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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended December 27, 1997.
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the Transition Period From _______________ to
_______________.
Commission file number 0-21677
PROSOURCE, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0335019
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1500 San Remo Avenue
Coral Gables, Florida 33146
----------------------------------------
(Address of principal executive offices)
(305) 740-1000
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Class A Common
Stock, par value $0.01 per share.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part II of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on February 20, 1998 was approximately $42,079,251. The market value
calculation was determined using the closing sale price of the Registrant's
Class A Common Stock on February 20, 1998, as reported on the Nasdaq National
Market.
At February 20, 1998, the registrant had outstanding 3,526,835 shares of Class A
Common Stock and 5,856,756 shares of Class B Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Documents from which portions are incorporated by reference
Part IV Portions of the Registrant's Registration Statement on
Securities and Exchange Commission Form S-1 (registration
no. 333-11499) are incorporated by reference into Item 14.
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FORM 10-K
PROSOURCE, INC.
Part I
Item 1. Business.
ProSource, Inc. ("ProSource" or the "Company") provides foodservice
distribution services to chain restaurants in North America and provides
purchasing and logistics services to the foodservice market. 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 serves a variety of restaurants, including Burger King, Red Lobster,
Long John Silver's, Olive Garden, TGIFriday's, Chick-fil-A, Chili's, Sonic, TCBY
and Wendy's. ProSource is an indirect subsidiary of Onex Corporation (together
with its affiliates, "Onex"). See "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. Since the
acquisition, ProSource has, through a combination of acquisitions and internal
growth, become a leading distributor to chain restaurants, servicing
approximately 12,700 restaurants within 16 different restaurant chains as of
December 27, 1997. In March 1995, the Company acquired substantially all of the
assets and assumed certain liabilities of the National Accounts Division ("NAD")
of The Martin-Brower Company ("Martin-Brower"), which added a total of
approximately 8,000 restaurants within 11 chains included in the Company's
current customer base. The Company has also been successful in expanding through
internally generated sales. Since the Company's formation in 1992, net sales
have grown from $1.3 billion in 1993 (the first full year of operations) to $3.9
billion in 1997.
The Company was incorporated in 1992 as a Delaware corporation. Its
principal executive offices are located at 1500 San Remo Avenue, Coral Gables,
Florida 33146, and the Company's telephone number is (305) 740-1000. The Company
operates under the name "ProSource Distribution Services."
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 network of 34 distribution centers, its fleet of approximately 1,500
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
1997 net sales.
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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 (i.e. transportation of products
from the vendor to the distribution center), 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 1997, the Company managed approximately 38% 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 approximately 7,000 types of products for
its customers at its distribution centers. 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
implementing a new national network of distribution centers. Through this
"network optimization" program, which is expected to take up to 5 years to
complete, the Company intends to consolidate and integrate its existing
distribution network into a hub and spoke network utilizing approximately six
large regional distribution centers ("RDCs"), and nineteen local distribution
centers ("LDCs"). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." 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 by enabling the Company to fully service more customers from a
distribution center closer to the customer, and thereby reduce transportation
costs. In addition, the new network should provide the Company with additional
distribution center capacity for continued growth. 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.
Order Fulfillment. The Company places a significant emphasis on providing
a high service level in order fulfillment. For the year ended December 27, 1997,
the Company achieved order fill rates of 99.7% and on-time deliveries of 92.3%.
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
53% 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.
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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. Delivery routes are scheduled both to fully utilize the
trailer's load capacity and minimize the number of miles driven. The Company
transports approximately 2.1 million tons of product and its trucks travel
approximately 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 cart delivery system.
Fleet. The Company's fleet, as of December 27, 1997, consisted of
approximately 1,500 vehicles, including approximately 600 tractors and 900
trailers. The Company leases approximately 500 of the tractors from Penske Truck
Leasing, Co. L.P. 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 400 trailers from GE Capital Services. The
remainder are either Company-owned or leased from various other companies. Lease
terms average 4-6 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.
Management Information Systems. The Company currently has in place a
variety of information technology systems, including electronic ordering,
inventory management, financial and routing systems. In addition, in connection
with its "network optimization" program, the Company intends to put in place new
customer ordering and warehouse management systems. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Customers
The Company's customers as of December 27, 1997 consisted of 3,110
franchisees and 14 franchisor/owners of approximately 12,700 quick service and
casual dining chain restaurants representing 16 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 in 1997 were Burger King and Red Lobster,
representing 46% and 15% of 1997 net sales, respectively. The Company's largest
customer is Darden Restaurants, Inc. (owner of all Olive Garden and Red Lobster
restaurants), representing 21% of the Company's 1997 net sales. No other chain
or single customer accounted for more than 10% of the Company's net sales in
1997. In January 1997, the Company announced the termination, effective April 1,
1997, of its distribution agreement with ARCOP, the purchasing cooperative for
Arby's, which represented approximately 10% of the Company's net sales in 1996.
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 approximately 5% of 1997
net sales), (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
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exclusive distributor agreement, upon the bankruptcy of the Company. In addition
to the 520 BKC-owned restaurants, as of December 27, 1997, the Company also
serviced 4,554 Burger King restaurants owned by franchisees. In the aggregate,
this represents approximately 68% of all Burger King restaurants in the United
States. The Company has also entered into two distribution agreements with
Darden Restaurants, Inc. pursuant to which the Company is the primary
distributor to its restaurants, Olive Garden and Red Lobster, operating in the
United States and Canada. All Olive Garden and Red Lobster restaurants are
currently company-owned. Olive Garden and Red Lobster 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 2002. The Company believes that from time to time it may
not have been in strict compliance with all of the performance reliability
standards in these and other contracts. However, it is not aware of any issues
of non-compliance which could reasonably be expected to result in early
termination of material contracts.
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. 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 growing 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 which might benefit from the industry focus that
it, as a specialist in distribution to chain restaurants, 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.
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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.
The Company rigorously monitors customer service levels. 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.
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., U.S. Foodservice, Inc. (formerly JP
Foodservice, Inc.), Alliant Foodservice Inc. (formerly Kraft Distribution), MBM
Corp., AmeriServe Food Distribution, Inc. ("AmeriServe"), Marriott Distribution
Services Inc., Performance Food Group, and McLane Company, Inc. The Company also
competes with regional distributors, principally for business from
franchisee-owned Burger King restaurants. The Company believes 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. See "Merger Agreement."
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 since that time, there can be
no assurance that severe competitive pricing pressure will not recur in the
future.
Employees
As of December 27, 1997, the Company had approximately 3,400 full-time
employees, of whom approximately 340 were employed in corporate support
functions and approximately 3,060 were warehouse, driver and administrative
staff in the distribution centers. Approximately 560 of the Company's employees
were covered by 11 collective bargaining contracts with 7 local unions, all of
which are associated with the International Brotherhood of Teamsters. 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
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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.
Controlling Stockholder
The Company is controlled by Onex Corporation. Onex, 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. $8.9 billion for
1996 (Cdn. $8.1 billion for the 9 months ended September 30, 1997) and
consolidated assets of Cdn. $3.8 billion at December 31, 1996 (Cdn. $5.3 billion
at September 30, 1997). In addition to its interests in ProSource, as of
December 31, 1997, Onex had investments in a broad range of companies, including
Onex Food Services, Inc. (which does business through its subsidiaries, Sky
Chefs, Inc. and Caterair International Inc.), Celestica International Holdings
Inc., Dura Automotive Systems, Inc., Tower Automotive, Inc., Phoenix Pictures
Inc., Vencap, Inc. and Lantic Sugar Limited, its most recently acquired
subsidiary. None of Onex's current businesses competes with or is a customer of
the Company. Onex currently owns approximately 89% of the Company's outstanding
Class B common stock, $.01 par value per share (the "Class B Common Stock"), and
approximately 14% of the Company's outstanding Class A common stock, $.01 par
value per share (the "Class A Common Stock" and, collectively with the Class B
Common Stock, "Common Stock"), representing approximately 85% of the combined
voting power of the outstanding Common Stock. See "Security Ownership of Certain
Beneficial Owners and Management."
Merger Agreement
On January 29, 1998, the Company signed a definitive merger agreement with
AmeriServe. Under the terms of the agreement, AmeriServe has agreed to pay
$15.00 in cash for each outstanding share of the Company's common stock. In
addition, under the agreement, all outstanding options will be accelerated and
option holders will receive $15.00 less the applicable exercise for each share
issuable upon exercise of the options. The merger is subject to regulatory
approvals and other customary conditions to closing. Onex Corporation and
certain of its affiliates have committed to vote in favor of the merger, which
will assure the necessary stockholder approval. The merger is expected to close
in the second quarter of fiscal 1998.
Upon consummation of the merger, the Company will become a wholly-owned
subsidiary of AmeriServe. AmeriServe has advised the Company that following the
consummation of the Merger, it anticipates that it will cause the Surviving
Corporation to seek to have the Class A Common Stock, which is currently traded
on the Nasdaq National Market, delisted. In addition, following the consummation
of the Merger, the Class A Common Stock will be eligible for deregistration
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
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Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of Section 21E of the Exchange Act that involve
risks and uncertainties. Such forward looking statements include, among other
things, statements regarding sources of growth and plans and objectives of
management for future operations (including those concerning the Company's new
distribution center network and new information systems and upgrades), the
potential impact of pending litigation and anticipated capital expenditures and
working capital needs. Actual outcomes may be affected by economic trends
impacting its customers and the restaurant industry, in general. Also, the
Company is in a highly competitive business, is in the process of integrating
its operations, and is implementing a strategic plan intended to expand its
business through acquisitions and internal growth and improve its cost
structure. There can be no assurance that in its highly competitive business
environment, the Company will achieve the planned efficiencies and cost savings,
successfully acquire other distributors, or increase its business with new or
existing customers.
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Item 2. Properties.
The Company leases its principal executive office and corporate support
center which is located in Coral Gables, Florida. The facility consists of
approximately 83,000 square feet. The Company operates 34 distribution centers
and 5 remote locations, of which 25 facilities (representing an aggregate of
approximately 1,574,176 square feet) are leased and 14 facilities (representing
an aggregate of approximately 794,238 square feet) are owned by the Company.
The following table sets forth certain information with respect to the
Company's operating distribution centers:
<TABLE>
<CAPTION>
Approximate
Location Square Feet
- -------- -----------
<S> <C>
Atlanta, Georgia (1) 217,670
Burlington, New Jersey 60,880
Chester, New York 127,100
Chicago, Illinois 91,021
Cleveland, Ohio 40,540
Columbus, Ohio 174,000
Dallas, Texas (1)(3) 165,423
Denver, Colorado 92,145
Detroit, Michigan 34,897
Greensboro, North Carolina 41,000
Gridley, Illinois 146,100
Humbolt, Tennessee 35,000
Houston, Texas (1) 74,900
Kansas City, Kansas (1)(4) 175,642
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 (5) 63,000
Orlando, Florida 143,200
Oxford, Massachusetts 40,000
Phoenix, Arizona 38,200
Portland, Oregon 70,400
San Jose, California 31,500
Trenton, Ontario 20,000
Virginia Beach, Virginia 23,045
Washington, DC (6) 83,000
---------
Total: 2,368,414
=========
</TABLE>
- ----------
(1) Two facilities.
(2) Three facilities.
(3) Includes approximately 28,223 square feet of supplemental space in two
remote facilities.
(4) Includes approximately 26,172 square feet of supplemental space in a
remote facility.
(5) Includes approximately 11,000 square feet of supplemental space in a
remote facility.
(6) Includes approximately 30,000 square feet of supplemental space in a
remote facility.
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Item 3. Legal Proceedings.
The Company and its subsidiaries are parties to various legal actions
arising in the ordinary course of business. Management believes that the outcome
of such cases will not have a material adverse effect on the consolidated
results of operations or the financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the stockholders during the fourth
quarter ended December 27, 1997.
Part II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
The Company's Class A Common Stock began trading on the Nasdaq National
Market under the symbol "PSDS" on November 12, 1996. The table below sets forth
the high and low sales prices per share for the Company's Class A Common Stock
as reported on the Nasdaq National Market for each fiscal quarter subsequent to
the commencement of trading.
<TABLE>
<CAPTION>
High Low
---- ---
Fiscal Year Ended December 28, 1996
- -----------------------------------
<S> <C> <C>
Fourth Quarter
(from November 12, 1996)...................................... 14 1/8 9 3/4
Fiscal Year Ended December 27, 1997
- -----------------------------------
First Quarter................................................. 14 1/8 10 1/2
Second Quarter................................................ 13 3/8 6 1/4
Third Quarter ................................................ 9 1/8 6 3/4
Fourth Quarter ............................................... 9 3/4 6
</TABLE>
As of February 20, 1998, the closing price for the Company's Class A
Common Stock on the Nasdaq National Market was $14.25, and the approximate
number of record owners of the Company's Class A Common Stock and Class B Common
Stock was 36 and 62, respectively. At such date, the Company had approximately
1,200 beneficial owners of its Class A Common Stock and Class B Common Stock, in
the aggregate.
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 agreements prohibit it from
paying dividends to its stockholders without the approval of the lending group.
Holders of Class A Common Stock and Class B Common Stock share ratably in any
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dividend declared by the Board of Directors, subject to the preferential rights
of any outstanding Preferred Stock.
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 vote together on all
matters submitted to a vote of stockholders, including the election of
directors. 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.
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Item 6. Selected Consolidated Financial Data.
(in millions, except per share and certain other data)
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------------------------------------
December 27, December 28, December 30, December 31, December 25,
1997 1996 1995(a) 1994(b) 1993(c)
--------------------------------------------------------------------
(52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 3,901.2 $ 4,125.0 $ 3,461.8 $ 1,598.1 $ 1,329.3
Cost of sales 3,591.4 3,806.8 3,193.3 1,464.5 1,210.9
--------------------------------------------------------------------
Gross profit 309.8 318.2 268.5 133.6 118.4
Operating expenses 302.1 301.3 255.2 131.0 114.2
Loss on impairment of long-live assets -- 15.7 -- -- --
Restructuring and contract-termination charges -- 28.5 0.7 -- --
--------------------------------------------------------------------
Income (loss) from operations 7.7 (27.3) 12.6 2.6 4.2
Interest expense, net 9.2 13.1 13.3 6.6 5.5
--------------------------------------------------------------------
Loss before income taxes, extraordinary items and
cumulative effect of a change in accounting
principle (1.5) (40.4) (0.7) (4.0) (1.3)
Income tax benefit (provision) 0.5 15.4 (0.1) 1.6 0.5
--------------------------------------------------------------------
Loss before extraordinary items and cumulative effect
of a change in accounting principle (1.0) (25.0) (0.8) (2.4) (0.8)
Extraordinary (loss) gain, net (6.3) 0.6 (0.8) -- --
Cumulative effect of a change in accounting principle,
net (6.4) -- -- -- --
--------------------------------------------------------------------
Net loss $ (13.7) $ (24.4) $ (1.6) $ (2.4) $ (0.8)
====================================================================
Net loss per common share (basic and diluted):
Loss before extraordinary items and cumulative effect
of a change in accounting principle $ (0.11) $ (4.30) $ (0.18) $ (0.99) $ (0.35)
Extraordinary items, net (0.67) 0.10 (0.17) -- --
Cumulative effect of a change in accounting principle,
net (0.69) -- -- -- --
--------------------------------------------------------------------
Net loss per common share $ (1.47) $ (4.20) $ (0.35) $ (0.99) $ (0.35)
====================================================================
Average outstanding shares used in calculation (in
thousands) 9,332 5,804 4,490 2,402 2,397
====================================================================
Balance Sheet Data (at end of period):
Working capital $ 106.0 $ 85.5 $ 115.9 $ 41.6 $ 42.7
Total assets 548.1 503.7 487.3 216.9 199.6
Total debt 174.2 112.6 162.7 65.1 68.5
Stockholders' equity 64.4 78.5 49.4 22.5 25.3
Other Data:
Net asset turnover 16.4x 20.1x 18.3x 16.5x 13.6x
Depreciation and amortization $ 11.2 $ 10.9 $ 12.7 $ 8.0 $ 7.9
Capital expenditures $ 30.0 $ 20.0 $ 5.7 $ 1.4 $ 3.5
Number of restaurants served (at end of period) 12,715 14,641 14,562 6,752 5,113
</TABLE>
- ----------
(a) Includes the effects of the acquisition of substantially all of the assets
and the assumption of certain liabilities of NAD on March 31, 1995.
