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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 8-K/A
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CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 21, 1998
AMERISERVE FOOD DISTRIBUTION, INC.*
(Exact Name of Registrant as Specified in its Charter)
COMMISSION FILE NUMBER: 19367
DELAWARE 75-2296149
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
14841 DALLAS PARKWAY
DALLAS, TX 75240 (972) 338-7000
(Address of Principal Executive Offices) (Registrant's Telephone Number,
Including Area Code)
* This Current Report on Form 8-K/A (this "Form 8-K/A") is also filed on
behalf of the Registrant's operating subsidiaries that are guarantors of
certain debt securities of the Registrant that are registered under the
Securities Act of 1933.
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AMERISERVE FOOD DISTRIBUTION, INC.
This Current Report on Form 8-K/A amends items 7 (a), 7 (b) and 7 (c) of the
Current Report on Form 8-K filed on May 22, 1998.
Item 7. Financial Statements and Exhibits
(a). Financial Statements of Business Acquired
ProSource, Inc. Audited Financial Statements
Independent Auditors' Report .............................................................. F-1
Consolidated Balance Sheets as of December 28, 1996 and December 27, 1997 ................. F-2
Consolidated Statements of Operations for each of the three fiscal years in the period
ended December 27, 1997 ................................................................ F-3
Consolidated Statements of Stockholders' Equity for each of the three fiscal years
in the period ended December 27, 1997 .................................................. F-4
Consolidated Statements of Cash Flows for each of the three fiscal years in the
period ended December 27, 1997 ......................................................... F-5
Notes to Consolidated Financial Statements ................................................ F-6
ProSource, Inc. Unaudited Financial Statements
Consolidated Balance Sheets as of March 28, 1998 and December 27, 1997 .................... F-19
Consolidated Statements of Operations for the thirteen weeks ended March 28,1998
and March 29, 1997 ..................................................................... F-20
Consolidated Statements of Cash Flows for the thirteen weeks ended March 28, 1998
and March 29, 1997 ..................................................................... F-22
Notes to Consolidated Financial Statements ................................................ F-23
(b). Unaudited Pro Forma Financial Information
Introductory Information .................................................................. P-1
Pro Forma Consolidated Statement of Operations for the year ended
December 27, 1997 ...................................................................... P-3
Notes to Pro Forma Consolidated Statement of Operations for the year ended
December 27, 1997 ...................................................................... P-4
Pro Forma Consolidated Statement of Operations for the six months ended June 27,
1998 .................................................................................. P-6
Notes to Pro Forma Consolidated Statement of Operations for the six months
ended June 27, 1998 ................................................................... P-7
(c). Consent of KPMG Peat Marwick LLP ............................................................. E-1
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ProSource, Inc.:
We have audited the accompanying consolidated balance sheets of ProSource,
Inc. and subsidiaries as of December 28, 1996 and December 27, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 27, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ProSource,
Inc. and subsidiaries as of December 28, 1996 and December 27, 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 27, 1997, in conformity with generally accepted
accounting principles.
As discussed in Note 13 to the consolidated financial statements, the
Company changed its method of capitalization of business process reengineering
activities in the fourth quarter of 1997.
KPMG PEAT MARWICK LLP
Miami, Florida
February 20, 1998
F-1
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PROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1996 AND DECEMBER 27, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
ASSETS
1996 1997
-------- --------
Current assets:
Cash and cash equivalents................................. $ 2,763 $ 12,501
Accounts receivable, net of allowance for doubtful accounts
of $2,334 and $4,085 respectively......................... 219,340 222,247
Inventories............................................... 144,040 160,621
Deferred income taxes, net................................ 10,914 7,190
Prepaid expenses and other current assets................. 7,373 8,434
-------- --------
Total current assets.............................. 384,430 410,993
Property and equipment, net................................. 49,637 59,961
Intangible assets, net...................................... 41,436 39,883
Deferred income taxes, net.................................. 16,100 28,802
Other assets................................................ 12,121 8,462
-------- --------
Total assets...................................... $503,724 $548,101
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $254,907 $277,953
Accrued liabilities....................................... 42,475 27,012
Current portion of long-term debt......................... 1,500 --
-------- --------
Total current liabilities......................... 298,882 304,965
Long-term debt, less current portion........................ 111,084 174,200
Other noncurrent liabilities................................ 15,243 4,521
-------- --------
Total liabilities................................. 425,209 483,686
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; Authorized 10,000,000
shares; none issued.................................... -- --
Class A common stock, $.01 par value; Authorized
50,000,000 shares; issued and outstanding 3,400,000
shares and 3,496,499 shares, respectively.............. 34 35
Class B common stock, $.01 par value; Authorized
10,000,000 shares; issued and outstanding 5,963,856
shares and 5,856,756 shares, respectively.............. 60 58
Additional paid-in capital................................ 105,256 104,934
Accumulated deficit....................................... (26,901) (40,580)
Accumulated foreign-currency translation adjustments...... 66 (32)
-------- --------
Total stockholders' equity........................ 78,515 64,415
-------- --------
Total liabilities and stockholders' equity........ $503,724 $548,101
======== ========
See accompanying notes to consolidated financial statements.
