any provision of this
Agreement, LESSEE shall have the right, but not the obligation, at its option,
to effect such compliance as in LESSEE's sole discretion is appropriate, in
whole or in part, and all reasonable costs and expenses of LESSEE incurred in
effecting such compliance shall be immediately due and payable. LESSEE's
effecting such compliance shall not in any way be deemed to constitute a waiver
of any default by LESSOR.
LESSOR SHALL IN NO EVENT BE LIABLE FOR ANY CONSEQUENTIAL, SPECIAL,
EXEMPLARY, PUNITIVE, INCIDENTAL OR INDIRECT DAMAGES, INCLUDING, WITHOUT
LIMITATION, LOSS OF GOODWILL, BUT SHALL BE LIABLE FOR ACTUAL AND DIRECT DAMAGES
SUSTAINED BY LESSEE.
Section (14) of the Agreement is hereby deleted and replaced with the
following (14)(a) and (b):
(14)(a) ASSIGNMENT BY LESSOR: LESSOR may from time to time assign all
or any part of its right, title and interest in this Agreement, including all
moneys and claims for moneys due and to become due hereunder, provided,
however, that the LESSEE shall be entitled to remain in possession of any
leased Vehicles under the terms of this Agreement until expiration of the lease
term, including renewal terms, as long as the LESSEE shall not be in default.
No such assignment by LESSOR shall relieve LESSOR of its obligations and
liabilities hereunder; provided, however, LESSOR shall not assign its interest
in the Agreement and title to the Vehicles unless the Assignee shall assume the
obligations and liabilities of LESSOR in writing under the Agreement.
(14)(b) ASSIGNMENT BY LESSEE: LESSEE may from time to time assign or
transfer its right, title and interest in this Agreement or the Vehicles to its
parent, subsidiary or affiliated corporation so long as LESSOR has determined
that such corporation has financial strength equal to or greater than the
LESSEE. LESSEE may sublease its right title and interest in the Agreement or
the Vehicles, provided, however, no such sublease shall relieve the LESSEE of
its obligations and liabilities under the Lease and LESSEE shall obtain
LESSOR's prior written consent which consent shall not unreasonably be withheld.
<PAGE> 16
Except as permitted above, LESSEE shall not otherwise assign or
transfer its right, title and interest in this Agreement or the Vehicles
without the written consent of LESSOR, which consent shall not unreasonably be
withheld.
The parties hereby agree to add the following Sections (23) and (24) to the
Agreement:
(23) NOTICES: All notices provided for herein will be sent certified
mail, return receipt requested, postage prepaid to the parties at the respective
addresses listed below or at such other address(es) as required by the parties
in writing.
(24) QUIET ENJOYMENT: LESSOR hereby warrants that it has full right,
title and interest in and to the Vehicles described herein and that LESSOR has
an unencumbered right to lease the Vehicles to LESSEE. LESSOR hereby covenants
and guarantees that, so long as LESSEE is not in default of its terms,
conditions and covenants of this Agreement, LESSEE shall be entitled to the
peaceful and quiet enjoyment of the Vehicles during the initial term and any
renewal terms.
GELCO CORPORATION D/B/A BURGER KING DISTRIBUTION SERVICES,
GE CAPITAL FLEET SERVICES a Division of BURGER KING CORPORATION
BY________________________ By_______________________________
Its_______________________ Its_______________________________
<PAGE> 1
EXHIBIT 10.32
MANAGEMENT ADVISORY AGREEMENT
Management Advisory Agreement (the "AGREEMENT"), dated as of July 1,
1992, between OMI Partnership Holdings Ltd., a corporation organized under the
laws of the province of Ontario, Canada ("OMI"), and ProSource Services
Corporation (f/k/a BKDA Corporation), a Delaware corporation ("PROSOURCE").
ProSource desires to memorialize the basis on which it engages OMI to
provide services to it and its affiliates (collectively, the "COMPANY"), on the
terms set forth herein.
The parties, intending to be legally bound, hereby agree as follows:
1. Services. ProSource hereby engages OMI to provide advisory services
to the Company in connection with:
(a) strategic planning;
(b) the identification of financing, acquisition and
divestiture opportunities and assistance with respect
to such matters; and
(c) other financial matters in which OMI has acquired
expertise, as OMI and the Board of Directors of
ProSource may from time to time agree.