(b) Includes the effects of the acquisition of certain assets and the
assumption of certain liabilities of Malone Products, Inc. on October 31,
1994.
(c) Includes the effects of the acquisition of certain operating assets of
McCabe's Quality Foods, California, Inc. on February 27, 1993 and the
effects of the acquisition of certain assets and the assumption of certain
liabilities of Valley Food Services, Inc. on March 27, 1993.
(d) The per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share". For further discussion of this and the impact of Statement No.
128, see the notes to the consolidated financial statements.
(e) Certain amounts presented above for prior years have been reclassified to
conform to the current year's presentation.
13
<PAGE> 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In the following comparisons of the results of operations, the fiscal
years ended December 27, 1997, December 28, 1996 and December 30, 1995 are
referred to as 1997, 1996 and 1995, respectively. The Company's fiscal year ends
on the last Saturday in December. Consequently, the Company will periodically
have a 53 week fiscal year. 1997, 1996 and 1995 each consisted of 52 weeks.
Results of Operations
The following sets forth, for the periods indicated, the components of the
Company's consolidated statements of operations expressed as percentage of net
sales:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales 100.00% 100.00% 100.00%
Cost of sales 92.06 92.29 92.24
----------------------------------------
Gross profit 7.94 7.71 7.76
Operating expenses 7.74 7.30 7.37
Loss on impairment of long-lived assets -- 0.38 --
Restructuring and contract-termination charges -- 0.69 0.02
----------------------------------------
Income (loss) from operations 0.20 (0.66) 0.37
Interest expense, net (0.24) (0.32) (0.39)
----------------------------------------
Loss before income taxes, extraordinary items and
cumulative effect of a change in accounting principle (0.04) (0.98) (0.02)
Income tax benefit 0.01 0.37 --
----------------------------------------
Loss before extraordinary items and cumulative effect
of a change in accounting principle (0.03) (0.61) (0.02)
Extraordinary (loss) gain, net (0.16) 0.01 (0.02)
Cumulative effect of a change in accounting principle, net (0.16) -- --
----------------------------------------
Net loss (0.35)% (0.60)% (0.04)%
========================================
</TABLE>
Year Ended December 27, 1997 Compared to Year Ended December 28, 1996
Net sales declined 5.4% to $3,901.2 million in 1997 from $4,125.0 million
in 1996. The decrease is primarily attributed to the Company's decision to
terminate its distribution contract with ARCOP, the purchasing cooperative for
Arby's, effective April 1, 1997. In 1996, sales to company-owned and franchisee-
owned Arby's restaurants accounted for approximately 10% of the Company's sales.
The Company was able to partially mitigate the effect this had on 1997's
operations by increasing its sales to its current customer base. This was
accomplished by two methods: (1) increasing its sales to existing restaurants
and (2) increasing the number of restaurants served (primarily franchisee-owned
Burger King restaurants).
Gross profit decreased by 2.7% to $309.8 million in 1997 from $318.2
million in 1996. The gross profit percentage increased slightly to 7.9% in 1997
from 7.7% in 1996 as a result of the Company's efforts to increase its
value-added services and a change in sales mix.
Operating expenses increased slightly by 0.3% to $302.1 million in 1997
from $301.3 million in 1996. As a percentage of net sales, operating expenses
increased to 7.7% in 1997 from 7.3% in 1996 due primarily to the impact that
certain fixed costs have on a lower sales volume. The Company has also incurred
14
<PAGE> 15
higher expenses in the fourth quarter of 1997 due to the start-up of new
distribution centers as part of its new network program.
The Company generated income from operations totaling $7.7 million in 1997
compared to a loss from operations of $27.3 million in 1996. The 1996 loss from
operations was caused by restructuring charges of $10.9 million,
contract-termination charges of $17.6 million, and a loss on impairment of
long-lived assets of $15.7 million. Excluding these non-recurring items, the
Company generated income from operations of $16.9 million in 1996. The 1997
operating income was negatively affected by the reduction in gross profit caused
by the lower sales volume and the start-up costs incurred in the fourth quarter,
discussed previously.
Net interest expense decreased 30.0% to $9.2 million in 1997 from $13.1
million in 1996. This is due to the prepayment of indebtedness in November 1996
with the proceeds of the Company's initial public offering as well as a lower
effective interest rate on the Company's new credit facilities, which closed in
March 1997.
The Company recognized an income tax benefit in 1997 of $0.5 million
compared to $15.4 million in 1996 as a result of a lower pre-tax loss in 1997.
The effective income tax rates for 1997 and 1996 were 32.9% and 38.2%,
respectively. The decreased 1997 effective tax rate is due to an increase in
permanent tax differences, relative to taxable loss, which resulted in a lower
recorded tax benefit.
The Company recognized an extraordinary loss of $10.3 million ($6.3
million net of taxes) in 1997 associated with the early retirement of its
previous credit facility in March 1997. This charge includes the write-off of
deferred financing costs ($6.3 million), prepayment penalties ($2.7 million) and
costs associated with the termination of interest-rate protection agreements
($1.3 million). In 1996, the Company recognized an extraordinary gain of $0.6
million, net of taxes, due to the pay-off of subordinated debt with the proceeds
from the Company's initial public offering.
During the fourth quarter of 1997, the Financial Accounting Standards
Board's Emerging Issues Task Force reached a consensus on Issue No. 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project that Combines Business Process Reengineering and Information
Technology Transformation." The consensus requires that the cost of business
process reengineering activities, whether done internally or by third parties,
is to be expensed as incurred. As a result, any remaining unamortized portion of
previously capitalized business process reengineering costs is required to be
written off. The cumulative impact of initially conforming to this new standard
in the fourth quarter of 1997 was reported as a change in accounting principle,
resulting in a charge of $9.7 million ($6.4 million net of taxes).
Year Ended December 28, 1996 Compared to Year Ended December 30, 1995
Net sales increased 19.2% to $4,125.0 million in 1996 from $3,461.8
million in 1995. The increase in net sales is primarily attributable to the
acquisition of NAD on March 31, 1995. Net sales, excluding the effect of the NAD
acquisition, increased to $1,916.1 million in 1996 from $1,791.2 million in
1995, a $124.9 million or 7.0% increase when compared to 1995. This 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.
Gross profit increased 18.5% to $318.2 million in 1996 compared to $268.5
million in 1995 primarily due to the increase in net sales. The gross profit
percentage decreased to 7.7% in 1996 from 7.8% in 1995
15
<PAGE> 16
due primarily to the inclusion for the entire year in 1996 of NAD sales which
have a higher product cost than other Company sales.
Operating expenses increased 18.1% to $301.3 million in 1996 from $255.2
million in 1995 primarily due to the increase in net sales. As a percentage of
net sales, operating expenses declined to 7.3% in 1996 from 7.4% in 1995 due
primarily to the impact of the higher product cost per unit sold by NAD.
Losses from operations in 1996 were $27.3 million (as compared to earnings
from operations of $12.6 million in 1995), as a result of restructuring charges
of $10.9 million, contract-termination charges of $17.6 million, and a loss on
impairment in value of long-lived assets of $15.7 million. The restructuring
charges and impairment losses are related to a plan to consolidate and integrate
the Company's corporate and network operations. Of the restructuring charges,
approximately $7.9 million related 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 contract-termination charges consist of $10.6 million of costs associated
with terminating the distribution agreement with ARCOP, the purchasing
cooperative for Arby's, and $7.0 million in costs associated with the
termination of various agreements in connection with the Company's initial
public offering in November 1996. 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 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 and contract
termination charges and impairment losses were $16.9 million in 1996 compared to
$13.3 million in 1995.
Net interest expense decreased to $13.1 million in 1996 from $13.3 million
in 1995. Net interest expense as a percentage of net sales decreased 17.9% from
0.39% to 0.32% as a result of lower interest rates and improved net asset
turnover.
The income tax benefit in 1996 was $15.4 million compared to an income tax
provision of $0.1 million in 1995. The change in the tax benefit was
attributable to the Company's greater pre-tax loss in 1996. The 1995 provision
resulted from a pre-tax loss which, due to permanent differences arising from
the NAD acquisition, translated into a relatively small amount of taxable
income.
The extraordinary items in both 1996 and 1995 relate to the early
retirement of debt. In 1996, the pay-off of subordinated debt with the proceeds
from the initial public offering resulted in a gain of $0.6 million, net of the
related tax provision of $0.4 million. In 1995, the debt refinancing associated
with the NAD acquisition resulted in the write-off of unamortized deferred debt
issuance costs of $0.8 million, net of the related tax benefit of $0.5 million.
Liquidity and Capital Resources
The Company meets its liquidity needs through cash provided by operations,
normal vendor trade-credit terms, operating leases and borrowings under its
credit facilities. Excluding $18.8 million of non-recurring payments for
acquisition, contract termination and restructure related items, the Company
generated net cash of $0.4 million from operating activities in 1997. The
Company generated net cash from operating activities of $21.3 million and $50.0
million in 1996 and 1995, respectively. The significant cash flow in 1995 was
attributable to the one-time benefit of acquiring assets without assuming
certain corresponding
16
<PAGE> 17
liabilities in connection with the acquisition of NAD. Cash flow in 1997 was
negatively impacted primarily by an increase in inventory.
Cash used for capital expenditures was $30.0 million in 1997, primarily
for computer system upgrades ($13.3 million) and distribution facilities and
equipment ($8.7 million). In 1996, the Company used $20.0 million for capital
expenditures, primarily for the Company's cart delivery program ($6.6 million)
and computer system upgrades ($9.5 million). 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). The Company anticipates capital
expenditures of approximately $19.0 million in 1998 (consisting primarily of
$9.6 million for computer system upgrades and $7.4 million for distribution
facilities and equipment); however, there can be no assurance that capital
expenditures will not exceed such amount.
On November 15, 1996 the Company completed an initial public offering of
3,400,000 shares of its Class A Common Stock. The net proceeds of the offering
of $43.2 million were used primarily to prepay $25.3 million in outstanding
indebtedness under subordinated notes payable and repay $16.6 million of
outstanding indebtedness under the Company's previous credit facility. The
reduction of outstanding indebtedness with the proceeds resulted in a reduction
of interest expense in 1997.
In March 1997, the Company entered into five-year loan agreements
aggregating $225 million with a group of financial institutions to replace its
previous credit facility. The agreements, which consist of a $150 million
accounts receivable securitization facility and a $75 million revolving-credit
facility, bear interest based on either the prime rate or LIBOR plus an
additional spread based on certain financial ratios and mature on March 14,
2002. The effective rate at December 27, 1997 was 7.34%. The Company is required
to comply with various covenants and borrowings are subject to calculations
based on accounts receivable and inventory. These agreements are secured by
liens on substantially all of the Company's assets and contain various
restrictions on, among other things, the Company's ability to pay dividends and
dispose of assets. ProSource Receivables Corporation ("PRC"), a subsidiary of
ProSource Services Corporation, the Company's principal operating subsidiary
("PSC"), is the legal borrower for the accounts receivable securitization
facility. Pursuant to the terms of the accounts receivable securitization
facility PSC sells, on an ongoing basis and without recourse, an undivided
interest in a designated pool of trade accounts receivable to PRC. In order to
maintain the designated balance in the pool of accounts receivable sold, PSC is
obligated to sell undivided interests in new receivables as existing receivables
are collected. PSC has retained substantially the same credit risk as if the
receivables had not been sold. PSC, as agent for PRC, retains collection and
administrative responsibilities on the receivables sold to PRC. The creditors
for this facility have security interests in PRC's assets (consisting primarily
of accounts receivable purchased from PSC) and are entitled to be satisfied by
such assets prior to equity holders.
The Company borrowed an additional $61.6 million in 1997 under its credit
facilities to fund its operating, investing and other financing activities and
increase its cash and cash equivalents by $9.7 million. The Company paid
approximately $4.6 million in 1997 for fees associated with the early
extinguishment of its previous credit facility and for deferred loan fees on its
new credit facilities, which closed in March 1997. Approximately $0.6 million
was paid in 1997 to acquire and retire treasury stock.
The Company believes that the combination of cash flow generated from
operations and borrowings under the existing credit facilities are sufficient to
satisfy its anticipated capital expenditures and working capital needs for at
least twelve 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.
17
<PAGE> 18
The Company is a holding company with no independent operations or assets
other than an investment in its operating subsidiaries and, as such, is
dependent on its operating subsidiaries to obtain cash flow. The Company's
credit agreements include 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.
Impact of Fluctuation in Product Cost and Inflation
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
(which constituted the substantial portion of restaurants served by NAD),
particularly those which serve seafood, have a higher average product cost per
unit of measure than quick service chain restaurants, 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.
Information Systems and the Impact of the Year 2000
Since 1995, the Company has been actively engaged in a program to replace
and/or upgrade its significant transaction processing systems. This effort was
initiated to effect the integration of acquired businesses. As a result of this
program, the Company believes that it will be Year 2000 compliant on all of its
significant applications by the end of 1998. In addition, the Company at this
time does not believe that the cost of Year 2000 remediation for its transaction
processing systems will have a material financial impact on the Company's
financial operations over the next two years. The Company has engaged a firm to
conduct an outside review to ensure the Company's entire enterprise compliance
readiness. Until this review is complete, however, there can be no assurance
that significant efforts will not be required to ensure Year 2000 compliance,
including with respect to its customer and vendor relationships. See "Liquidity
and Capital Resources."
18
<PAGE> 19
Quarterly Results and Seasonality
Set forth is summary information with respect to the Company's operations
for the most recent eight fiscal quarters. Historically, the restaurant and
foodservice business is seasonal with lower sales in the first calendar quarter.
Furthermore, the Company may experience quarterly fluctuations in net sales
depending on the timing of any acquisitions or lost accounts. 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
or lost business.
The 1996 and first three quarters of 1997 income (loss) per share amounts
have been restated to comply with Statement of Financial Accounting Standards
No. 128, "Earnings Per Share". For further discussion of this and the impact of
Statement No. 128, see the notes to the consolidated financial statements.
<TABLE>
<CAPTION>
Fiscal Year Ended 1997
-----------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter (a) Quarter Quarter
-----------------------------------------------
(In millions, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 1,017.0 $ 970.8 $ 945.8 $ 967.6
Gross profit 80.6 76.2 77.3 75.7
Income (loss) from operations 2.5 2.6 4.3 (1.7)
Income (loss) before extraordinary item and
cumulative effect of a change in
accounting principle 0.2 0.1 0.7 (2.0)
Net income (loss) (6.1) 0.1 0.7 (8.4)
Net income (loss) per common share - basic
and diluted (0.64) 0.01 0.08 (0.9)
<CAPTION>
Fiscal Year Ended 1997
----------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter (a) Quarter Quarter
----------------------------------------------
(In millions, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 968.7 $ 1,045.4 $ 1,053.5 $ 1,057.4
Gross profit 73.2 81.9 80.8 82.3
Income (loss) from operations (26.9) 5.6 5.8 (11.8)
Income (loss) before extraordinary item (19.2) 1.2 1.4 (8.4)
Net income (loss) (19.2) 1.2 1.4 (7.8)
Net income (loss) per common share - basic (3.61) 0.23 0.26 (1.07)
Net income (loss) per common share -
diluted (3.61) 0.23 0.25 (1.07)
</TABLE>
- -----------------
(a) Includes the effects resulting from the Company's decision to terminate
its distribution contract with ARCOP, the purchasing cooperative for
Arby's, effective April 1, 1997.
19
<PAGE> 20
Item 8. Financial Statements and Supplementary Data.
PROSOURCE, INC.
Index to Consolidated Financial Statements
Independent Auditors' Report............................................... 21
Audited Consolidated Financial Statements:
Consolidated Balance Sheets............................................... 22
Consolidated Statements of Operations..................................... 23
Consolidated Statements of Stockholders' Equity........................... 24
Consolidated Statements of Cash Flows..................................... 25
Notes to Consolidated Financial Statements................................ 26
20
<PAGE> 21
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 27, 1997 and December 28, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 27, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ProSource, Inc. and
subsidiaries as of December 27, 1997 and December 28, 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 27, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 13 to the consolidated financial statements, the Company
changed its method of capitalization of business process reengineering
activities in the fourth quarter of 1997.