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PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 30, 1995,
DECEMBER 28, 1996 AND DECEMBER 27, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
1995 1996 1997
---------- ---------- ----------
Net sales.............................................. $3,461,837 $4,125,054 $3,901,165
Cost of sales.......................................... 3,193,270 3,806,811 3,591,368
---------- ---------- ----------
Gross profit......................................... 268,567 318,243 309,797
Operating expenses, including management fees to Onex
of $808, $729 and $0, respectively................... 255,216 301,295 302,080
Loss on impairment of long-lived assets................ -- 15,733 --
Restructuring and contract-termination charges......... 711 28,466 --
---------- ---------- ----------
Income (loss) from operations........................ 12,640 (27,251) 7,717
Interest expense, including interest to Onex of $1,738,
$1,888 and $0, respectively.......................... (14,678) (14,824) (11,745)
Interest income........................................ 1,339 1,694 2,552
---------- ---------- ----------
Loss before income taxes, extraordinary items and
cumulative effect of a change in accounting
principle......................................... (699) (40,381) (1,476)
Income tax benefit (provision)......................... (85) 15,410 485
---------- ---------- ----------
Loss before extraordinary items and cumulative effect
of a change in accounting principle............... (784) (24,971) (991)
Extraordinary (loss) gain on early retirement of debt,
net of income tax benefit (provision) of $502, $(397)
and $4,073, respectively............................. (772) 610 (6,262)
Cumulative effect of a change in accounting principle,
net of income tax benefit of $3,293.................. -- -- (6,426)
---------- ---------- ----------
Net loss..................................... $ (1,556) $ (24,361) $ (13,679)
---------- ---------- ----------
Net loss per common share (basic and diluted):
Loss before extraordinary items and cumulative effect
of a change in accounting principle............... $ (0.18) $ (4.30) $ (0.11)
Extraordinary items, net............................. (0.17) 0.10 (0.67)
Cumulative effect of a change in accounting principle,
net.................................................. -- -- (0.69)
---------- ---------- ----------
Net loss per common share.................... $ (0.35) $ (4.20) $ (1.47)
========== ========== ==========
Weighted average number of shares...................... 4,489,906 5,804,319 9,331,845
See accompanying notes to consolidated financial statements.
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PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 30, 1995,
DECEMBER 28, 1996 AND DECEMBER 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
FOREIGN-
COMMON STOCK ADDITIONAL CURRENCY
----------------- PAID-IN ACCUMULATED TRANSLATION
CLASS A CLASS B CAPITAL DEFICIT ADJUSTMENTS TOTAL
------- ------- ---------- ----------- ----------- --------
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
=== === ======== ======== ==== ========
See accompanying notes to consolidated financial statements.