2. Term. This Agreement shall commence on July 1, 1992 and continue
until terminated by a writing executed by both parties hereto.
3. Fees and Expenses.
(a) As compensation for OMI's advisory services rendered pursuant to
this Agreement, ProSource shall pay to OMI $750,000 per fiscal year, subject to
increase beginning in the 1993 fiscal year of ProSource by a percentage equal to
the year-over-year change in the most recently published Consumer Price Index
for all Urban Consumers, National Average, as published by the United States
Department of Labor. Fees shall be payable in advance in equal quarterly
installments on the first day of each fiscal quarter or at such other times as
the parties may agree. In addition, OMI shall be entitled to such additional
compensation for services rendered in connection with any specific transaction
as may be agreed upon with respect to such transaction by the parties hereto. In
the event that ProSource is prohibited from paying such fee under the terms of
the Loan and Security Agreement, dated as of June 30, 1992, among ProSource, the
financial institutions party thereto from time to time and NationsBank of
Georgia, N.A., as agent, any amendments, supplements or modifications thereto or
any refinancings thereof (the "Loan Agreement"), it shall not constitute a
default hereunder. In such case, such fee shall be due and payable on the first
date such fee is permitted to be paid under the Loan Agreement and shall accrue
interest at a rate equal to the average rate of interest on the Company's senior
debt.
(b) ProSource shall promptly reimburse OMI for all reasonable
out-of-pocket costs and expenses incurred thereby and by its representatives in
connection with the performance of its services hereunder.
<PAGE> 2
4. Indemnity. ProSource shall indemnify and hold harmless OMI and its
controlling persons, stockholders, partners, directors, officers, agents and
employees, to the full extent lawful, from and against any losses, claims,
damages or liabilities related to or arising out of this Agreement or OMI's role
in connection herewith, including related activities prior to the date hereof,
and shall promptly reimburse OMI and any other party entitled to be indemnified
hereunder for all reasonable out-of-pocket expenses (including counsel fees and
expenses) as incurred by OMI or any such party in connection with investigating,
preparing or defending any such claim, whether or not in connection with pending
or threatened litigation in which OMI or any other party entitled to be
indemnified hereunder is a party. ProSource will not, however, be responsible
for any claims, liabilities, losses, damages or expenses which are finally
judicially determined to have resulted primarily from OMI's wilful misconduct or
gross negligence. If such indemnification is for any reason not available, the
parties shall contribute to the losses, claims, damages and liabilities involved
in such proportion as it is appropriate to reflect the relative benefits
received (or anticipated to be received) by the parties from the actual and
proposed transactions giving rise to or contemplated by this Agreement as well
as other possible considerations such as the relative fault of the parties.
Under no circumstances shall OMI and the other parties entitled to be
indemnified hereunder be responsible for any amounts in excess of the amount of
any fees received by OMI. The foregoing agreement shall be in addition to any
rights that OMI or any indemnified party may have at common law or otherwise.
ProSource shall not, without OMI's prior consent, settle or compromise
any pending or threatened claim, action or suit in respect of which
indemnification or contribution may be sought hereunder unless the foregoing
contains an unconditional release of OMI and any other party entitled to be
indemnified hereunder from all liability and obligation arising therefrom. OMI
shall have no liability to ProSource arising out of or in connection with this
Agreement unless a loss results to ProSource that is finally judicially
determined to have resulted primarily from OMI's wilful misconduct or gross
negligence. ProSource hereby consents to personal jurisdiction, service and
venue in any court in which any claim which is subject to this Agreement is
brought against OMI or any other party entitled to be indemnified hereunder. Any
right to trial by jury with respect to any claim or action arising out of or
contemplated by this Section is hereby waived. The provisions of this Section
shall survive the expiration of this Agreement.
5. Notices. Any notice required or permitted to be given hereunder
shall be in writing and shall be deemed sufficient if (a) delivered in person,
(b) mailed by certified mail, (c) delivered by Federal Express or other
overnight courier or (d) sent by facsimile transmission, with a copy sent
simultaneously by the United States mail as follows:
2
<PAGE> 3
If to ProSource, to:
550 Biltmore Way, 10th Floor
Coral Gables, Florida 33134
Attention: David R. Parker
Chairman of the Board
Telecopier: (305) 378-7866
with a copy to:
Kaye, Scholer, Fierman, Hays & Handler, LLP
425 Park Avenue
New York, New York 10022
Attention: Joel I. Greenberg, Esq.