KPMG PEAT MARWICK LLP
/s/ KPMG PEAT MARWICK LLP
Miami, Florida
February 20, 1998
21
<PAGE> 22
PROSOURCE, INC.
Consolidated Balance Sheets
December 27, 1997 and December 28, 1996
(In thousands, except share and per-share data)
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,501 $ 2,763
Accounts receivable, net of allowance
for doubtful accounts of
$4,085 and $2,334 respectively 222,247 219,340
Inventories 160,621 144,040
Deferred income taxes, net 7,190 10,914
Prepaid expenses and other current assets 8,434 7,373
--------- ---------
Total current assets 410,993 384,430
Property and equipment, net 59,961 49,637
Intangible assets, net 39,883 41,436
Deferred income taxes, net 28,802 16,100
Other assets 8,462 12,121
--------- ---------
Total assets $ 548,101 $ 503,724
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 277,953 $ 254,907
Accrued liabilities 27,012 42,475
Current portion of long-term debt -- 1,500
--------- ---------
Total current liabilities 304,965 298,882
Long-term debt, less current portion 174,200 111,084
Other noncurrent liabilities 4,521 15,243
--------- ---------
Total liabilities 483,686 425,209
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value
Authorized 10,000,000 shares: none
issued -- --
Class A common stock, $.01 par value
Authorized 50,000,000 shares; issued
and outstanding 3,496,499 shares and
3,400,000 shares, respectively 35 34
Class B common stock, $.01 par value
Authorized 10,000,000 shares; issued
and outstanding 5,856,756 shares and
5,963,856 shares, respectively 58 60
Additional paid-in capital 104,934 105,256
Accumulated deficit (40,580) (26,901)
Accumulated foreign-currency translation
adjustments (32) 66
--------- ---------
Total stockholders' equity 64,415 78,515
--------- ---------
Total liabilities and stockholders' equity $ 548,101 $ 503,724
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
PROSOURCE, INC.
Consolidated Statements of Operations
Years ended December 27, 1997,
December 28, 1996 and December 30, 1995
(In thousands, except share and per-share data)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $ 3,901,165 $ 4,125,054 $ 3,461,837
Cost of sales 3,591,368 3,806,811 3,193,270
----------- ----------- -----------
Gross profit 309,797 318,243 268,567
Operating expenses, including management fees to Onex of
$0, $729 and $808, respectively 302,080 301,295 255,216
Loss on impairment of long-lived assets -- 15,733 --
Restructuring and contract-termination charges -- 28,466 711
----------- ----------- -----------
Income (loss) from operations 7,717 (27,251) 12,640
Interest expense, including interest to Onex of $0, $1,888
and $1,738, respectively (11,745) (14,824) (14,678)
Interest income 2,552 1,694 1,339
----------- ----------- -----------
Loss before income taxes, extraordinary items and
cumulative effect of a change in accounting
principle (1,476) (40,381) (699)
Income tax benefit (provision) 485 15,410 (85)
----------- ----------- -----------
Loss before extraordinary items and cumulative
effect of a change in accounting principle (991) (24,971) (784)
Extraordinary (loss) gain on early retirement of debt, net of
income tax benefit (provision) of $4,073, $(397) and $502,
respectively (6,262) 610 (772)
Cumulative effect of a change in accounting principle, net
of income tax benefit of $3,293 (6,426) -- --
----------- ----------- -----------
Net loss $ (13,679) $ (24,361) $ (1,556)
=========== =========== ===========
Net loss per common share (basic and diluted):
Loss before extraordinary items and cumulative
effect of a change in accounting principle $ (0.11) $ (4.30) $ (0.18)
Extraordinary items, net (0.67) 0.10 (0.17)
Cumulative effect of a change in accounting principle, net (0.69) -- --
----------- ----------- -----------
Net loss per common share $ (1.47) $ (4.20) $ (0.35)
=========== =========== ===========
Weighted average number of shares 9,331,845 5,804,319 4,489,906
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
PROSOURCE, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 27, 1997,
December 28, 1996 and December 30, 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
foreign-
Additional currency
Common Stock paid-in Accumulated translation
Class A Class B capital deficit adjustments Total
------- ------- ------- ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 25, 1994 $ -- $ 23 $ 23,504 $ (984) $ -- $ 22,543
Issuance of 2,858,500 Class B shares -- 29 28,556 -- -- 28,585
Acquisition and retirement of 23,000 Class B shares -- -- (222) -- -- (222)
Net loss -- -- -- (1,556) -- (1,556)
Foreign-currency translation adjustments -- -- -- -- 71 71
--------- --------- --------- --------- --------- ---------
Balance, December 30, 1995 -- 52 51,838 (2,540) 71 49,421
Issuance of 3,400,000 Class A shares, net 34 -- 43,193 -- -- 43,227
Amendment to 1995 Option Plan -- -- 1,224 -- -- 1,224
Issuance of 285,714 Class B shares to Onex -- 3 3,997 -- -- 4,000
Conversion of subordinated notes payable to Onex
into 459,242 Class B shares -- 5 4,594 -- -- 4,599
Issuance of 61,500 Class B shares -- -- 615 -- -- 615
Acquisition and retirement of 20,000 Class B shares -- -- (205) -- -- (205)
Net loss -- -- -- (24,361) -- (24,361)
Foreign-currency translation adjustments -- -- -- -- (5) (5)
--------- --------- --------- --------- --------- ---------
Balance, December 28, 1996 34 60 105,256 (26,901) 66 78,515
Issuance of 33,799 Class A shares under the Employee
Stock Purchase Plan -- -- 204 -- -- 204
Acquisition and retirement of 44,400 Class B shares -- (1) (554) -- -- (555)
Conversion of 62,700 Class B shares into 62,700 Class A
shares 1 (1) -- -- -- --
Compensation expense accrued under the 1997
Directors Stock Option Plan -- -- 28 -- -- 28
Net loss -- -- -- (13,679) -- (13,679)
Foreign-currency translation adjustments -- -- -- -- (98) (98)
--------- --------- --------- --------- --------- ---------
Balance, December 27, 1997 $ 35 $ 58 $ 104,934 $ (40,580) $ (32) $ 64,415
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
PROSOURCE, INC.
Consolidated Statements of Cash Flows
Years ended December 27, 1997,
December 28, 1996 and December 30, 1995
(In thousands, except share and per-share data)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (13,679) $ (24,361) $ (1,556)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 11,231 10,937 12,693
Bad debt expense 2,275 1,682 1,845
Loss (gain) on early retirement of debt 10,335 (1,007) 1,274
Cumulative effect of a change in accounting principle 9,719 -- --
Deferred income tax benefit (8,978) (14,085) (1,749)
Loss on impairment of long-lived assets -- 15,733 --
Noncash contract-termination charges -- 5,224 --
Gain on sales of property and equipment (655) (154) (184)
Changes in operating assets and liabilities, net of effects of
companies acquired
(Increase) decrease in accounts receivable (5,182) 9,067 (13,441)
(Increase) decrease in inventories (16,581) (3,608) 7,706
Increase in prepaid expenses and other assets (3,949) (13,854) (1,208)
Increase in accounts payable 23,046 12,262 43,518
(Decrease) increase in accrued and other noncurrent liabilities (25,952) 23,450 1,099
--------- --------- ---------
Net cash (used in) provided by operating activities (18,370) 21,286 49,997
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (29,997) (19,987) (5,683)
Proceeds from sales of property and equipment 1,786 154 362
Payment for purchase of net assets acquired -- -- (170,279)
--------- --------- ---------
Net cash used in investing activities (28,211) (19,833) (175,600)
--------- --------- ---------
Cash flows from financing activities:
Repayments of long-term debt to Onex -- (15,000) (2,085)
Repayments of long-term debt to others (112,584) (30,269) (78,938)
Borrowings on long-term debt from Onex -- -- 18,750
Borrowings on long-term debt from others, net 174,200 -- 160,616
Fees incurred in conjunction with long-term debt (4,644) -- --
Proceeds from issuance of common stock to Onex -- 7,000 26,500
Proceeds from issuance of common stock to others -- 37,464 2,085
Payments to acquire and retire treasury stock (555) (205) (222)
--------- --------- ---------
Net cash provided by (used in) financing activities 56,417 (1,010) 126,706
--------- --------- ---------
Effect of exchange-rate changes on cash (98) (5) 71
--------- --------- ---------
Net increase in cash and cash equivalents 9,738 438 1,174
--------- --------- ---------
Cash and cash equivalents at beginning of year 2,763 2,325 1,151
--------- --------- ---------
Cash and cash equivalents at end of year $ 12,501 $ 2,763 $ 2,325
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest to Onex $-- $ 2,927 $ 41
========= ========= =========
Interest to others $ 10,938 $ 16,435 $ 12,291
========= ========= =========
Income taxes, net of refunds $-- $-- $ 993
========= ========= =========
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities:
In October 1997, the Company issued 33,799 Class A common shares to employees
under the 1997 Employee Stock Purchase Plan at $6.035 per share in exchange for
accrued compensation totaling $204.
During 1997, the Company recognized $28 of compensation expense associated with
the 1997 Directors Stock Option Plan.
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
PROSOURCE, INC.
Notes to Consolidated Financial Statements Years Ended
December 27, 1997, December 28, 1996 and December 30, 1995
(1) Summary of Significant Accounting Policies
(a) The Business
ProSource, Inc. (the "Company") provides foodservice distribution
services to chain restaurants in North America and provides
purchasing and logistics services to the foodservice market. The
Company's 3,400 associates serve approximately 12,700 restaurants,
consisting primarily of Burger King, Red Lobster, Long John
Silver's, Olive Garden, TGIFriday's, Chick-fil-A, Chili's, Sonic,
TCBY and Wendy's restaurant concepts, from 34 distribution centers
and its Corporate Support Center in Coral Gables, Florida.
The Company operates through ProSource Services Corporation ("PSC"),
a wholly owned subsidiary, and PSC's four main wholly-owned
operating subsidiaries, ProSource Distribution Services Limited
("ProSource Canada"), BroMar Services, Inc. ("BroMar"), ProSource
Receivables Corporation ("PRC"), and PSD Transportation Services,
Inc. ("PSD"). PSC commenced operations in July 1992. PRC and PSD
commenced operations during fiscal 1997. The consolidated financial
statements include the results of the operations of PSC, PRC and PSD
from their inception and the results of operations of ProSource
Canada and BroMar, which were formed or acquired by the Company in
connection with the acquisition of the National Accounts Division
("NAD") of The Martin-Brower Company ("Martin-Brower"), since the
date of acquisition. The Company is a subsidiary of Onex Corporation
(collectively with its affiliates, "Onex"), a company traded on the
Toronto and Montreal stock exchanges.
The Company operates on a 52- to 53-week accounting year, ending on
the last Saturday of each calendar year.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Operations of the companies and
businesses acquired have been included in the accompanying
consolidated financial statements from their respective dates of
acquisition. All significant intercompany accounts and transactions
have been eliminated in consolidation.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
26
<PAGE> 27
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(1) Summary of Significant Accounting Policies (continued)
(d) Cash and Cash Equivalents
Cash on hand and in banks and short-term securities with maturities
of three months or less when purchased are considered cash and cash
equivalents.
(e) Inventories
Inventories, consisting primarily of food items, are stated at the
lower of cost or net realizable value. Cost is determined using the
weighted-average-cost method and the first-in, first-out method.
Cost of inventory using the weighted-average-cost method represents
34%, 32% and 32% of inventories in 1997, 1996, and 1995,
respectively.
(f) Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the related
assets. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the lease term or estimated
useful lives of the related assets.
Costs of normal maintenance and repairs are charged to expense when
incurred. Replacements or betterments of properties are capitalized.
When assets are retired or otherwise disposed of, their cost and the
applicable accumulated depreciation and amortization are removed
from the accounts, and the resulting gain or loss is reflected in
the consolidated statements of operations.
(g) Intangible Assets
Intangible assets are amortized using the straight-line method over
the following periods:
Goodwill 40 years
Noncompete agreements 5 years
Customer lists 12 years
Goodwill represents the excess of cost over fair value of net assets
acquired. The Company periodically evaluates the recoverability of
recorded costs for goodwill based upon estimations of future
undiscounted related operating income from the acquired companies.
Should the Company determine it probable that future estimated
undiscounted related operating income from any of its acquired
companies will be less than the carrying amount of the associated
goodwill, an impairment of goodwill would be recognized, and
goodwill would be reduced to the amount estimated to be recoverable.
The Company believes that no material impairment existed at December
27, 1997 and December 28, 1996.
27
<PAGE> 28
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(1) Summary of Significant Accounting Policies (continued)
(h) Deferred Debt-Issuance Costs
Included in other assets are deferred debt-issuance costs which are
amortized over the term of the related debt.
(i) Self-Insurance
The Company self-insures up to certain retention limits under its
workers' compensation (except for a period during 1996-1997), auto
liability and medical and dental insurance programs. Costs in excess
of retention limits are insured under various contracts with
insurance carriers. Estimated costs for claims for which the Company
is responsible are determined based on historical claims experience,
adjusted for current trends. The liability related to workers'
compensation is discounted to net present value using a risk-free
treasury rate for maturities that match the expected settlement
periods. At December 27, 1997 and December 28, 1996, the estimated
accrued liabilities related to workers' compensation were
approximately $3.3 million and $4.4 million, respectively, net of a
discount of approximately $1.0 million and $1.6 million,
respectively.
(j) Net Loss Per Common Share
In February 1997, Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share" was issued. SFAS No. 128
replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all
periods have been presented, and where appropriate, restated to
conform with the requirements of SFAS No. 128.
Shares and options issued within one year prior to the filing of the
Registration Statement relating to the initial public offering (see
note 10) have been treated as outstanding for all periods presented,
even where the impact of the incremental shares is antidilutive.
(k) Income Taxes
The Company and its wholly-owned domestic subsidiaries file
consolidated federal and state tax returns in the United States.
Separate foreign tax returns are filed for the Company's Canadian
subsidiary. The Company follows the asset and liability method of
accounting for income taxes prescribed by SFAS No. 109, "Accounting
for Income Taxes". Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying
amounts and the tax basis of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in
income in the year that includes the enactment date.
28
<PAGE> 29
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(1) Summary of Significant Accounting Policies (continued)
(l) Translation of Foreign Currency
The accounts of ProSource Canada are translated into U.S. dollars in
accordance with SFAS No. 52, "Foreign Currency Translation".
Consequently, all balance sheet accounts are translated at the
current exchange rate. Income and expense accounts are translated at
the average exchange rates in effect during the year. Adjustments
resulting from the translation are included in accumulated
foreign-currency translation adjustments as a component of
stockholders' equity.
(m) Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive
income and its components. In June 1997, the FASB also issued
Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information." This statement establishes standards for
reporting information about a company's operating segments and
related disclosures about its products, services, geographic areas
of operations and major customers. Both statements will be adopted
by the Company in 1998. Management believes the adoption of these
statements will not materially impact the Company's results of
operations, cash flows or financial position.
(n) Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for
cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate fair value because of their
short-term maturities. The carrying amounts reported for long-term
debt approximate fair value because they are variable-rate
instruments that reprice monthly.
(o) Reclassifications
Certain amounts previously presented in the financial statements of
prior years have been reclassified to conform to the current year
presentation.
(2) Business Combinations
On March 31, 1995, the Company completed the acquisition of substantially
all of the assets and the assumption of certain liabilities of NAD from
Martin-Brower. The total cost of the acquisition of $170 million was
funded through a borrowing of $116 million under the Company's previous
revolving credit facility, a $9 million note payable to Martin-Brower (net
of a discount to reflect a constant interest rate), $18.5 million in notes
payable to Onex, and the issuance of 2,650,000 shares of the Company's
Class B common stock, valued at approximately $26.5 million. The
acquisition has been accounted for under the purchase method of
accounting. The accompanying consolidated financial statements include the
assets acquired of approximately $232 million, consisting primarily
29
<PAGE> 30
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(2) Business Combinations (continued)
of accounts receivable and inventories, and liabilities assumed of
approximately $87 million, consisting primarily of trade accounts payable,
based on their estimated fair values at the acquisition date. As a result
of this transaction, the Company recorded goodwill of approximately $25
million. In addition, the Company incurred an extraordinary charge
relating to the write-off of approximately $0.8 million of unamortized
deferred-debt issuance costs on debt repaid at the acquisition date.
On March 30, 1996, the Company revised its estimates of certain costs
related to the acquisition by $12 million. The effect of the revision
increased acquisition-related liabilities by $12 million, deferred tax
assets by approximately $4.4 million and goodwill by approximately $7.6
million.
(3) Restructuring, Termination Charges and Impairment of Long-Lived Assets
In conjunction with the NAD acquisition, the Company incurred
restructuring costs of approximately $0.7 million in 1995 primarily
relating to costs incurred to consolidate and integrate certain functions
and operations. In 1996, as a result of a study to analyze, among other
things, ways to integrate the NAD operations, improve customer service,
reduce operating costs and increase existing warehouse capacity, the
Company adopted a plan, which was approved by its Board of Directors, to
consolidate and integrate its corporate and network operations, including
the closing of 19 distribution facilities under lease agreements and 11
owned distribution facilities. As a result, in the first quarter of 1996,
the Company accrued restructuring charges of $10.9 million, primarily
related to the termination of the existing facility leases and employee
related costs. The Company began the integration of some of these
facilities, including communications to its employees and its customers in
1996. During 1997, the Company undertook a thorough evaluation of each
specific facility's return on investment and alternative uses. As a
result, the Company now intends to close 10 distribution facilities
currently leased and 9 distribution facilities currently owned. The
Company expects to complete the plan in stages through the year 2002.
During 1997 and 1996, the Company paid in the aggregate $1.7 million and
$2.8 million, respectively, in costs primarily related to facility leases
and relocation costs. In addition, during 1997 the Company reclassified
$3.4 million to acquisition related liabilities. As of December 27, 1997,
the Company had approximately $3.0 million of accrued unpaid restructuring
charges. Management believes that the remaining accrued restructuring
charges are adequate to complete its plans.
The significant change brought about by the plan to integrate and
consolidate the existing distribution network impaired the value of
long-lived assets to be held and used until the plan is completed. As a
result, in conjunction with the recording of the restructuring reserves in
the first quarter of 1996, the Company recognized a loss on impairment in
value of long-lived assets. The loss consisted of $7.3 million of land and
owned buildings, $4.3 million of furniture and equipment and leasehold
improvements management plans to hold and use through the completion of
the plan, and $4.1 million of capitalized software costs which do not meet
the long-term information technology strategy of the Company. The Company
measured the amount of the loss by comparing fair value of the land and
the owned buildings (determined by independent appraisals and updated with
current comparisons to similar assets) to capitalized cost. The carrying
value of furniture and equipment and capitalized software costs was
written down to net realizable value since it is being replaced.
30
<PAGE> 31
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(3) Restructuring, Termination Charges and Impairment of Long-Lived Assets
(continued)
The Company discontinued its distribution services to Arby's restaurants
effective April 1, 1997. In connection therewith, as of December 28, 1996,
the Company accrued approximately $10.6 million of costs associated with
the termination of this agreement. During 1997, the Company paid and
charged in the aggregate $9.1 million in costs primarily related to lease
costs in connection with idle equipment and warehouse space and costs
associated with rerouting the Company's transportation fleet required as a
result of the loss of the Arby's business. In addition, the Company
reclassified approximately $1.2 million to the allowance for doubtful
accounts receivable to reserve against outstanding Arby's accounts
receivable. As of December 27, 1997, the Company had approximately $0.3
million of accrued unpaid termination charges which management believes
will be paid during 1998.
(4) Property and Equipment
Property and equipment and related depreciable lives were as follows (in
thousands):
<TABLE>
<CAPTION>
December 27, December 28, Depreciable
1997 1996 Lives
------------ ------------ -----------
<S> <C> <C> <C>
Land $ 3,662 $ 3,636 --
Buildings and improvements 17,092 16,413 15 to 40 years
Warehouse and transportation
equipment 25,592 24,465 3 to 10 years
Computer software 7,391 4,262 1 1/2 to 5 years
Leasehold improvements 8,966 4,384 3 to 13 years
Office equipment 8,209 7,261 3 to 7 years
Projects in progress 18,456 11,760 --
------- -------
89,368 72,181
Less accumulated depreciation
and amortization 29,407 22,544
------- -------
Property and equipment, net $59,961 $49,637
======= =======
</TABLE>
(5) Intangible Assets
Intangible assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
Goodwill $ 41,298 $ 41,298
Identifiable intangibles 3,870 3,870
-------- --------
45,168 45,168
Less accumulated amortization 5,285 3,732
-------- --------
Intangible assets, net $ 39,883 $ 41,436
======== ========
</TABLE>
31
<PAGE> 32
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(6) Long-Term Debt
Long-term debt consisted of the following loan agreements with banks (in
thousands):
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
$150 million accounts receivable securitization facility,
due March 14, 2002 $125,000 $ --
$75 million revolving credit facility, due March 14, 2002 49,200 --
$210 million revolving credit facility, retired and repaid
March 14, 1997 -- 84,834
$15 million term-loan facility, retired and repaid
March 14, 1997 -- 12,750
$15 million term-loan facility, retired and repaid
March 14, 1997 -- 15,000
-------- --------
Total long-term debt 174,200 112,584
Less current portion -- 1,500
-------- --------
Long-term debt, less current portion $174,200 $111,084
======== ========
</TABLE>
(a) Existing Credit Facilities
In March, 1997, the Company entered into two five-year loan
agreements aggregating $225 million (the "Existing Credit
Facilities") with a group of financial institutions to replace its
previous credit facility. In connection with this early retirement
of long-term debt, the Company recorded a pre-tax extraordinary
charge of $10.3 million ($6.3 million net of taxes) in the first
quarter of fiscal 1997. This charge reflected the write-off of
deferred financing costs of $6.3 million, prepayment penalties of
$2.7 million and $1.3 million in costs associated with the
termination of interest-rate protection agreements.
The Existing Credit Facilities bear interest based on either the
prime rate or LIBOR plus an additional spread based on certain
financial ratios and mature on March 14, 2002. The effective rate at
December 27, 1997 was 7.34%. The Company is required to comply with
various covenants in connection with the Existing Credit Facilities
and borrowings are subject to calculations based on accounts
receivable and inventory. The revolving credit facility is secured
by liens on substantially all of the Company's assets and contains
various restrictions on, among other things, the Company's ability
to pay dividends and dispose of assets. Additionally, in the event
of a change in control, the outstanding principal amount of these
facilities shall become due and payable. PRC is the legal borrower
for the accounts receivable securitization facility. Pursuant to the
terms of the accounts receivable securitization facility PSC sells,
on an ongoing basis and without recourse, an undivided interest in a
designated pool of trade accounts receivable to PRC. In order to
maintain the designated balance in the pool of accounts receivable
sold, PSC is obligated to sell undivided interests in new
receivables as existing receivables are collected. PSC has retained
substantially the same credit risk as if the receivables had not
been sold. PSC, as agent for PRC, retains collection and
administrative responsibilities on the receivables sold to PRC. The
creditors for this facility have security interests in PRC's assets
(consisting primarily of
32
<PAGE> 33
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(6) Long-Term Debt (continued)
accounts receivable purchased from PSC) and are entitled to be
satisfied by such assets prior to equity holders. The Company pays a
quarterly variable commitment fee, as defined in the agreements,
based on the unused portion of the facilities which fee averaged
0.33% of such unused portion during 1997. At December 27, 1997, the
Company had approximately $35 million available under the Existing
Credit Facilities.
(b) Previous Credit Facility
On March 31, 1995, in conjunction with the acquisition of NAD, the
Company entered into a $240 million Loan and Security Agreement (the
"Previous Credit Facility") with a group of banks that was retired
and repaid before its maturity on March 14, 1997. The Previous
Credit Facility provided for a revolving-credit facility of up to
$210 million and term loans aggregating $30 million. The interest
rate on the Previous Credit Facility was reset every month to
reflect current market rates. The effective rate during fiscal 1996
and 1995 was 8.7 percent. This rate reflected the effect of
interest-rate protection agreements, which were terminated on March
14, 1997 in connection with the retirement of this facility.
(7) Leases
The Company leases certain of its facilities, vehicles and other
equipment under long-term operating leases. Certain transportation
equipment leases call for contingent rental payments based upon
total miles. Future minimum lease payments under non-cancelable
operating leases as of December 27, 1997, by fiscal year are as
follows (in thousands):
1998 $ 28,600
1999 25,183
2000 22,222
2001 18,342
2002 13,581
Thereafter 36,315
-------
Total $ 144,243
=======
Rent expense, including contingent rental expense, was approximately
$36.8 million, $39.3 million and $30.6 million during fiscal years
1997, 1996 and 1995, respectively.
33
<PAGE> 34
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(8) Income Taxes
The income tax benefit (provision) before extraordinary items and
cumulative effect of a change in accounting principle for fiscal years
1997, 1996 and 1995, respectively, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current taxes:
Federal $ (582) $ 937 $ (1,236)
State (545) (9) (408)
-------- -------- --------
Total current taxes (1,127) 928 (1,644)
-------- -------- --------
Deferred taxes, excluding other components:
Federal 1,170 11,449 1,126
State 404 3,217 264
-------- -------- --------
Total deferred taxes, excluding
other components 1,574 14,666 1,390
-------- -------- --------
Other:
Alternative minimum tax-credit
(utilization) carryforwards 38 (184) 666
Utilization of operating-loss carryforwards -- -- (497)
-------- -------- --------
Total other 38 (184) 169
-------- -------- --------
Income tax benefit (provision) $ 485 $ 15,410 $ (85)
======== ======== ========
</TABLE>
The following table summarizes the differences between the Company's
effective income tax rate and the statutory Federal income tax rate for
fiscal years 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State income taxes (net of federal taxes) 5.0 5.2 (16.9)
Goodwill amortization (0.7) (0.3) (10.9)
Other (5.4) (0.7) (18.4)
-------- -------- --------
32.9% 38.2% (12.2)%
======== ======== ========
</TABLE>
34
<PAGE> 35
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(8) Income Taxes (continued)
The tax effects of each type of temporary difference that gave rise to the
Company's deferred tax assets and deferred tax liabilities at December 27,
1997 and December 28, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Acquisition-related expenses $ 1,262 $ 3,567
Accounts receivable, principally due to allowance for
doubtful accounts 2,011 1,222
Property, plant and equipment, principally due to
differences in depreciation 1,063 1,935
Self-insurance reserves 3,355 3,493
Impairment of long-lived assets 3,231 4,036
Restructuring and contract-termination charges 3,224 8,121
Benefit of federal and state net operating-loss
carryforwards 23,933 5,797
Other 2,682 2,025
-------- --------
Total deferred tax assets 40,761 30,196
Less valuation allowance -- --
-------- --------
Total deferred tax assets, net $ 40,761 $ 30,196
======== ========
Deferred tax liabilities:
Computer software $ (3,225) $ (1,811)
Acquisition-related liabilities (1,138) (803)
Other (406) (568)
-------- --------
Total deferred tax liabilities (4,769) (3,182)
-------- --------
Net deferred tax assets $ 35,992 $ 27,014
======== ========
</TABLE>
In order to fully realize the net deferred tax assets at December 27,
1997, the Company will need to generate future taxable income of
approximately $90 million. Management believes that it is more likely than
not that the Company's deferred tax asset will be realized as a result of
future taxable income, expected to be generated based on the Company's
reasonable projections of future earnings. The Company anticipates that
increases in taxable income will result primarily from (i) future
projected revenue and gross margin growth through the addition of new
restaurant chains and the expansion of services provided to new and
existing restaurant chains, (ii) a reduction in interest expense due to a
reduction in its indebtedness, (iii) cost savings through its corporate
and network consolidation plan and (iv) other cost-reduction initiatives.
In addition, management believes reasonable tax planning strategies and
other potential transactions will be available that could be used to
realize the deferred tax asset before the expiry of any material net
operating losses, which will not begin to occur until after 2010.
35
<PAGE> 36
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(8) Income Taxes (continued)
At December 27, 1997 and December 28, 1996, other current assets included
income taxes receivable of approximately $0.4 million and $1.5 million,
respectively, which consisted primarily of overpayments of tax liabilities
and pending carryback refund claims. United States federal income tax
returns for fiscal years 1992 and 1993 are currently under examination by
the Internal Revenue Service. A preliminary assessment is pending which is
not material to the consolidated financial position or results of
operations as of December 27, 1997.
(9) Employee Benefit Plans
(a) Defined-Contribution Plans
On January 1, 1997, the Company's defined contribution plan, which
covers substantially all employees, was renamed the ProSource
Retirement Advantage Plan. Eligible employees can contribute up to
15% of base compensation, with the following benefits: (i) Company
contributions of 2 percent, (ii) additional Company matching of 50
percent of the first 6 percent contributed by the employee, and
(iii) vesting of Company contributions ratably over four years of
service.
The Company also had a Money Purchase Plan which covered those
former NAD salaried employees not covered by a defined-benefit plan.
Under this plan, the Company contributed 10 percent of eligible
salary. The Money Purchase Plan was terminated effective December
1996.
The amount of contribution expense incurred by the Company for these
plans was approximately $1.5 million, $2.7 million and $2.2 million
for fiscal years 1997, 1996 and 1995, respectively.
(b) Defined-Benefit Pension Plans
In conjunction with the changes to the ProSource Retirement
Advantage Plan in 1997, the Company terminated all three
noncontributory defined-benefit pension plans covering substantially
all employees except those covered by multiemployer pension plans
under collective-bargaining agreements. The Company settled all
pension obligations related to these terminated plans in 1997
through (i) the purchase of annuities, (ii) lump-sum payments, or
(iii) the transfer of plan benefits into the ProSource Retirement
Advantage Plan, at the participant's discretion. The accrued
liability as of December 28, 1996 was adequate to cover the unfunded
termination liability of these three pension plans.
Pension costs of approximately $1.1 million and $0.9 million
reflected in the consolidated statements of operations for fiscal
years 1996 and 1995, respectively, were determined based on
actuarial studies. The Company's pension expense for contributions
to the various multiemployer pension plans under
collective-bargaining agreements was approximately $1.1 million,
$1.2 million, and $0.9 million for fiscal years 1997, 1996 and 1995,
respectively.
36
<PAGE> 37
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(10) Stockholders' Equity
Under the ProSource, Inc. Employee Stock Purchase Plan (the "Stock Plan"),
officers and key employees of the Company ("Management Employees")
purchased a total of 408,100 shares of Class B common stock at $10.00 per
share in 1992, 132,500 shares of Class B common stock at $11.00 per share
in 1993 and 1994, and 270,000 shares of Class B common stock at $10.00 per
share in 1995 and 1996. In connection with the purchases of Class B common
stock, each Management Employee entered into a Management Shareholders
Agreement with the Company and Onex.
The ProSource, Inc. Amended Management Option Plan (1995) (the "1995
Option Plan") provides certain Management Employees with options to
purchase one-half the number of shares of Class B common stock purchased
under the Stock Plan at the same price per share paid by such stockholder
(either $10.00 or $11.00). Subject to the 1995 Option Plan, options
granted under the 1995 Option Plan are exercisable until December 31,
2000. No additional options will be granted under the 1995 Option Plan.
The 1995 Option Plan was amended in November 1996 to provide that all
unvested options vest at a rate of 10% per year through December 31,
1999, when all remaining options vest. As a result, the Company recorded
a pretax charge in 1996 of $1.2 million reflecting the difference between
the market price of the Company's Class A common stock on the date of
amendment and the exercise price of such options.
Under the 1996 Stock Option Plan (the "1996 Option Plan"), the Company may
grant options to its employees for up to 550,000 shares of Class B common
stock. In 1997 and 1996, the Company granted options to purchase 16,000
and 358,000 shares, respectively, of Class B common stock at $14.00 per
share. Options under the 1996 Option Plan vest ratably over four years
from the date of grant. These options cannot be exercised, however, until
the earlier of (i) the date on which the market value of the Company's
common stock is 25% greater than the exercise price and (ii) the eighth
anniversary of the date of grant. Subject to the provisions of the 1996
Option Plan, vested options may be exercised for a period of up to 10
years from the date of grant.
Under the ProSource, Inc. 1997 Directors Stock Option Plan (the "1997
Directors Plan"), which was approved by the shareholders in April 1997,
the Company may grant options to its directors, who so elect to receive
such options in lieu of fees, to purchase shares of Class A common stock
at $4.00 per share below the stated fair market value on the date of
grant. Options to purchase up to 100,000 shares of Class A common stock
may be granted under this plan. In April 1997, the Company granted options
to purchase 10,500 shares of Class A common stock at $5.25 per share.
Options under the 1997 Directors Plan vest and become exercisable one year
from the date of grant, provided that the holder thereof is still a
director of the Company at such time. Subject to the provisions of the
1997 Directors Plan, options may be exercised for a period of up to 10
years after the vesting date. During the year ended December 27, 1997, the
Company recognized $28,000 of compensation expense associated with this
plan.
37
<PAGE> 38
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(10) Stockholders' Equity (continued)
A summary of the status of the Company's three option plans for the years
ended December 27, 1997, December 28, 1996, and December 30, 1995 is as
follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
1997 Exercise 1996 Exercise 1995 Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding -
beginning 706,450 $12.10 327,700 $10.16 237,450 $10.22
Options granted 26,500 10.53 388,750 13.69 101,750 10.00
Options exercised -- -- (125) 10.00 -- --
Options canceled (93,300) 11.91 (9,875) 10.00 (11,500) 10.00
-------- ------ -------- ------ -------- ------
Options outstanding -
ending 639,650 $12.06 706,450 $12.10 327,700 $10.16
======== ====== ======== ====== ======== ======
Options exercisable -
year-end 176,449 $11.86 78,401 $10.13 41,500 $10.12
======== ====== ======== ====== ======== ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 27, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------- -----------------------------
Number Weighted Avg. Number
Exercise Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Prices at 12/27/97 Contractual Life Exercise Price at 12/27/97 Exercise Price
------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
$ 5.25 10,500 9 years $ 5.25 -- $ 5.25
10.00 262,100 3 years 10.00 87,034 10.00
11.00 33,050 3 years 11.00 9,915 11.00
14.00 334,000 9 years 14.00 79,500 14.00
------- ------- ------- ------- -------
Totals 639,650 6 years $ 12.06 176,449 $ 11.86
======= ======= ======= ======= =======
</TABLE>
During fiscal year 1996, the Company adopted SFAS No. 123. Under the
provisions of the new standard, the Company elected to continue using the
intrinsic-value method of accounting for stock-based compensation plans
granted to employees under Accounting Principles Board Opinion No. 25 and
provide pro-forma disclosure for the fair-value based method of accounting
for compensation costs related to stock-option plans and other forms of
stock-based compensation under SFAS No. 123.
The Company estimated the weighted-average fair value of each option
granted during 1997, 1996 and 1995 at $5.41, $7.34 and $8.27,
respectively. The fair value of these options was computed at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1997, 1996 and 1995, respectively:
risk-free interest rates of 6.3%, 6.2% and 6.3%; dividend yields of 0.0%
for all years presented, volatility factors of the expected market price
of the Company's common stock of 33.0% for all years presented and a
weighted-average expected life of the options of 5, 7 and 7 years,
respectively.
38
<PAGE> 39
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(10) Stockholders' Equity (continued)
The Black-Scholes option valuation model was developed for use in
computing the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
For purposes of pro forma disclosures, the computed fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands, except per share
data).
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net loss $ (13,943) $ (23,817) $ (1,587)
Pro forma net loss per share - basic and diluted $ (1.49) $ (4.10) $ (0.35)
</TABLE>
In conjunction with the acquisition of NAD, the Company issued warrants to
Martin-Brower. At December 27, 1997 and December 28, 1996, the warrants
were exercisable for 283,425 shares of Class B common stock at $12.35 per
share during the period from April 1, 1997 through March 31, 2000, and
upon consummation of certain transactions.
On November 15, 1996, the Company completed the issuance of 3,400,000
shares of Class A common stock (at a price of $14.00 per share) through an
initial public offering, resulting in net proceeds to the Company of
approximately $43.2 million, after deducting underwriting discounts and
commissions, and other offering costs of approximately $4.4 million. The
net proceeds of the offering were used: (i) to prepay $15 million in
outstanding principal and $1.1 million in accrued interest under a
subordinated note payable to Onex; (ii) to prepay, at a discount, $10
million in outstanding principal and $0.1 million in accrued interest
under a subordinated note payable to Martin-Brower for a total payment of
$9.2 million and (iii) to repay $16.6 million of outstanding indebtedness
under the Company's revolving-credit facility, after deducting a $1.3
million payment concurrent with the offering for the termination of a
consulting agreement between the Company and certain former owners of an
acquired company. Also in connection with the initial public offering, the
Company incurred a noncash charge of $4 million resulting from the
issuance to Onex of 285,714 shares of Class B common stock valued at the
initial public-offering price in exchange for the agreement of Onex to
relinquish its rights to receive an annual fee, previously paid in cash,
for management services rendered to the Company.
Under the ProSource, Inc. 1997 Employee Stock Purchase Plan, which was
approved by the shareholders in April 1997, employees of the Company
purchased a total of 33,799 shares of Class A common stock at $6.035 per
share in 1997. In January 1998, an additional 30,336 shares of Class A
common stock were purchased by employees at $6.035 per share under this
plan.
39
<PAGE> 40
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(11) Contingencies and Guarantees
The Company has guaranteed the principal due on certain loans obtained by
its officers and employees in connection with the purchase of common stock
under the Stock Plan. At December 27, 1997, such guarantees amounted to
approximately $0.8 million and were covered by a letter of credit. At
December 27, 1997, the Company was also obligated for $15.0 million in
other letters of credit issued on behalf of the Company primarily as a
guarantee of payment for obligations arising from workers' compensation
claims. At December 27, 1997, the Company had $9.2 million available in
unused letters of credit under its Existing Credit Facilities.
The Company and its subsidiaries are parties to various legal actions
arising in the ordinary course of business. Management believes that the
outcome of such cases will not have a material adverse effect on the
consolidated results of operations or the financial position of the
Company.
(12) Concentrations of Credit Risk
Burger King Corporation ("BKC") owned and franchisee-owned Burger King
restaurants collectively accounted for 46%, 41% and 45% of the Company's
sales in fiscal years 1997, 1996 and 1995, respectively. Sales to
BKC-owned restaurants represented approximately 5% of sales for each of
the aforementioned years. Amounts due from BKC-owned restaurants at
December 27, 1997 and December 28, 1996 were $5.8 million and $5.5
million, respectively.
In addition, sales to Darden Restaurants, Inc. (owner of Red Lobster and
Olive Garden restaurants) accounted for 21%, 20%, and 18% of the Company's
sales in fiscal years 1997, 1996 and 1995, respectively. Amounts due from
Darden Restaurants, Inc. at December 27, 1997 and December 28, 1996, were
approximately $41.4 million and $41.1 million, respectively.
Sales to company-owned and franchisee-owned Arby's restaurants accounted
for 10% of Company sales in fiscal years 1996 and 1995. No other customer
or restaurant concept accounted for more than 10% of the Company's sales
in fiscal years 1997, 1996 or 1995. The Company periodically performs
credit evaluations on its customers' financial condition and generally
does not require collateral.
(13) Cumulative Effect of a Change in Accounting Principle
During the fourth quarter of 1997, the Financial Accounting Standards
Board's Emerging Issues Task Force reached a consensus on Issue No. 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract or
an Internal Project that Combines Business Process Reengineering and
Information Technology Transformation." The consensus requires that the
cost of business process reengineering activities, whether done internally
or by third parties, is to be expensed as incurred. As a result, any
remaining unamortized portion of previously capitalized business process
reengineering costs is required to be written off. The cumulative impact
of initially conforming to this new standard in the fourth quarter of 1997
was reported as a change in accounting principle in the accompanying
consolidated statements of operations, with a cumulative charge, net of
tax, of $6.4 million, or $0.69 per share.
40
<PAGE> 41
PROSOURCE, INC.
Notes to Consolidated Financial Statements (continued)
Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
(14) Net Loss Per Share
For all years presented in the accompanying consolidated statements of
operations, all stock options and other potential common shares were
excluded from the calculation of diluted loss per share, since they would
produce anti-dilutive results. As a result, there are no reconciling items
to the numerator and denominator of the basic and diluted loss per share
computations.
The following were outstanding during fiscal 1997, but were excluded from
the computation of diluted net loss per common share for fiscal 1997.
<TABLE>
<CAPTION>
Related Number of Conversion
Common Stock Shares Price per Share Expiration
------------------- --------------- ----------
<S> <C> <C> <C>
Options - 1995 Option Plan 288,650 shares - Class B $10.00 or $11.00 December 2000
Options - 1996 Option Plan 340,500 shares - Class B $14.00 November 2006 to January 2007
Options - 1997 Directors Plan 10,500 shares - Class A $ 5.25 April 2007
Stock Warrants 283,425 shares - Class B $12.35 March 2000
$0.5 million convertible
subordinated note 25,000 shares - Class A $20.00 November 1999
</TABLE>
(15) Subsequent Event
On January 29, 1998, the Company signed a definitive merger agreement with
AmeriServe Food Distribution, Inc. ("AmeriServe"). Under the terms of the
agreement, AmeriServe has agreed to pay $15.00 in cash for each
outstanding share of the Company's common stock. In addition, under the
agreement, all outstanding options will be accelerated and option holders
will receive $15.00 less the applicable exercise for each share issuable
upon exercise of the options. AmeriServe has indicated that it intends to
refinance all of the Company's outstanding debt.
The merger is subject to regulatory approvals and other customary
conditions to closing. Onex Corporation and certain of its affiliates,
which own approximately 61% of the Company's outstanding stock,
representing approximately 85% of the voting power, have committed to vote
in favor of the merger, which will assure the necessary shareholder
approval. The merger is expected to close in the second quarter of fiscal
1998.
41
<PAGE> 42
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 10. Directors and Executive Officers of the Registrant.
Set forth below are the directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
David R. Parker 54 Chairman of the Board of Directors
Thomas C. Highland 56 President, Chief Executive Officer and Director
Daniel J. Adzia 55 Vice-Chairman, Chief Marketing Officer and Director
Gerald W. Schwartz 55 Director
Anthony R. Melman 50 Director
Michael Carpenter 50 Director
Anthony Munk 37 Director
C. Lee Johnson 65 Director
R. Geoffrey P. Styles 67 Director
William F. Evans 50 Executive Vice President, Chief Financial Officer
Robert S. Donaldson 42 Executive Vice President, Chief Operating Officer, ProSource
Distribution Operations
Paul A. Garcia de Quevedo 43 Vice President, Treasurer and Secretary
Maurice L. Ambler 50 Senior Vice President, Human Resources
Dennis T. Andruskiewicz 44 Senior Vice President, Operations Support
Bruce O. Burnham 54 Senior Vice President, Procurement and Supply Chain Services
John E. Foley 48 Senior Vice President, Chief Information Officer
John P. Gainor 40 Senior Vice President, Logistics and Chief Operating Officer,
PSD Transportation Services
</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 from BKC. 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., SunTrust Bank,
Miami, N.A. and Tupperware Corporation.
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.
42
<PAGE> 43
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.
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. He is Vice-Chairman and Member of the
Executive Committee of Mount Sinai Hospital and is a Director or Governor of a
number of other organizations, including Junior Achievement, Canadian Council of
Christians and Jews, and The Starlight Foundation.
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. Mr. Melman serves on the Board of
Directors of Purolator Courier Ltd., Celestica, Inc., BT Bank of Canada and
AlphaNet Telecom, Inc.
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.
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 of The Horsham Corporation, a Canadian based company which
has interests in gold, real estate and refining ventures, and is currently a
Director of Barrick Gold Corporation.
C. Lee Johnson Mr. Johnson has served as a Director of the Company since
October 1992. Since October 1997, he has been President Emeritus of Limited
Distribution Services (a subsidiary of The Limited, Inc.), where he was
President from 1986 to 1997. From 1984 to 1986, he was Senior Vice President,
Beatrice U.S. Food Corporation and the President, Beatrice Distribution, Inc.
Mr. Johnson serves on the Executive Committee and Board of Directors of the
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. From 1990-1996, he
served as Chairman of the Board of Directors of Drivers Jonas (Canada) Ltd. He
serves as Chairman and Director of Grosvenor International Holdings Limited and
is on the Boards of Directors of Royal Trust Company, The Geon Company, Echo Bay
Mines Ltd., Fairwater Capital Corporation and Working Ventures Canadian Fund
Inc.
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
43
<PAGE> 44
1985, Mr. Evans served as a partner of KPMG Peat Marwick LLP, the Company's
independent auditors. Mr. Evans serves as a Director of Interim Services, Inc.
Mr. Evans is a certified public accountant.
Robert S. Donaldson Mr. Donaldson has served as Executive Vice President
Chief Operating Officer, ProSource Distribution Operations since January 1998.
From January 1995 to January 1998, he served as Senior Vice President, Field
Operations of the Company. 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.
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.
Maurice L. Ambler Mr. Ambler has served as Senior Vice President of Human
Resources of the Company since January 1997. From July 1992 to December 1996,
Mr. Ambler served as Vice President of Human Resources. Prior to such time, Mr.
Ambler was Senior Director of Human Resources of BKDS from April 1991 to June
1992, and Director of Human Resources for BKDS from July 1990 to April 1991.
Prior to joining BKDS, Mr. Ambler held various human resources positions at ITT
Sheraton, Pepsico Inc.'s Pizza Hut and Frito-Lay divisions and Miller Brewing
Company.
Dennis T. Andruskiewicz Mr. Andruskiewicz has served as Senior Vice
President, Operations Support of the Company since September 1996 and
Vice-President, Field Operations 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 1987 to
1990.
Bruce O. Burnham Mr. Burnham joined the Company in December 1997 and
serves as the Senior Vice President, Procurement and Supply Chain Services. Mr.
Burnham has twenty years of experience in distribution, supply chain management
and strategic purchasing. From July 1994 to December 1997, Mr. Burnham served as
Vice President, Purchasing and Distribution for Boston Chicken, Inc. From May
1990 to July 1994, Mr. Burnham served as Corporate Vice President of Procurement
for Service America Corporation.
John E. Foley Mr. Foley has served as Senior Vice President, Chief
Information Officer since January 1998. From August 1995 to January 1998, he
served as Senior Vice President, Operations Development of the Company 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 BKC from 1990 to 1992.
John P. Gainor Mr. Gainor has served as Senior Vice President, Logistics
and Chief Operating Officer, PSD Transportation Services, the Company's
transportation subsidiary, since January 1998, Senior Vice President, Logistics
and Purchasing from November 1995 to January 1998, 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.
44
<PAGE> 45
Each director is elected annually by the Company's stockholders and holds
office until the next annual meeting of stockholders and until his successor is
elected and qualified. Each executive officer is elected annually by the Board
of Directors and holds office until his successor is elected and qualified.
There are no family relationships among any of the directors or executive
officers of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who beneficially own more than ten percent of the
Company's Class A Common Stock, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than ten percent stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it and
written representations from certain reporting persons that no Form 5s were
required for those persons, the Company believes that, except for the Initial
Statement on Form 3 for Maurice L. Ambler, Senior Vice President, Human
Resources, which was filed late, all filing requirements applicable to its
officers, directors and greater than ten percent stockholders were complied with
during the year ended December 27, 1997.
45
<PAGE> 46
Item 11. Executive Compensation.
The following table sets forth certain information regarding compensation
earned during the Company's three most recently completed fiscal years by the
chief executive officer and each of the five other most highly compensated
executives officers during 1997, including one former executive officer (the
"Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards/
Other Annual Securities All Other
Fiscal Annual Compensation Underlying Compensation
Name and Principal Position Year Compensation ($)(1) Options(#)(2) ($)(3)
- --------------------------- ---- ------------ ------ ------------- ------
Salary Bonus
($) ($)
--- ---
<S> <C> <C> <C> <C> <C>
1997 450,000 -- (4) -- 7,950
David R. Parker 1996 324,038 -- 35,148 25,000 90,500
Chairman of the Board of Directors ........... 1995 300,000 150,000 (4) 5,000 153,120
1997 450,000 -- (4) -- 7,950
Thomas C. Highland 1996 324,038 -- 33,104 25,000 90,500
President, Chief Executive Officer ........... 1995 300,000 150,000 (4) 3,750 103,120
1997 320,000 -- 47,406 -- 7,950
Daniel J. Adzia 1996 310,000 -- 61,448 15,000 15,000
Vice Chairman, Chief Marketing Officer ....... 1995(5) 225,385 112,500 (4) 22,500 21,410
William F. Evans 1997 315,000 -- 60,333 -- 7,950
Executive Vice President, Chief Financial 1996 287,500 -- 44,548 15,000 135,051
Officer ...................................... 1995(6) 116,346 82,282 (4) 22,500 --
Robert S. Donaldson 1997 199,550 -- (4) -- 25,155
Executive Vice President, Chief Operating 1996 175,961 -- (4) 10,000 30,601
Officer, ProSource Distribution Operations ... 1995 157,500 58,575 (4) -- 13,749
William G. Berryman
Senior Vice President, Information 1997 177,187 35,000 (4) -- 43,689
Technology(7) ................................ 1996 117,789 35,000 (4) 10,000 75,320
</TABLE>
- ----------
(1) The amounts shown in the "Other Annual Compensation" column consist of the
following (i) Mr. Parker: For 1996, $14,000 car allowance, $13,000
perquisite allowance and $8,148 of interest paid by the Company in respect
of an outstanding loan, (ii) Mr. Highland: For 1996, $14,000 car
allowance, $13,000 perquisite allowance and $6,104 of interest paid by the
Company in respect of an outstanding loan, (iii) Mr. Adzia: For 1997 and
1996, respectively, $14,400 and $4,528 car allowance, $13,000 and $16,283
perquisite allowance and $20,006 and $40,637 of interest paid by the
Company in respect of an outstanding loan, and (iv) Mr. Evans: For 1997
and 1996, respectively, $14,400 and $11,100 car allowance, $5,000 and
$5,000 perquisite allowance and $40,933 and $28,448 of interest paid by
the Company in respect of an outstanding loan. The loans referred to in
the previous sentence were provided by a third party lender to finance, in
part, certain purchases of Common Stock by employees, including the Named
Executive Officers, and were guaranteed by the Company. Effective as of
March 21, 1997 (November 20, 1997 with respect to Mr. Adzia), the lender
released the Company from its guaranty of such loans and took a pledge of
the shares as security for the loans. As of December 27, 1997, the Company
continued to guarantee the loan to Mr. Evans.
(2) Options to acquire shares of Class B Common Stock.
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<PAGE> 47
(3) The amounts shown in the "All Other Compensation" column for each Named
Executive Officer in 1997 consist of $7,950 in the Company's contributions
to its defined contribution plan, plus $17,205 in educational payments in
the case of Mr. Donaldson, and $35,739 in relocation payments, in the case
of Mr. Berryman. See "Defined Contribution Plans." Amounts for 1995 and
1996 have been restated to reflect the reversal of accruals previously
made for the benefit of the Named Executive Officers under the Company's
proposed Supplemental Executive Retirement Plan. The Company subsequently
determined not to adopt such plan.
(4) 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 the Named Executive Officer.
(5) Represents amounts paid from April 1, 1995 through the end of 1995. Prior
to such time Mr. Adzia was employed by NAD.
(6) Represents amounts paid from July 28, 1995 through the end of 1995. Prior
to such time Mr. Evans was not employed by the Company.
(7) 1996 represents amounts paid from April 29, 1996 through the end of 1996.
Prior to such time Mr. Berryman was not employed by the Company. Due to a
change in responsibilities, Mr. Berryman was not reelected as an executive
officer in January 1998.
Employment 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 T. 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 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 case of Mr. Highland. 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.
Effective April 1, 1998, Mr. Adzia's current employment agreement will
terminate and he will become a consultant to the Company. Under the terms of
this consulting agreement, Mr. Adzia will receive annual compensation of $75,000
through April 1, 2000. In addition, Mr. Adzia will be eligible for an incentive
bonus of up to $200,000 based on achieving certain agreed upon targets. All
benefits, bonuses and other types of compensation previously provided under his
employment contract, with the exception of medical coverage and existing stock
options, will terminate on March 31, 1998.
Each Employee is also subject to a one-year covenant not to compete
effective upon termination of employment for any reason, except in the case of
Mr. Highland (eighteen months).
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<PAGE> 48
Director Compensation
Directors who are not officers or employees of the Company or Onex are
entitled to receive an annual fee of $14,000, plus $1,500 for each Board of
Directors meeting attended, $1,000 for each committee meeting attended and a
$2,500 annual fee for serving as chairman of a committee. All directors are
reimbursed for out-of-pocket expenses.
1997 Directors Stock Option Plan. Under the 1997 Directors Stock Option
Plan (the "Directors Plan"), each outside director may elect to receive in lieu
of all or any portion of such director's annual retainer fee, a stock option
exercisable for a number of shares of Class A Common Stock equal to the amount
of such fee or portion thereof divided by $4.00. The exercise price for such
stock option will be equal to $4.00 per share below the Fair Market Value of a
share of Class A Common Stock on the date of grant; provided, however, that in
no event will the exercise price of such Stock Option be less than 50% of the
Fair Market Value of a share of Class A Common Stock on the date of the grant.
"Fair Market Value" is defined as the average closing price of a share of Class
A Common Stock on the Nasdaq National Market (or such other exchange on which
shares of Class A Common Stock are listed) for the five trading days immediately
preceding the applicable date. The duration of the Directors Plan is ten years.
The number of shares of Class A Common Stock currently available for use in the
Directors Plan is 89,500.
The date of grant of a stock option is the date of the annual meeting of
stockholders of the Company. A stock option vests and becomes exercisable on the
day prior to the date of the next annual meeting of stockholders after the date
of grant. In the event that a stock option grantee is not a member of the Board
on the vesting date, any stock option which has not become vested and
exercisable as of such time will expire without vesting. Vested stock options
may be exercised for 10 years from the date of grant.
The Directors Plan may be amended by the Board of Directors; provided,
however, that approval of the stockholders is required to (i) materially
increase the benefits accruing to participants under the Directors Plan, (ii)
materially increase the number of securities which may be issued under the
Directors Plan or (iii) materially modify the requirements as to eligibility for
participation in the Directors Plan. The Directors Plan may be terminated at any
time by the Board of Directors or by the approval of the stockholders.
The Directors Plan contains provisions designed to preserve for directors
the benefits of grants in the event of a Change of Control (as defined in the
Directors Plan). Upon a Change of Control any unvested option will vest. A
director may surrender any option and receive cash equal to the excess of the
Change of Control Price (as defined in the Directors Plan) over the exercise
price.
Currently, three members of the Board of Directors (Messrs. Carpenter,
Johnson and Styles) are eligible to participate in the Directors Plan and such
directors received options totaling 10,500 during 1997. Messrs. Carpenter,
Johnson and Styles have elected to receive 50%, 100% and 100%, respectively, of
their annual retainer fee for 1998 in stock options. In light of the fact that,
if the proposed merger is consummated, the Company will not hold an annual
meeting in 1998, the Company has waived such elections and in lieu thereof
agreed to pay the directors the annual retainer to which they would otherwise be
entitled in cash. See "Business--Merger Agreement."
Compensation Committee Interlocks and Insider Participation
The Compensation and Nominating Committee consists of Messrs. Johnson,
Melman and Parker. The Equity Compensation Committee (the "Committee") consists
of Messrs. Carpenter, Johnson and Styles. Mr. Parker is Chairman of the Board of
ProSource.
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<PAGE> 49
Option Plans and Other Equity Based Compensation Plans
Amended Management Option Plan (1995). The 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 Class B Common Stock.
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, and currently is administered by the Committee. Options
granted under the 1995 Option Plan are not transferable 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.
At December 27, 1997, options to purchase 295,150 shares of Class B Common
Stock were outstanding. Additionally, during 1997, 53,300 options were canceled.
No options were granted in 1997, and no additional options will be granted under
the 1995 Option Plan.
1996 Stock Option Plan. Pursuant to the 1996 Option Plan, executive
officers and key employees of the Company are eligible to receive awards of
stock options. The 1996 Option Plan provides for the award of NQSO's only. The
1996 Option Plan is administered by the Committee. Subject to the provisions of
the 1996 Option Plan, the Committee determines when and to whom awards are
granted, and the number of shares covered by each award. The Committee may
interpret the 1996 Option Plan and may at any time adopt such rules and
regulations for the 1996 Option Plan as it deems advisable. In addition, the
Committee may cancel or suspend awards. Options granted under the 1996 Option
Plan are not transferable or assignable, other than upon death.
The exercise price for options granted under the 1996 Option Plan is at
least 100% of the fair market value of a share of Class B Common Stock on the
date of grant. Options vest ratably on each of the first four anniversaries of
the date of grant. However, notwithstanding such vesting, no option becomes
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 Stock is listed for the five consecutive
trading days immediately preceding the applicable date. 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.
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<PAGE> 50
The Board of Directors may at any time and from time to time suspend,
amend, modify or terminate the 1996 Option Plan; provided, however, that, to the
extent required by Rule 16b-3 promulgated under 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.
The Company has reserved 550,000 shares of Class B Common Stock for
issuance upon exercise of options granted under the 1996 Option Plan. During
1997, the Company granted options to purchase 16,000 shares, none of which went
to Named Executive Officers or directors. At December 27, 1997, options to
purchase 334,000 shares of Class B Common Stock were outstanding. Additionally,
40,000 options were canceled during 1997. No options may be granted under the
1996 Option Plan after the tenth anniversary of the approval of the 1996 Option
Plan.
1997 Employee Stock Purchase Plan. The 1997 Employee Stock Purchase Plan
(the "Employee Plan") was adopted by the Company's stockholders on April 29,
1997. The purpose of the Employee Plan is to permit eligible employees to
purchase Class A Common Stock, through payroll deductions, at a specified
percentage of the fair market value of the Class A Common Stock. It is intended
that the Employee Plan qualify as an employee stock purchase plan under Section
423 of the Code.
The Employee Plan is administered by the Committee. Subject to the express
provisions of the Employee Plan, the Committee, by majority action thereof, is
authorized to interpret and prescribe, amend and rescind rules relating to the
Employee Plan and to make all other determinations necessary or advisable for
the administration of the Employee Plan.
The Employee Plan generally operates on the basis of a 12-month period
beginning July 1 of each year (each a "Plan Year"). The first Plan Year
commenced July 1, 1997. With respect to any Plan Year, all full-time employees
of the Company and its participating subsidiaries (including officers and
directors who are also employees) who have been employed continuously for at
least three months prior to July 1 of such Plan Year are eligible to participate
in the Employee Plan. No eligible employee may participate in the Employee Plan
if after the purchase such employee would own (or have the right to purchase)
stock of the Company possessing 5% or more of the total combined voting power or
value of all classes of capital stock of the Company.
An eligible employee electing to participate in the Employee Plan may
contribute funds for the purchase of Class A Common Stock under the Employee
Plan by directing his or her employer to withhold (in increments of 1%) not less
than 1% and not more than 15% of his or her Base Earnings (as defined in the
Employee Plan). A participant may elect to reduce (but not increase) the amount
of rate of withholding for any Plan Year. Amounts withheld will be held by the
participant's employer and automatically applied to purchase Class A Common
Stock unless refunded to the participant by written election or direction of
such participant.
Amounts withheld from (and not refunded to) a participant in the Employee
Plan will be used to purchase Class A Common Stock as of the last business day
of each quarter of the Plan Year at a price equal to 85% of the Fair Market
Value (as defined in the Employee Plan) of a share of Class A Common Stock on
the first business day of such Plan Year.
No participant in the Employee Plan may purchase Class A Common Stock
under the Employee Plan and all other employee stock purchase plans of the
Company and any of its subsidiaries at a rate in excess of $25,000 in Fair
Market Value of such stock (determined as of the first business day of the Plan
Year with respect to which stock is granted) for each calendar year in which any
such right to purchase stock granted
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<PAGE> 51
to such participant is outstanding at any time. If a participant is not entitled
to purchase Class A Common Stock under any such other plan during a Plan Year,
the total number of shares purchased under the Employee Plan for the participant
with respect to that Plan Year may not exceed (1) $25,000 divided by (ii) the
Fair Market Value of a share of Class A Common Stock on the first day of such
Plan Year.
The Board of Directors may at any time terminate, amend or modify the
Employee Plan, provided that approval of stockholders is required to (i)
increase the total amount of Class A Common Stock which may be offered under the
Employee Plan (except for adjustments in the outstanding shares of Class A
Common Stock by reason of a stock dividend or split, combination,
recapitalization, or reclassification), (ii) withdraw the administration of the
Employee Plan from the Committee or (iii) permit any member of the Committee to
be eligible to participate in the Employee Plan.
During 1997, 33,799 shares of Class A Common Stock were issued under this
plan. Of this amount, Named Executive Officers accounted for 7,275 shares.
Currently, 235,865 shares of Class A Common Stock are available to be purchased
under the Employee Plan.
The Employee Plan is scheduled to remain in effect until June 30, 2002.
Defined Contribution Plans
401(k) Plan. The Company maintains the ProSource Retirement Advantage Plan
(the "401(k) Plan"), a defined contribution retirement plan with a cash or
deferral arrangement as described in Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code"). The 401(k) Plan is intended to be qualified
under Section 401(a) of the Code. All regular employees who are at least 21
years old, work at least 1,000 hours a year and are not excluded by a bargaining
agreement are eligible to participate in the 401(k) Plan. The 401(k) Plan
provides that each participant may make pre-tax elective contributions from 1%
to 15% of his or her compensation, subject to statutory limits. The Company
contributes to the 401(k) Plan (i) 2% of an eligible employee's compensation,
and (ii) fifty cents for every dollar contributed by the employee up to the
first 6% 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 25% 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 four 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.
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<PAGE> 52
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock at February 9, 1998 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. On that date 3,526,835 shares
of Class A Common Stock and 5,856,756 shares of Class B Common Stock were
outstanding. 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.
<TABLE>
<CAPTION>
Class A and B
Shares of Class A Shares of Class B Combined
Common Stock Common Stock Voting
Beneficially Owned (1) Beneficially Owned (1) Power (2)
------------------------ ----------------------- ----------
Name Number Percentage Number Percentage Percentage
- -------------------------------------- ------ ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Onex DHC LLC(3) (7)
421 Leader Street
Marion, Ohio 43302 ............... 500,000 14.2% 4,951,242 84.5% 80.5%
Onex Corporation (4) (7)
161 Bay Street
Toronto, Ontario
Canada ............................ 500,000 14.2 5,236,956 89.4 85.1
Onex OMI LLC (7) ..................... -- -- 285,714 4.9 4.6
Onex Ohio LLC (7) .................... -- -- 379,242 6.5 6.1
Steamboat Acquisition Corp. (7)
Nebco Evans Holding Company
Nebco Evans Distributors, Inc
Holberg Industries, Inc.
Holberg Incorporated
John V. Holten
545 Steamboat Road
Greenwich, CN 06830 .............. 496,583 14.1 5,218,072 89.1 84.8
AmeriServe Food Distribution, Inc. (7)
14841 Dallas Parkway
Dallas, TX 75240 ................. 496,583 14.1 5,218,072 89.1 84.8
The Kaufman Fund, Inc.
140 E. 45th Street, 43rd Floor
New York, NY 10017 ............... 1,000,000 28.4 -- -- 1.6
Skyline Asset Management
311 South Wacker Drive, Ste. 4500
Chicago, IL 60606 ................. 480,300 13.6 -- -- *
Heartland Advisors, Inc.
790 North Milwaukee Street
Milwaukee, WI 53202 ............... 300,000 8.5 -- -- *
David R. Parker (5) .................. 7,337 * 174,378 3.0 2.3
Thomas C. Highland (5) ............... 1,118 * 94,188 1.6 1.2
Daniel J. Adzia (5) .................. -- -- 55,500 * *
William F. Evans (5) ................. 4,187 * 55,500 * *
Gerald W. Schwartz (4) ............... 500,000 14.2 5,236,956 89.4 85.1
</TABLE>
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<PAGE> 53
<TABLE>
<CAPTION>
Class A and B
Shares of Class A Shares of Class B Combined
Common Stock Common Stock Voting
Beneficially Owned (1) Beneficially Owned (1) Power (2)
------------------------ ----------------------- ----------
Name Number Percentage Number Percentage Percentage
- -------------------------------------- ------ ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Anthony R. Melman (6) ................ -- -- -- -- --
Michael Carpenter .................... -- -- 18,200 * *
Anthony Munk (6) ..................... -- -- -- -- --
C. Lee Johnson ....................... -- -- 4,500 * *
R. Geoffrey P. Styles ................ 1,000 * 7,300 * *
Robert S. Donaldson (5) .............. 1,732 * 25,960 * *
All directors and executive
officers of the Company as a group
(17 persons) ....................... 517,645 14.7 5,778,495 97.0 92.2
</TABLE>
- ----------
* Less than 1%.
(1) Each share of Class B Common Stock is presently 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. All information in the table assumes that no
shares of Class B Common Stock are converted into shares of Class A Common
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) Onex DHC LLC's beneficial ownership of the Company's Common Stock includes
(i) 500,000 shares of Class A Common Stock and 4,572,000 shares of Class B
Common Stock beneficially owned directly by Onex DHC LLC and (ii) 379,242
shares of Class B Common Stock beneficially owned directly by Onex Ohio
LLC, which Onex DHC LLC may be deemed to own beneficially as a result of
its direct beneficial ownership of 74.9% of the equity of Onex Ohio LLC
(clauses (i) and (ii) together referred to as the "DHC Shares").
(4) As the direct and indirect beneficial owner of 100% of the equity of Onex
DHC LLC, and the direct beneficial owner of 25.1% of the equity of Onex
Ohio LLC, Onex Corporation may be deemed to own beneficially the DHC
Shares. In addition, as the indirect beneficial owner of 100% of the
equity of Onex OMI LLC, Onex Corporation may be deemed to own beneficially
285,714 shares of Class B Common Stock beneficially owned directly by Onex
OMI LLC. Gerald W. Schwartz is the Chairman of the Board, President and
Chief Executive Officer of Onex Corporation and the indirect holder of all
the issued and outstanding Multiple Voting Shares (defined below) of Onex
Corporation, and therefore may also be deemed to own beneficially such
shares of Common Stock.
(5) Includes shares of Class B 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 - 31,078; Thomas C. Highland - 19,188,
Daniel J. Adzia - 10,500; William F. Evans - 10,500; and Robert S.
Donaldson - 5,560.
(6) Excludes shares in which Messrs. Melman and Munk have an indirect
interest, with respect to which Mr. Schwartz, Onex Corporation and Onex
DHC LLC share beneficial ownership.
(7) On January 29, 1998, AmeriServe, Steamboat Acquisition Corp. ("Merger
Sub") and the Company entered into an Agreement and Plan of Merger
pursuant to which, subject to the terms and conditions thereof, AmeriServe
has agreed to acquire the Company for consideration of $15.00 per share.
In connection therewith, AmeriServe and Merger Sub entered into a Voting
Agreement (the "Voting Agreement"), dated as of January 29, 1998, with
Onex DHC LLC and certain of its affiliates, including Onex OMI LLC and
Onex Ohio LLC (collectively, the "Onex Stockholders"), pursuant to which
the Onex Stockholders have agreed to vote the shares beneficially owned by
such stockholders (the "Subject Shares"), among other things, in favor of
the adoption of the merger agreement and the merger contemplated thereby,
and the Onex Stockholders have granted AmeriServe and Merger Sub an
irrevocably proxy to vote the Subject Shares in such manner. Pursuant to
the Voting Agreement, the Onex Stockholders have also granted to Merger
Sub an irrevocable option (the "Merger Sub Option") to purchase the
Subject Shares at $15.00 per share under certain circumstances if the
merger agreement is terminated. Based on information contained in a
Statement on Schedule 13D (the "Schedule 13D") filed with the SEC on
February 9, 1998 by AmeriServe, Merger Sub and certain of their affiliates
(the "Filing Persons"), as of January 29, 1998, under the definition of
"beneficial ownership" as set forth in Rule 13d-3 under the Exchange Act,
Merger Sub may be deemed to beneficially own the Subject Shares subject to
the Voting Agreement. If Merger Sub were to exercise the Merger Sub
Option, Merger Sub would have the power to dispose of all of the Subject
Shares. Unless and until Merger Sub or its designee, if any, acquires
shares of Common Stock upon exercise of the Merger Sub Option, neither
Merger Sub nor such designee, if any, has any power to dispose of any
shares of Common Stock. The Filing Persons may be deemed to share the
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<PAGE> 54
power to direct the voting of the Subject Shares with respect to the
Merger and certain related actions, in accordance with the terms of the
Voting Agreement, and, upon exercise of the Merger Sub Option, would have
the shared power to direct the voting of and the disposition of such
shares.
In addition, as of December 27, 1997, Messrs. Schwartz and Styles
beneficially owned 13,051,878 and 17,000 subordinate voting shares of Onex
Corporation ("Subordinate Voting Shares"), respectively, representing 27.6% 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 Mr. Styles.
All directors and executive officers of the Company as a group owned 13,068,878
Subordinate Voting Shares, representing 27.6% of the outstanding Subordinate
Voting Shares. Subordinate Voting Shares beneficially owned includes shares
which Mr. Styles (9,000) 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.
Item 13. Certain Relationships and Related Transactions.
Shareholders Agreements. All of the Company's employees, including
executive officers, and directors who purchased Class B Common Stock from the
Company prior to the Company's initial public offering are parties to
shareholders agreements (the "Shareholders Agreements") under which all such
Class B Common Stock, as well as Class A Common Stock issuable upon conversion
thereof and securities convertible into shares of Class B Common Stock
(including shares issued upon exercise of options), held by them are subject to
certain restrictions on transfer. Such restrictions provide, among other things,
that, in the case of employee stockholders, sales through the public markets are
subject to a right of first offer in favor of the Company, and, if the Company
declines to purchase the shares, limitations on the amount sold. The
Shareholders Agreements also provide that, subject to certain exceptions,
employee stockholders have the right to participate with Onex in certain sales
of Common Stock and that Onex may compel the sale of Common Stock by such
stockholders in connection with certain sales of shares by Onex. In addition,
the Shareholders Agreements provide employee and director stockholders with
"piggyback" registration rights. The Shareholders Agreements terminate if Onex
ceases to hold in the aggregate 20% of the outstanding voting capital stock of
the Company of if another person or group holds in the aggregate a greater
percentage of the outstanding voting capital stock of the Company than Onex.
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Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. and 2. Financial Statements and Financial Statement Schedules
The following consolidated financial statements and financial statement
schedules of the Company are filed as part of this Report:
Independent Auditors' Report
Consolidated Balance Sheets as of December 27, 1997 and December 28, 1996
Consolidated Statements of Operations for the years ended December 27,
1997, December 28, 1996 and December 30, 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 27, 1997, December 28, 1996 and December 30, 1995
Consolidated Statements of Cash Flows for the years ended December 27,
1997, December 28, 1996 and December 30, 1995
Notes to Consolidated Financial Statements for the years ended December
27, 1997, December 28, 1996 and December 30, 1995
Schedule I - Condensed Financial Information of the Registrant (ProSource,
Inc. - Parent Only) for the years ended December 27, 1997, December 28,
1996 and December 30, 1995
Schedule II - Valuation and Qualifying Accounts for the years ended
December 27, 1997, December 28, 1996 and December 30, 1995
3. Exhibits
The following exhibits are filed with this Report or are incorporated by
reference.
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of January 29, 1998, by
and among AmeriServe Food Distribution, Inc., Steamboat
Acquisition Corp. and the Company (8)
3.1 Restated Certificate of Incorporation of the Company(4)
3.2 Amended and Restated By-Laws of the Company, as amended by
Amendment No. 1 thereto(6)
4.1 Form of Certificate for Class A Common Stock(2)
10.1 Amended and Restated Management Shareholders Agreement among
ProSource, Inc., Onex DHC LLC and the individuals party thereto
from time to time(4)
10.2 Amended and Restated Director Shareholders Agreement among
ProSource, Inc., Onex DHC LLC and the individuals party thereto
from time to time(4)
55
<PAGE> 56
Exhibit No. Description
- ----------- -----------
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(1)
10.4 Credit Agreement, dated as of March 14, 1997, among ProSource
Services Corporation, various Financial Institutions and The Bank
of Nova Scotia, as Administrative Agent(4)
10.5 Revolving Note, dated March 14, 1997, executed by ProSource
Services Corporation and payable to the order of The Bank of Nova
Scotia in the original principal amount of $150,000,000(4)
10.6 Borrower Pledge Agreement, made as of March 14, 1997, by
ProSource Services Corporation in favor of The Bank of Nova
Scotia, as Administrative Agent(4)
10.7 Parent Pledge Agreement, made as of March 14, 1997, by ProSource,
Inc. in favor of The Bank of Nova Scotia, as Administrative
Agent(4)
10.8 Parent Guaranty, made as of March 14, 1997, by ProSource, Inc. in
favor of The Bank of Nova Scotia, as Administrative Agent(4)
10.9 Subsidiary Guaranty, made as of March 14, 1997, by Broomier
Services, Inc. in favor of The Bank of Nova Scotia, as
Administrative Agent(4)
10.10 Secured Credit Agreement, dated as of March 14, 1997, among
ProSource Receivables Corporation and ProSource Services
Corporation, as Servicer, and various Financial Institutions and
the Bank of Nova Scotia, as Issuer, as Swingling Bank and as
Administrative Agent(4)
10.11 Purchase and Sale Agreement, dated as of March 14, 1997, between
ProSource Services Corporation and ProSource Receivables
Corporation(4)
10.12 Note, dated March 14, 1997, executed by ProSource Receivables
Corporation and payable to the order of The Bank of Nova Scotia
in the original principal amount of $150,000,000(4)
10.13 Swingline Note, dated March 14, 1997, executed by ProSource
Receivables Corporation and payable to the order of The Bank of
Nova Scotia in the original principal amount of $15,000,000(4)
10.14 Form of Distribution Agreement, dated as of June 30, 1992,
between Burger King Corporation and ProSource Services
Corporation(1)
10.15 Form of Amendment Agreement, dated as of June 30, 1992, between
Burger King Corporation and ProSource Services Corporation(1)
10.16 Addendum to Forms of Distribution Agreement and Amendment
Agreement(1)
10.17 Amended and Restated Employment Agreement, dated as of November
15, 1996, between ProSource Services Corporation and David R.
Parker(4)
10.18 Amended and Restated Employment Agreement, dated as of November
15, 1996, between ProSource Services Corporation and Thomas C.
Highland(4)
56
<PAGE> 57
Exhibit No. Description
- ----------- -----------
10.19 Employment Agreement, dated as of April 1, 1995, between
ProSource Services Corporation and Daniel Adzia(1)
10.20 Employment Agreement, dated July 1, 1992, between ProSource
Services Corporation and Paul A. Garcia de Quevedo(1)
10.21 Employment Agreement, dated as of July 1, 1995, between ProSource
Services Corporation and Dennis Andruskiewicz(1)
10.22 Employment Agreement, dated April 1, 1994, between ProSource
Services Corporation and John E. Foley(1)
10.23 Amended and Restated Management Option Plan (1995)(3)
10.24 1996 Stock Option Plan(3)
10.25 ProSource, Inc. 1997 Directors Stock Option Plan(5)
10.26 Amended and Restated ProSource, Inc. 1997 Employee Stock Purchase
Plan(6)
10.27 Lease Agreement, dated as of August 22, 1991, between Burger King
Corporation (subsequently assigned to ProSource Services
Corporation) and Gulch Corporation, doing business as GE Capital
Fleet Services(2)
10.28 Vehicle Lease and Service Agreement, dated as of June 9, 1997,
between Penske Truck Leasing Co., L.P. and ProSource Services
Corporation(7)
10.29 License Agreement, dated August 18, 1997, between Penske Truck
Leasing Co., L.P. and ProSource Services Corporation(7)
10.30 Voting Agreement, dated as of January 29, 1998, by and among
AmeriServe Food Distribution, Inc., Steamboat Acquisition Corp.
and Onex DHC LLC and certain of its affiliates(8)
21.1 Subsidiaries of the Company
23.1 Consent of Independent Public Accountants
27.1 Financial Data Schedule
- ----------
(1) Incorporated by reference to the Registration Statement (Registration No.
333-11499) on Form S-1 of the Company filed with the Commission on
September 6, 1996.
(2) Incorporated by reference to Amendment No. 3 to the Registration Statement
(Registration No. 333-11499) on Form S-1 of the Company filed with the
Commission on October 29, 1996.
(3) Incorporated by reference to Amendment No. 4 to the Registration Statement
(Registration No. 333-11499) on Form S-1 of the Company filed with the
Commission on November 6, 1996.
57
<PAGE> 58
(4) Incorporated by reference to the Annual Report on Form 10-K of the Company
for the fiscal year ended December 28, 1996 filed with the Commission on
March 28, 1997.
(5) Incorporated by reference to the Quarterly Report on Form 10-Q of the
Company for the fiscal quarter ended March 29, 1997 filed with the
Commission on May 13, 1997.
(6) Incorporated by reference to the Quarterly Report on Form 10-Q of the
Company for the fiscal quarter ended June 28, 1997 filed with the
Commission on August 11, 1997.
(7) Incorporated by reference to the Quarterly Report on Form 10-Q of the
Company for the fiscal quarter ended September 28, 1997 filed with the
Commission on November 11, 1997.
(8) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Commission on February 2, 1998.
(b) Reports on Form 8-K
During the fourth quarter of 1997, the Company filed no reports on Form
8-K. A Form 8-K was filed on February 2, 1998 with respect to the transactions
contemplated by the merger agreement and voting agreement described herein. See
"Business -- Merger Agreement."
58
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROSOURCE, INC.
Date: March 2, 1998 By: /s/ David R. Parker
-------------------
David R. Parker
Chairman of the Board of Directors
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ David R. Parker Chairman of the Board of
- --------------------------- Directors (principal executive
David R. Parker officer) March 2, 1998
/s/ Thomas C. Highland President, Chief Executive Officer
- --------------------------- and Director March 2, 1998
Thomas C. Highland
/s/ Daniel J. Adzia Vice-Chairman, Chief Marketing
- --------------------------- Officer and Director March 2, 1998
Daniel J. Adzia
/s/ William F. Evans Executive Vice President, Chief
- --------------------------- Financial Officer (principal
William F. Evans financial officer) March 2, 1998
/s/ Norberto Garcia
- ---------------------------
Norberto Garcia Controller March 2, 1998
/s/ Gerald W. Schwartz
- ---------------------------
Gerald W. Schwartz Director March 2, 1998
/s/ Anthony R. Melman
- ---------------------------
Anthony R. Melman Director March 2, 1998
/s/ Michael Carpenter
- ---------------------------
Michael Carpenter Director March 2, 1998
/s/ Anthony Munk
- ---------------------------
Anthony Munk Director March 2, 1998
/s/ C. Lee Johnson
- ---------------------------
C. Lee Johnson Director March 2, 1998
/s/ R. Geoffrey P. Styles
- ---------------------------
Geoffrey P. Styles Director March 2, 1998
59
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors and Stockholders
ProSource, Inc.:
Under date of February 20, 1998, we reported on the consolidated balance sheets
of ProSource, Inc. and subsidiaries as of December 27, 1997 and December 28,
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 27, 1997, which are included in the Company's Annual Report on Form
10-K. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedules in the
Company's Annual Report on Form 10-K. These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
/s/ KPMG PEAT MARWICK LLP
Miami, Florida
February 20, 1998
60
<PAGE> 61
PROSOURCE, INC. (PARENT ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets Information
December 27, 1997 and December 28, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................... $ 689 $ 670
Due from subsidiaries .............................. 2,621 2,936
--------- ---------
Total current assets ........................... 3,310 3,606
Investment in subsidiaries ........................... 58,735 72,526
Deferred income taxes ................................ 2,387 2,383
--------- ---------
Total assets ................................... $ 64,432 $ 78,515
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accrued liabilities ................................ $ 17 $ --
--------- ---------
Total current liabilities .......................... 17 --
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred Stock .................................... -- --
Class A Common Stock ............................... 35 34
Class B Common Stock ............................... 58 60
Additional paid-in capital ......................... 104,934 105,256
Accumulated deficit ................................ (40,580) (26,901)
Accumulated foreign currency translation adjustments (32) 66
--------- ---------
Total stockholders' equity ..................... 64,415 78,515
--------- ---------
Total liabilities and stockholders' equity ..... $ 64,432 $ 78,515
========= =========
</TABLE>
See accompanying notes to condensed financial information.
61
<PAGE> 62
PROSOURCE, INC. (PARENT ONLY)
SCHEDULE 1 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Statements of Operations and
Retained Earnings (Deficit) Information
For the years ended December 27, 1997,
December 28, 1996 and December 30, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C>
Revenues .................................................... $ -- $ -- $ --
Operating expenses .......................................... -- -- (3)
Contract termination charges ................................ -- (5,224) --
Interest expense ............................................ -- (748) (729)
Interest income ............................................. 18 33 53
Equity in losses of subsidiaries ............................ (13,693) (21,418) (1,294)
-------- -------- --------
Loss before income taxes and extraordinary item .......... (13,675) (27,357) (1,973)
Income tax (provision) benefit .............................. (4) 2,386 417
-------- -------- --------
Loss before extraordinary item ........................... (13,679) (24,971) (1,556)
Gain on early retirement of debt net of tax provision of $397 -- 610 --
-------- -------- --------
Net loss ................................................. (13,679) (24,361) (1,556)
Retained earnings (deficit), beginning of year .............. (26,901) (2,540) (984)
-------- -------- --------
Retained earnings (deficit), end of year .................... $(40,580) $(26,901) $ (2,540)
======== ======== ========
</TABLE>
See accompanying notes to condensed financial information.
62
<PAGE> 63
PROSOURCE, INC. (PARENT ONLY)
SCHEDULE 1 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Statements of
Cash Flow Information For the years
ended December 27, 1997, December 28,
1996 and December 30, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................................ $(13,679) $(24,361) $ (1,556)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Undistributed losses of subsidiaries ............................ 13,693 21,418 914
Contract termination charges .................................... -- 5,224 --
Dividends received from subsidiaries ............................ -- -- 7,208
Deferred income taxes ........................................... (4) (1,989) (103)
Gain on early retirement of debt ................................ -- (1,007) --
Amortization of note discount ................................... -- 740 592
Changes in operating assets and liabilities:
Decrease in other current assets .............................. -- -- 58
Increase (decrease) in accrued liabilities .................... 17 (110) 100
-------- -------- --------
Net cash provided by (used in) operating activities ......... 27 (85) 7,213
-------- -------- --------
Cash flows from investing activities:
Capital contributions to subsidiaries ............................ -- (31,802) (38,897)
Advances to/from subsidiaries .................................... 90 (2,870) (7,170)
-------- -------- --------
Net cash provided by (used in) investing activities ......... 90 (34,672) (46,067)
-------- -------- --------
Cash flows from financing activities:
Issuance of long-term debt ........................................ -- -- 12,326
Repayments of long-term debt ...................................... -- (9,766) (2,085)
Proceeds from issuance of common stock ............................ -- 44,464 28,585
Payments to acquire and retire treasury stock ..................... -- (205) (222)
-------- -------- --------
Net cash provided by financing activities ................... -- 34,493 38,604
-------- -------- --------
Effect of exchange-rate changes on cash ............................. (98) (5) 71
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ........ 19 (269) (179)
Cash and cash equivalents, beginning of year ........................ 670 939 1,118
-------- -------- --------
Cash and cash equivalents, end of year .............................. $ 689 $ 670 $ 939
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .................................................... $ -- $ -- $ 41
======== ======== ========
Income taxes, net of refunds ................................ $ -- $ -- $ 1
======== ======== ========
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities:
In October 1997, the parent issued 33,799 Class A common shares to
employees under the 1997 Employee Stock Purchase Plan at $6.035 per share in
exchange for a reduction in advances owed by subsidiaries of $204.
During 1997, the parent recognized $28 of compensation expense (included
in equity in losses of subsidiaries) associated with the 1997 Directors Stock
Option Plan.
During 1997, the parent retired treasury stock totalling $555 in exchange
for a reduction in advances owed by subsidiaries. A subsidiary remitted this
amount to the affected stockholders.
See accompanying notes to condensed financial information.
63
<PAGE> 64
PROSOURCE, INC. (PARENT ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Notes to Condensed Financial Information
December 27, 1997, December 28, 1996 and December 30, 1995
(1) Basis of Presentation
In the parent company-only financial statements, the Company's investment
in subsidiaries is stated at cost plus equity in undistributed earnings (losses)
of subsidiaries since the date of acquisition. The parent company-only financial
statements should be read in conjunction with the ProSource, Inc. consolidated
financial statements.
(2) Stockholders' Equity
In November 1996, the Parent changed its capital structure to 10,000,000
authorized shares of $0.01 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 $0.01 par value Class B Common Stock. Each share of Class A Common Stock is
entitled to one vote per share and each share of Class B Common Stock is
entitled to ten votes. In addition, each share of Class B Common Stock is
convertible at the option of the holder thereof into one share of Class A Common
Stock and will automatically convert into one share of Class A Common Stock upon
certain events.
In November 1996, the Parent's board of directors declared a 100-to-1
stock split. The Parent's additional paid-in capital account and the Class B
Common Stock account have been restated to retroactively reflect the stock
split.
On November 15, 1996, the Parent completed the issuance of 3,400,000
shares of Class A Common Stock (at a price of $14 per share) through an initial
public offering, resulting in net proceeds of approximately $43.2 million, after
deducting underwriting discounts and commissions, and other offering costs of
approximately $4.4 million. The net proceeds of the offering were partially used
to pay a $10 million subordinated note and the remainder was advanced as a
capital contribution to ProSource Services Corporation, a wholly-owned
subsidiary.
(3) Termination of Contract Agreements
In connection with the initial public offering, the Parent incurred a
noncash charge of $4 million resulting from the issuance to Onex of 285,714
shares of Class B Common Stock valued at the initial public offering price in
exchange for the agreement of Onex to relinquish its right to receive an annual
fee, previously paid in cash, for management services rendered to the Company.
In November 1996, the Parent amended the ProSource, Inc. Management Option
Plan (1995) to provide for unvested options to vest at a rate of 10% per year
through December 31, 1999, when all remaining options will vest. In connection
with this amendment, the Parent Company recorded a pre-tax charge of $1.2
million reflecting the difference between the market price of the Company's
Class A Common Stock on the date of amendment and the exercise price of such
options.
64
<PAGE> 65
PROSOURCE, INC. (PARENT ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Notes to Condensed Financial Information (continued)
December 27, 1997, December 28, 1996 and December 30, 1995
(4) Reclassification
Certain amounts previously presented in the financial statements of prior
years have been reclassified to conform to the current year presentation.
65
<PAGE> 66
PROSOURCE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 30, 1995, December 28, 1996 and December 27, 1997
(Dollars in thousands)
Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
<S> <C>
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
Additions charged to costs and expenses ................... 1,682
Recoveries ................................................ 709
Write-offs ................................................ (2,642)
-------
BALANCE, December 28, 1996 .................................... $ 2,334
Additions charged to costs and expenses ................... 2,275
Recoveries ................................................ 268
Reclassifications ......................................... 1,160
Write-offs ................................................ (1,952)
-------
BALANCE, December 27, 1997 .................................... $ 4,085
=======
</TABLE>
66
<PAGE> 67
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of January 29, 1998, by
and among AmeriServe Food Distribution, Inc., Steamboat
Acquisition Corp. and the Company (8)
3.1 Restated Certificate of Incorporation of the Company(4)
3.2 Amended and Restated By-Laws of the Company, as amended by
Amendment No. 1 thereto(6)
4.1 Form of Certificate for Class A Common Stock(2)
10.1 Amended and Restated Management Shareholders Agreement among
ProSource, Inc., Onex DHC LLC and the individuals party thereto
from time to time(4)
10.2 Amended and Restated Director Shareholders Agreement among
ProSource, Inc., Onex DHC LLC and the individuals party thereto
from time to time(4)
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(1)
10.4 Credit Agreement, dated as of March 14, 1997, among ProSource
Services Corporation, various Financial Institutions and The Bank
of Nova Scotia, as Administrative Agent(4)
10.5 Revolving Note, dated March 14, 1997, executed by ProSource
Services Corporation and payable to the order of The Bank of Nova
Scotia in the original principal amount of $150,000,000(4)
10.6 Borrower Pledge Agreement, made as of March 14, 1997, by
ProSource Services Corporation in favor of The Bank of Nova
Scotia, as Administrative Agent(4)
10.7 Parent Pledge Agreement, made as of March 14, 1997, by ProSource,
Inc. in favor of The Bank of Nova Scotia, as Administrative
Agent(4)
10.8 Parent Guaranty, made as of March 14, 1997, by ProSource, Inc. in
favor of The Bank of Nova Scotia, as Administrative Agent(4)
10.9 Subsidiary Guaranty, made as of March 14, 1997, by Broomier
Services, Inc. in favor of The Bank of Nova Scotia, as
Administrative Agent(4)
10.10 Secured Credit Agreement, dated as of March 14, 1997, among
ProSource Receivables Corporation and ProSource Services
Corporation, as Servicer, and various Financial Institutions and
the Bank of Nova Scotia, as Issuer, as Swingling Bank and as
Administrative Agent(4)
10.11 Purchase and Sale Agreement, dated as of March 14, 1997, between
ProSource Services Corporation and ProSource Receivables
Corporation(4)
10.12 Note, dated March 14, 1997, executed by ProSource Receivables
Corporation and payable to the order of The Bank of Nova Scotia
in the original principal amount of $150,000,000(4)
10.13 Swingline Note, dated March 14, 1997, executed by ProSource
Receivables Corporation and payable to the order of The Bank of
Nova Scotia in the original principal amount of $15,000,000(4)
10.14 Form of Distribution Agreement, dated as of June 30, 1992,
between Burger King Corporation and ProSource Services
Corporation(1)
<PAGE> 68
Exhibit No. Description
- ----------- -----------
10.15 Form of Amendment Agreement, dated as of June 30, 1992, between
Burger King Corporation and ProSource Services Corporation(1)
10.16 Addendum to Forms of Distribution Agreement and Amendment
Agreement(1)
10.17 Amended and Restated Employment Agreement, dated as of November
15, 1996, between ProSource Services Corporation and David R.
Parker(4)
10.18 Amended and Restated Employment Agreement, dated as of November
15, 1996, between ProSource Services Corporation and Thomas C.
Highland(4)
10.19 Employment Agreement, dated as of April 1, 1995, between
ProSource Services Corporation and Daniel Adzia(1)
10.20 Employment Agreement, dated July 1, 1992, between ProSource
Services Corporation and Paul A. Garcia de Quevedo(1)
10.21 Employment Agreement, dated as of July 1, 1995, between ProSource
Services Corporation and Dennis Andruskiewicz(1)
10.22 Employment Agreement, dated April 1, 1994, between ProSource
Services Corporation and John E. Foley(1)
10.23 Amended and Restated Management Option Plan (1995)(3)
10.24 1996 Stock Option Plan(3)
10.25 ProSource, Inc. 1997 Directors Stock Option Plan(5)
10.26 Amended and Restated ProSource, Inc. 1997 Employee Stock Purchase
Plan(6)
10.27 Lease Agreement, dated as of August 22, 1991, between Burger King
Corporation (subsequently assigned to ProSource Services
Corporation) and Gulch Corporation, doing business as GE Capital
Fleet Services(2)
10.28 Vehicle Lease and Service Agreement, dated as of June 9, 1997,
between Penske Truck Leasing Co., L.P. and ProSource Services
Corporation(7)
10.29 License Agreement, dated August 18, 1997, between Penske Truck
Leasing Co., L.P. and ProSource Services Corporation(7)
10.30 Voting Agreement, dated as of January 29, 1998, by and among
AmeriServe Food Distribution, Inc., Steamboat Acquisition Corp.
and Onex DHC LLC and certain of its affiliates(8)
21.1 Subsidiaries of the Company
<PAGE> 69
Exhibit No. Description
- ----------- -----------
23.1 Consent of Independent Public Accountants
27.1 Financial Data Schedule
- ----------
(1) Incorporated by reference to the Registration Statement (Registration No.
333-11499) on Form S-1 of the Company filed with the Commission on
September 6, 1996.
(2) Incorporated by reference to Amendment No. 3 to the Registration Statement
(Registration No. 333-11499) on Form S-1 of the Company filed with the
Commission on October 29, 1996.
(3) Incorporated by reference to Amendment No. 4 to the Registration Statement
(Registration No. 333-11499) on Form S-1 of the Company filed with the
Commission on November 6, 1996.
(4) Incorporated by reference to the Annual Report on Form 10-K of the Company
for the fiscal year ended December 28, 1996 filed with the Commission on
March 28, 1997.
(5) Incorporated by reference to the Quarterly Report on Form 10-Q of the
Company for the fiscal quarter ended March 29, 1997 filed with the
Commission on May 13, 1997.
(6) Incorporated by reference to the Quarterly Report on Form 10-Q of the
Company for the fiscal quarter ended June 28, 1997 filed with the
Commission on August 11, 1997.
(7) Incorporated by reference to the Quarterly Report on Form 10-Q of the
Company for the fiscal quarter ended September 28, 1997 filed with the
Commission on November 11, 1997.
(8) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Commission on February 2, 1998.
<PAGE> 1
Exhibit 21.1
PROSOURCE, INC.
Significant Subsidiaries
<TABLE>
<CAPTION>
Legal Name State of Incorporation Trade Name
---------- ---------------------- ----------
<S> <C> <C>
ProSource Services Corporation Delaware ProSource Distribution Services
BroMar Services, Inc. Delaware n/a
ProSource Receivables Corporation Delaware n/a
PSD Transportation Services, Inc. Nevada n/a
ProSource Investments, Inc. Delaware n/a
</TABLE>
67
<PAGE> 1
Exhibit 23.1
[KPMG PEAT MARWICK LLP LETTERHEAD]
The Board of Directors
ProSource, Inc.:
We consent to incorporation by reference in the registration
statement (No. 333-36849 and 333-36851) on Form S-8 of ProSource, Inc. of our
report dated February 20, 1998, relating to the consolidated blance sheets of
ProSource, Inc. and subsidiaries as of December 27, 1997, and December 28,
1996, and the related consolidated statements of operations, retained earnings,
and cash flows for each of the years in the three-year period ended December
27, 1997, and all related schedules, which report appears in the December 27,
1997, annual report on Form 10-K of ProSource, Inc.
Our report refers to a change in accounting method of capitalization
of business process reengineering activities in the fourth quarter of 1997.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
March 2, 1998
68
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PROSOURCE, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-27-1997 DEC-27-1996
<PERIOD-END> DEC-27-1997 DEC-27-1996
<CASH> 12,501,000 2,763,000
<SECURITIES> 0 0
<RECEIVABLES> 226,332,000 221,674,000
<ALLOWANCES> 4,085,000 2,334,000
<INVENTORY> 160,621,000 144,040,000
<CURRENT-ASSETS> 410,993,000 384,430,000
<PP&E> 89,368,000 72,181,000
<DEPRECIATION> 29,407,000 22,544,000
<TOTAL-ASSETS> 548,101,000 503,724,000
<CURRENT-LIABILITIES> 304,965,000 298,882,000
<BONDS> 174,200,000 112,584,000
0 0
0 0
<COMMON> 93,000 94,000
<OTHER-SE> 64,322,000 78,421,000
<TOTAL-LIABILITY-AND-EQUITY> 548,101,000 503,724,000
<SALES> 3,901,165,000 4,125,054,000
<TOTAL-REVENUES> 3,901,165,000 4,125,054,000
<CGS> 3,591,368,000 3,806,811,000
<TOTAL-COSTS> 3,591,368,000 3,806,811,000
<OTHER-EXPENSES> 302,080,000 345,494,000
<LOSS-PROVISION> 2,275,000 1,682,000
<INTEREST-EXPENSE> 11,745,000 14,824,000
<INCOME-PRETAX> (1,476,000) (40,381,000)
<INCOME-TAX> 485,000 15,410,000
<INCOME-CONTINUING> (991,000) (24,971,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (6,262,000) 610,000
<CHANGES> (6,426,000) 0
<NET-INCOME> (13,679,000) (24,361,000)
<EPS-PRIMARY> (1.47) (4.20)
<EPS-DILUTED> (1.47) (4.20)
</TABLE>