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PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1995,
DECEMBER 28, 1996 AND DECEMBER 27, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
1995 1996 1997
--------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $ (1,556) $(24,361) $(13,679)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 12,693 10,937 11,231
Bad debt expense........................................ 1,845 1,682 2,275
Loss (gain) on early retirement of debt................. 1,274 (1,007) 10,335
Cumulative effect of a change in accounting principle... -- -- 9,719
Deferred income tax benefit............................. (1,749) (14,085) (8,978)
Loss on impairment of long-lived assets................. -- 15,733 --
Noncash contract-termination charges.................... -- 5,224 --
Gain on sales of property and equipment................. (184) (154) (655)
Changes in operating assets and liabilities, net of
effects of companies acquired:
(Increase) decrease in accounts receivable............ (13,441) 9,067 (5,182)
(Increase) decrease in inventories.................... 7,706 (3,608) (16,581)
Increase in prepaid expenses and other assets......... (1,208) (13,854) (3,949)
Increase in accounts payable.......................... 43,518 12,262 23,046
(Decrease) increase in accrued and other noncurrent
liabilities.......................................... 1,099 23,450 (25,952)
--------- -------- --------
Net cash (used in) provided by operating
activities.......................................... 49,997 21,286 (18,370)
--------- -------- --------
Cash flows from investing activities:
Capital expenditures...................................... (5,683) (19,987) (29,997)
Proceeds from sales of property and equipment............. 362 154 1,786
Payment for purchase of net assets acquired............... (170,279) -- --
--------- -------- --------
Net cash used in investing activities............... (175,600) (19,833) (28,211)
--------- -------- --------
Cash flows from financing activities:
Repayments of long-term debt to Onex...................... (2,085) (15,000) --
Repayments of long-term debt to others.................... (78,938) (30,269) (112,584)
Borrowings on long-term debt from Onex.................... 18,750 -- --
Borrowings on long-term debt from others, net............. 160,616 -- 174,200
Fees incurred in conjunction with long-term debt.......... -- -- (4,644)
Proceeds from issuance of common stock to Onex............ 26,500 7,000 --
Proceeds from issuance of common stock to others.......... 2,085 37,464 --
Payments to acquire and retire treasury stock............. (222) (205) (555)
--------- -------- --------
Net cash provided by (used in) financing
activities.......................................... 126,706 (1,010) 56,417
--------- -------- --------
Effect of exchange-rate changes on cash..................... 71 (5) (98)
--------- -------- --------
Net increase in cash and cash equivalents........... 1,174 438 9,738
Cash and cash equivalents at beginning of year.............. 1,151 2,325 2,763
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 2,325 $ 2,763 $ 12,501
========= ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest to Onex........................................ $ 41 $ 2,927 $ --
========= ======== ========
Interest to others...................................... $ 12,291 $ 16,435 $ 10,938
========= ======== ========
Income taxes, net of refunds............................ $ 993 $ -- $ --
========= ======== ========
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.
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PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND DECEMBER 27, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) The Business
ProSource, Inc. (the "Company") provides foodservice distribution services
to chain restaurants in North America and provides purchasing and logistics
services to the foodservice market. The Company's 3,400 associates serve
approximately 12,700 restaurants, consisting primarily of Burger King, Red
Lobster, Long John Silver's, Olive Garden, TGIFriday's, Chick-fil-A, Chili's,
Sonic, TCBY and Wendy's restaurant concepts, from 34 distribution centers and
its Corporate Support Center in Coral Gables, Florida.
The Company operates through ProSource Services Corporation ("PSC"), a
wholly owned subsidiary, and PSC's four main wholly-owned operating
subsidiaries, ProSource Distribution Services Limited ("ProSource Canada"),
BroMar Services, Inc. ("BroMar"), ProSource Receivables Corporation ("PRC"), and
PSD Transportation Services, Inc. ("PSD"). PSC commenced operations in July
1992. PRC and PSD commenced operations during fiscal 1997. The consolidated
financial statements include the results of the operations of PSC, PRC and PSD
from their inception and the results of operations of ProSource Canada and
BroMar, which were formed or acquired by the Company in connection with the
acquisition of the National Accounts Division ("NAD") of The Martin-Brower
Company ("Martin-Brower"), since the date of acquisition. The Company is a
subsidiary of Onex Corporation (collectively with its affiliates, "Onex"), a
company traded on the Toronto and Montreal stock exchanges.
The Company operates on a 52- to 53-week accounting year, ending on the
last Saturday of each calendar year.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Operations of the companies and businesses acquired have
been included in the accompanying consolidated financial statements from their
respective dates of acquisition. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Cash and Cash Equivalents
Cash on hand and in banks and short-term securities with maturities of
three months or less when purchased are considered cash and cash equivalents.
(e) Inventories
Inventories, consisting primarily of food items, are stated at the lower of
cost or net realizable value. Cost is determined using the weighted-average-cost
method and the first-in, first-out method. Cost of inventory using the
weighted-average-cost method represents 32%, 32% and 34% of inventories in 1995,
1996, and 1997, respectively.
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PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the related assets. Amortization of leasehold
improvements is computed using the straight-line method over the shorter of the
lease term or estimated useful lives of the related assets.
Costs of normal maintenance and repairs are charged to expense when
incurred. Replacements or betterments of properties are capitalized. When assets
are retired or otherwise disposed of, their cost and the applicable accumulated
depreciation and amortization are removed from the accounts, and the resulting
gain or loss is reflected in the consolidated statements of operations.
(g) Intangible Assets
Intangible assets are amortized using the straight-line method over the
following periods:
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 28, 1996 and December 27, 1997.
(h) Deferred Debt-Issuance Costs
Included in other assets are deferred debt-issuance costs which are
amortized over the term of the related debt.
(i) Self-Insurance
The Company self-insures up to certain retention limits under its workers'
compensation (except for a period during 1996-1997), auto liability and medical
and dental insurance programs. Costs in excess of retention limits are insured
under various contracts with insurance carriers. Estimated costs for claims for
which the Company is responsible are determined based on historical claims
experience, adjusted for current trends. The liability related to workers'
compensation is discounted to net present value using a risk-free treasury rate
for maturities that match the expected settlement periods. At December 28, 1996
and December 27, 1997, the estimated accrued liabilities related to workers'
compensation were approximately $4.4 million and $3.3 million, respectively, net
of a discount of approximately $1.6 million and $1.0 million, respectively.
(j) Net Loss Per Common Share
In February 1997, Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" was issued. SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to
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PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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
F-8
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PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, consisting primarily of trade accounts
payable, based on their estimated fair values at the acquisition date. As a
result of this transaction, the Company recorded goodwill of approximately $25
million. In addition, the Company incurred an extraordinary charge relating to
the write-off of approximately $0.8 million of unamortized deferred-debt
issuance costs on debt repaid at the acquisition date.
On March 30, 1996, the Company revised its estimates of certain costs
related to the acquisition by $12 million. The effect of the revision increased
acquisition-related liabilities by $12 million, deferred tax assets by
approximately $4.4 million and goodwill by approximately $7.6 million.
3. RESTRUCTURING, TERMINATION CHARGES AND IMPAIRMENT OF LONG-LIVED ASSETS
In conjunction with the NAD acquisition, the Company incurred restructuring
costs of approximately $0.7 million in 1995 primarily relating to costs incurred
to consolidate and integrate certain functions and operations. In 1996, as a
result of a study to analyze, among other things, ways to integrate the NAD
operations, improve customer service, reduce operating costs and increase
existing warehouse capacity, the Company adopted a plan, which was approved by
its Board of Directors, to consolidate and integrate its corporate and network
operations, including the closing of 19 distribution facilities under lease
agreements and 11 owned distribution facilities. As a result, in the first
quarter of 1996, the Company accrued restructuring charges of $10.9 million,
primarily related to the termination of the existing facility leases and
employee related costs. The Company began the integration of some of these
facilities, including communications to its employees and its customers in 1996.
During 1997, the Company undertook a thorough evaluation of each specific
facility's return on investment and alternative uses. As a result, the Company
now intends to close 10 distribution facilities currently leased and 9
distribution facilities currently owned. The Company expects to complete the
plan in stages through the year 2002. During 1996 and 1997, the Company paid in
the aggregate $2.8 million and $1.7 million, respectively, in costs primarily
related to facility leases and relocation costs. In addition, during 1997 the
Company reclassified $3.4 million to acquisition related liabilities. As of
December 27, 1997, the Company had approximately $3.0 million of accrued unpaid
restructuring charges. Management believes that the remaining accrued
restructuring charges are adequate to complete its plans.
The significant change brought about by the plan to integrate and
consolidate the existing distribution network impaired the value of long-lived
assets to be held and used until the plan is completed. As a result, in
conjunction with the recording of the restructuring reserves in the first
quarter of 1996, the Company recognized a loss on impairment in value of
long-lived assets. The loss consisted of $7.3 million of land and owned
buildings, $4.3 million of furniture and equipment and leasehold improvements
management plans to hold and use through the completion of the plan, and $4.1
million of capitalized software costs which do not meet the long-term
information technology strategy of the Company. The Company measured the amount
of the loss by comparing fair value of the land and the owned buildings
(determined by independent appraisals and updated with current comparisons to
similar assets) to capitalized cost. The carrying value of furniture and
equipment and capitalized software costs was written down to net realizable
value since it is being replaced.
The Company discontinued its distribution services to Arby's restaurants
effective April 1, 1997. In connection therewith, as of December 28, 1996, the
Company accrued approximately $10.6 million of costs associated with the
termination of this agreement. During 1997, the Company paid and charged in the
aggregate $9.1 million in costs primarily related to lease costs in connection
with idle equipment and
F-9
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PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
DECEMBER 28, DECEMBER 27, DEPRECIABLE
1996 1997 LIVES
------------ ------------ -----------
Land......................................... $ 3,636 $ 3,662 --
Buildings and improvements................... 16,413 17,092 15 to 40 years
Warehouse and transportation equipment....... 24,465 25,592 3 to 10 years
Computer software............................ 4,262 7,391 1 1/2 to 5 years
Leasehold improvements....................... 4,384 8,966 3 to 13 years
Office equipment............................. 7,261 8,209 3 to 7 years
Projects in progress......................... 11,760 18,456 --
------- -------
72,181 89,368
Less accumulated depreciation and
amortization............................... 22,544 29,407
------- -------
Property and equipment, net.................. $49,637 $59,961
======= =======
5. INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
Goodwill.................................................... $41,298 $41,298
Identifiable intangibles.................................... 3,870 3,870
------- -------
45,168 45,168
Less accumulated amortization............................... 3,732 5,285
------- -------
Intangible assets, net...................................... $41,436 $39,883
======= =======
6. LONG-TERM DEBT
Long-term debt consisted of the following loan agreements with banks (in
thousands):
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
$150 million accounts receivable securitization facility,
due March 14, 2002........................................ $ -- $125,000
$75 million revolving credit facility, due March 14, 2002... -- 49,200
$210 million revolving credit facility, retired and repaid
March 14, 1997............................................ 84,834 --
$15 million term-loan facility, retired and repaid March 14,
1997...................................................... 12,750 --
$15 million term-loan facility, retired and repaid March 14,
1997...................................................... 15,000 --
-------- --------
Total long-term debt.............................. 112,584 174,200
Less current portion........................................ 1,500 --
-------- --------
Long-term debt, less current portion........................ $111,084 $174,200
======== ========
F-10
13
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(a) Existing Credit Facilities
In March, 1997, the Company entered into two five-year loan agreements
aggregating $225 million (the "Existing Credit Facilities") with a group of
financial institutions to replace its previous credit facility. In connection
with this early retirement of long-term debt, the Company recorded a pre-tax
extraordinary charge of $10.3 million ($6.3 million net of taxes) in the first
quarter of fiscal 1997. This charge reflected the write-off of deferred
financing costs of $6.3 million, prepayment penalties of $2.7 million and $1.3
million in costs associated with the termination of interest-rate protection
agreements.
The Existing Credit Facilities bear interest based on either the prime rate
or LIBOR plus an additional spread based on certain financial ratios and mature
on March 14, 2002. The effective rate at December 27, 1997 was 7.34%. The
Company is required to comply with various covenants in connection with the
Existing Credit Facilities and borrowings are subject to calculations based on
accounts receivable and inventory. The revolving credit facility is secured by
liens on substantially all of the Company's assets and contains various
restrictions on, among other things, the Company's ability to pay dividends and
dispose of assets. Additionally, in the event of a change in control, the
outstanding principal amount of these facilities shall become due and payable.
PRC is the legal borrower for the accounts receivable securitization facility.
Pursuant to the terms of the accounts receivable securitization facility PSC
sells, on an ongoing basis and without recourse, an undivided interest in a
designated pool of trade accounts receivable to PRC. In order to maintain the
designated balance in the pool of accounts receivable sold, PSC is obligated to
sell undivided interests in new receivables as existing receivables are
collected. PSC has retained substantially the same credit risk as if the
receivables had not been sold. PSC, as agent for PRC, retains collection and
administrative responsibilities on the receivables sold to PRC. The creditors
for this facility have security interests in PRC's assets (consisting primarily
of accounts receivable purchased from PSC) and are entitled to be satisfied by
such assets prior to equity holders. The Company pays a quarterly variable
commitment fee, as defined in the agreements, based on the unused portion of the
facilities which fee averaged 0.33% of such unused portion during 1997. At
December 27, 1997, the Company had approximately $35 million available under the
Existing Credit Facilities.
(b) Previous Credit Facility
On March 31, 1995, in conjunction with the acquisition of NAD, the Company
entered into a $240 million Loan and Security Agreement (the "Previous Credit
Facility") with a group of banks that was retired and repaid before its maturity
on March 14, 1997. The Previous Credit Facility provided for a revolving-credit
facility of up to $210 million and term loans aggregating $30 million. The
interest rate on the Previous Credit Facility was reset every month to reflect
current market rates. The effective rate during fiscal 1995 and 1996 was 8.7
percent. This rate reflected the effect of interest-rate protection agreements,
which were terminated on March 14, 1997 in connection with the retirement of
this facility.
F-11
14
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $30.6
million, $39.3 million and $36.8 million during fiscal years 1995, 1996 and
1997, respectively.
8. INCOME TAXES
The income tax benefit (provision) before extraordinary items and
cumulative effect of a change in accounting principle for fiscal years 1995,
1996 and 1997, respectively, consisted of the following (in thousands):
1995 1996 1997
------- ------- -------
Current taxes:
Federal............................................... $(1,236) $ 937 $ (582)
State................................................. (408) (9) (545)
------- ------- -------
Total current taxes........................... (1,644) 928 (1,127)
------- ------- -------
Deferred taxes, excluding other components:
Federal............................................... 1,126 11,449 1,170
State................................................. 264 3,217 404
------- ------- -------
Total deferred taxes, excluding other
components.................................. 1,390 14,666 1,574
------- ------- -------
Other:
Alternative minimum tax-credit (utilization)
carryforwards...................................... 666 (184) 38
Utilization of operating-loss carryforwards........... (497) -- --
------- ------- -------
Total other................................... 169 (184) 38
------- ------- -------
Income tax benefit (provision).......................... $ (85) $15,410 $ 485
======= ======= =======
The following table summarizes the differences between the Company's
effective income tax rate and the statutory Federal income tax rate for fiscal
years 1995, 1996 and 1997:
1995 1996 1997
----- ---- ----
Statutory federal income tax rate........................... 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State income taxes (net of federal taxes)................. (16.9) 5.2 5.0
Goodwill amortization..................................... (10.9) (0.3) (0.7)
Other..................................................... (18.4) (0.7) (5.4)
----- ---- ----
(12.2)% 38.2% 32.9%
===== ==== ====
F-12
15
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 28, 1996
and December 27, 1997 are as follows (in thousands):
1996 1997
------- -------
Deferred tax assets:
Acquisition-related expenses.............................. $ 3,567 $ 1,262
Accounts receivable, principally due to allowance for
doubtful accounts...................................... 1,222 2,011
Property, plant and equipment, principally due to
differences in depreciation............................ 1,935 1,063
Self-insurance reserves................................... 3,493 3,355
Impairment of long-lived assets........................... 4,036 3,231
Restructuring and contract-termination charges............ 8,121 3,224
Benefit of federal and state net operating-loss
carryforwards.......................................... 5,797 23,933
Other..................................................... 2,025 2,682
------- -------
Total deferred tax assets......................... 30,196 40,761
Less valuation allowance.................................. -- --
------- -------
Total deferred tax assets, net.................... $30,196 $40,761
------- -------
Deferred tax liabilities:
Computer software......................................... $(1,811) $(3,225)
Acquisition-related liabilities........................... (803) (1,138)
Other..................................................... (568) (406)
------- -------
Total deferred tax liabilities.................... (3,182) (4,769)
------- -------
Net deferred tax assets........................... $27,014 $35,992
======= =======
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 28, 1996 and December 27, 1997, other current assets included
income taxes receivable of approximately $1.5 million and $0.4 million,
respectively, which consisted primarily of overpayments of tax liabilities and
pending carryback refund claims. United States federal income tax returns for
fiscal years 1992 and 1993 are currently under examination by the Internal
Revenue Service. A preliminary assessment is pending which is not material to
the consolidated financial position or results of operations as of December 27,
1997.
9. EMPLOYEE BENEFIT PLANS
(a) Defined-Contribution Plans
On January 1, 1997, the Company's defined contribution plan, which covers
substantially all employees, was renamed the ProSource Retirement Advantage
Plan. Eligible employees can contribute up to 15% of base
F-13
16
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation, with the following benefits: (i) Company contributions of 2
percent, (ii) additional Company matching of 50 percent of the first 6 percent
contributed by the employee, and (iii) vesting of Company contributions ratably
over four years of service.
The Company also had a Money Purchase Plan which covered those former NAD
salaried employees not covered by a defined-benefit plan. Under this plan, the
Company contributed 10 percent of eligible salary. The Money Purchase Plan was
terminated effective December 1996.