Telecopier: (212) 836-7149
If to OMI, to:
161 Bay Street
P.O. Box 700
Toronto, Ontario
M5J 2S1
Canada
Attention: Anthony R. Melman
Telecopier: (416) 943-4104
with a copy to:
Kaye, Scholer, Fierman, Hays & Handler, LLP
425 Park Avenue
New York, New York 10022
Attention: Joel I. Greenberg, Esq.
Telecopier: (212) 836-7149
Either party, by written notice to the other party hereto, may designate
additional or different addresses for subsequent notices or communications.
6. Permissible Activities. Nothing herein shall in any way preclude OMI
from engaging in any business activities or from performing services for its own
account or for the account of others.
3
<PAGE> 4
7. Amendments. This Agreement supersedes all prior agreements among the
parties with respect to its subject matter, is intended as a complete and
exclusive statement of the terms of the agreement among the parties with respect
thereto and cannot be changed or terminated orally. The failure of a party to
insist upon strict adherence to any term of this Agreement on any occasion shall
not be considered a waiver or deprive that party of the right thereafter to
insist upon strict adherence to that term or any other term of this Agreement. A
waiver by any party of any breach of this Agreement shall not operate or be
construed as a waiver of any subsequent breach. Any waiver must be in writing.
8. Miscellaneous. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and of their respective successors and permitted
assigns, including any corporation into which either of the parties shall
consolidate or merge or to which either of them shall transfer substantially all
of its assets. This Agreement may be assigned by OMI only, including, without
limitation, assignment to any affiliate of OMI. This Agreement shall be governed
by and construed in accordance with the laws of the province of Ontario, Canada
applicable to contracts made and to be performed entirely within such province.
9. Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which taken together shall constitute one and the same agreement. Delivery of
an executed counterpart of a signature page to this Agreement by telecopier
shall be effective as delivery of a manually executed signature page hereto.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
OMI PARTNERSHIP HOLDINGS LTD.
By: /s/ Ewout R. Heersink
--------------------------------
Name: Ewout R. Heersink
Title: Vice President
By: /s/ Anthony R. Melman
--------------------------------
Name: Anthony R. Melman
Title: Vice President
PROSOURCE SERVICES CORPORATION
By: \s\ Paul A. Garcia de Quevedo
--------------------------------
Name: Paul A. Garcia de Quevedo
Title: Vice President, Treasurer
and Secretary
5
<PAGE> 1
EXHIBIT 10.33
FORM OF TERMINATION AGREEMENT
Termination Agreement, dated as of _______ __, 1996, between
OMI Partnership Holdings Ltd., a corporation organized under the laws of the
province of Ontario, Canada ("OMI"), and ProSource Services Corporation (f/k/a
BKDA Corporation), a Delaware corporation ("ProSource").
WHEREAS, OMI and ProSource wish to terminate the Management
Advisory Agreement, dated as of July 1, 1992, between OMI and ProSource (the
"Management Advisory Agreement").
The parties, intending to be legally bound, hereby agree as
follows:
1. The Management Advisory Agreement is hereby
terminated.
2. In consideration for OMI's relinquishment of its
right to receive certain fees under the Management
Advisory Agreement, ProSource shall pay to OMI
$4,000,000 payable in Class B Common Stock, $0.01 par
value per share, of ProSource, Inc. valued at the
initial public offering price of the Class A Common
Stock, $0.01 par value per share, of ProSource, Inc.
3. This Termination Agreement shall be governed by and
construed in accordance with the laws of the province
of Ontario, Canada applicable to contracts under and
to be performed entirely within such province.
4. This Agreement may be executed in any number of
counterparts and by different parties hereto in
separate counterparts, each of which when so executed
and delivered shall be deemed to be an original and
all of which taken together shall constitute one and
the same agreement. Delivery of an executed
counterpart of a signature page to this Agreement by
telecopier shall be effective as delivery of a
manually executed signature page hereto.
IN WITNESS WHEREOF, the parties hereto have caused this
Termination Agreement to be duly executed by their respective officers as of the
date and year first written.
OMI PARTNERSHIP HOLDINGS LTD.
By:____________________________
Name:
Title:
PROSOURCE SERVICES CORPORATION
By:____________________________
Name:
Title:
