<PAGE> 1
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[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 of (I.R.S. Employer Identification No.)
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.
<PAGE> 2
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.
2
<PAGE> 3
FORM 10-K/A
AMENDMENT NO. 1
PROSOURCE, INC.
The undersigned registrant hereby amends "Item 6. Selected
Consolidated Financial Data" and the following portions of "Item 8. Financial
Statements and Supplementary Data" in its Annual Report on Form 10-K for the
Fiscal Year ended December 27, 1997: the Consolidated Statements of Operations,
Consolidated Statements of Cash Flows and Notes (1)(j), (2), (3), (9)(b) and
(12) of the Notes to Consolidated Financial Statements. In furtherance thereof,
Item 6 and Item 8 of such Report are each hereby amended to read in their
respective entireties as follows:
3
<PAGE> 4
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) $ (4.31) $ (0.18) $ (1.01) $ (0.35)
Extraordinary items, net ............................ (0.67) 0.11 (0.17) -- --
Cumulative effect of a change in accounting
principle, net ................................... (0.69) -- -- -- --
--------- --------- --------- --------- ---------
Net loss per common share ..................... $ (1.47) $ (4.20) $ (0.35) $ (1.01) $ (0.35)
========= ========= ========= ========= =========
Average outstanding shares used in calculation
(in thousands) ................................... 9,334 5,796 4,441 2,353 2,348
========= ========= ========= ========= =========
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.
<PAGE> 5
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PROSOURCE, INC.
Index to Consolidated Financial Statements
Independent Auditors' Report.................................................. 6
Audited Consolidated Financial Statements:
Consolidated Balance Sheets.......................................... 7
Consolidated Statements of Operations................................ 8
Consolidated Statements of Stockholders' Equity...................... 9
Consolidated Statements of Cash Flows................................10
Notes to Consolidated Financial Statements...........................11
4
<PAGE> 6
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
5
<PAGE> 7
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.
6
<PAGE> 8
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) $ (4.31) $ (0.18)
Extraordinary items, net (0.67) 0.11 (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 9,333,527 5,795,676 4,440,692
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 9
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.
8
<PAGE> 10
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 (589,701) (558,902) (578,813)
Borrowings on long-term debt from Onex -- -- 18,750
Borrowings on long-term debt from others 651,317 528,633 660,491
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.
9
<PAGE> 11
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.
10
<PAGE> 12
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.
11
<PAGE> 13
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.
(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.
12
<PAGE> 14
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 of accounts receivable
and inventories, and liabilities assumed of approximately $87 million,
13
<PAGE> 15
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1997, DECEMBER 28, 1996 AND DECEMBER 30, 1995
(2) BUSINESS COMBINATIONS (CONTINUED)
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. During 1997, the Company reviewed the adequacy of its reserve
associated with the NAD acquisition and concluded that the costs of
integrating NAD would be higher than originally anticipated,
principally due to employee related costs. As a result, in 1997 the
Company increased the acquisition reserve by reclassifying $3.4 million
from the restructuring reserve (see note 3). Management believes that
the recorded acquisition reserve at December 27, 1997 is sufficient to
cover all remaining costs associated with the integration of NAD.
(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, which had no impact on 1997 operating results. 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, which consist primarily of
costs associated with the termination of existing facility leases, 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
14
<PAGE> 16
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)
improvements management plans to hold and use through the completion of
the plan, and $4.1 million of capitalized software costs which do not
meet the long-term information technology strategy of the Company. The
Company measured the amount of the loss by comparing fair value of the
land and the owned buildings (determined by independent appraisals and
updated with current comparisons to similar assets) to capitalized
cost. The carrying value of furniture and equipment and capitalized
software costs was written down to net realizable value since it is
being replaced.
The Company discontinued its distribution services to Arby's
restaurants effective April 1, 1997. In connection therewith, as of
December 28, 1996, the Company accrued approximately $10.6 million of
costs associated with the termination of this agreement. During 1997,
the Company paid and charged in the aggregate $9.1 million in costs
primarily related to lease costs in connection with idle equipment and
warehouse space and costs associated with rerouting the Company's
transportation fleet required as a result of the loss of the Arby's
business. In addition, the Company reclassified approximately $1.2
million to the 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>
15
<PAGE> 17
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
16
<PAGE> 18
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)
receivable securitization facility. Pursuant to the terms of
the accounts receivable securitization facility PSC sells, on
an ongoing basis and without recourse, an undivided interest
in a designated pool of trade accounts receivable to PRC. In
order to maintain the designated balance in the pool of
accounts receivable sold, PSC is obligated to sell undivided
interests in new receivables as existing receivables are
collected. PSC has retained substantially the same credit risk
as if the receivables had not been sold. PSC, as agent for
PRC, retains collection and administrative responsibilities on
the receivables sold to PRC. The creditors for this facility
have security interests in PRC's assets (consisting primarily
of accounts receivable purchased from PSC) and are entitled to
be satisfied by such assets prior to equity holders. The
Company pays a quarterly variable commitment fee, as defined
in the agreements, based on the unused portion of the
facilities which fee averaged 0.33% of such unused portion
during 1997. At December 27, 1997, the Company had
approximately $35 million available under the Existing Credit
Facilities.
(b) PREVIOUS CREDIT FACILITY
On March 31, 1995, in conjunction with the acquisition of NAD,
the Company entered into a $240 million Loan and Security
Agreement (the "Previous Credit Facility") with a group of
banks that was retired and repaid before its maturity on March
14, 1997. The Previous Credit Facility provided for a
revolving-credit 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):
<TABLE>
<S> <C>
1998 $ 28,600
1999 25,183
2000 22,222
2001 18,342
2002 13,581
Thereafter 36,315
-------
Total $ 144,243
=======
</TABLE>
Rent expense, including contingent rental expense, was approximately
$36.8 million, $39.3 million and $30.6 million during fiscal years
1997, 1996 and 1995, respectively.
17
<PAGE> 19
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>
18
<PAGE> 20
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
-------- --------
Deferred tax assets:
<S> <C> <C>
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.
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.
19
<PAGE> 21
(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. In 1997, the
Company recognized no gain or loss associated with the
termination of these defined-benefit pension plans. At
December 27, 1997, the Company's remaining accrual of $9,000
combined with excess plan assets of approximately $46,000 are
expected to cover any remaining costs relating to the
termination of these 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.
(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
20
<PAGE> 22
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1997, DECEMBER 28, 1996 AND DECEMBER 30, 1995
(10) STOCKHOLDERS' EQUITY (continued)
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.
21
<PAGE> 23
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> <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.
22
<PAGE> 24
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.
23
<PAGE> 25
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 Arby's restaurants (primarily franchisee-owned) 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.
(14) NET LOSS PER SHARE
24
<PAGE> 26
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1997, DECEMBER 28, 1996 AND DECEMBER 30, 1995
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.
25
<PAGE> 27
SIGNATURE
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: April 30, 1998 By: /s/ David R. Parker
-------------------
David R. Parker
Chairman of the Board of Directors
(Principal Executive Officer)
26