The amount of contribution expense incurred by the Company for these plans
was approximately $2.2 million, $2.7 million and $1.5 million for fiscal years
1995, 1996 and 1997, respectively.
(b) Defined-Benefit Pension Plans
In conjunction with the changes to the ProSource Retirement Advantage Plan
in 1997, the Company terminated all three noncontributory defined-benefit
pension plans covering substantially all employees except those covered by
multiemployer pension plans under collective-bargaining agreements. The Company
settled all pension obligations related to these terminated plans in 1997
through (i) the purchase of annuities, (ii) lump-sum payments, or (iii) the
transfer of plan benefits into the ProSource Retirement Advantage Plan, at the
participant's discretion. The accrued liability as of December 28, 1996 was
adequate to cover the unfunded termination liability of these three pension
plans.
Pension costs of approximately $0.9 million and $1.1 million reflected in
the consolidated statements of operations for fiscal years 1995 and 1996,
respectively, were determined based on actuarial studies. The Company's pension
expense for contributions to the various multiemployer pension plans under
collective-bargaining agreements was approximately $0.9 million, $1.2 million,
and $1.1 million for fiscal years 1995, 1996 and 1997, respectively.
10. STOCKHOLDERS' EQUITY
Under the ProSource, Inc. Employee Stock Purchase Plan (the "Stock Plan"),
officers and key employees of the Company ("Management Employees") purchased a
total of 408,100 shares of Class B common stock at $10.00 per share in 1992,
132,500 shares of Class B common stock at $11.00 per share in 1993 and 1994, and
270,000 shares of Class B common stock at $10.00 per share in 1995 and 1996. In
connection with the purchases of Class B common stock, each Management Employee
entered into a Management Shareholders Agreement with the Company and Onex.
The ProSource, Inc. Amended Management Option Plan (1995) (the "1995 Option
Plan") provides certain Management Employees with options to purchase one-half
the number of shares of Class B common stock purchased under the Stock Plan at
the same price per share paid by such stockholder (either $10.00 or $11.00).
Subject to the 1995 Option Plan, options granted under the 1995 Option Plan are
exercisable until December 31, 2000. No additional options will be granted under
the 1995 Option Plan. The 1995 Option Plan was amended in November 1996 to
provide that all unvested options vest at a rate of 10% per year through
December 31, 1999, when all remaining options vest. As a result, the Company
recorded a pretax charge in 1996 of $1.2 million reflecting the difference
between the market price of the Company's Class A common stock on the date of
amendment and the exercise price of such options.
Under the 1996 Stock Option Plan (the "1996 Option Plan"), the Company may
grant options to its employees for up to 550,000 shares of Class B common stock.
In 1996 and 1997, the Company granted options to purchase 358,000 and 16,000
shares, respectively, of Class B common stock at $14.00 per share. Options under
the 1996 Option Plan vest ratably over four years from the date of grant. These
options cannot be exercised, however, until the earlier of (i) the date on which
the market value of the Company's common stock is 25% greater than the exercise
price and (ii) the eighth anniversary of the date of grant. Subject to the
F-14
17
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provisions of the 1996 Option Plan, vested options may be exercised for a period
of up to 10 years from the date of grant.
Under the ProSource, Inc. 1997 Directors Stock Option Plan (the "1997
Directors Plan"), which was approved by the shareholders in April 1997, the
Company may grant options to its directors, who so elect to receive such options
in lieu of fees, to purchase shares of Class A common stock at $4.00 per share
below the stated fair market value on the date of grant. Options to purchase up
to 100,000 shares of Class A common stock may be granted under this plan. In
April 1997, the Company granted options to purchase 10,500 shares of Class A
common stock at $5.25 per share. Options under the 1997 Directors Plan vest and
become exercisable one year from the date of grant, provided that the holder
thereof is still a director of the Company at such time. Subject to the
provisions of the 1997 Directors Plan, options may be exercised for a period of
up to 10 years after the vesting date. During the year ended December 27, 1997,
the Company recognized $28,000 of compensation expense associated with this
plan.
A summary of the status of the Company's three option plans for the years
ended December 30, 1995, December 28, 1996, and December 27, 1997 is as follows:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
1995 EXERCISE 1996 EXERCISE 1997 EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
Options
outstanding -- beginning....... 237,450 $10.22 327,700 $10.16 706,450 $12.10
Options granted.................. 101,750 10.00 388,750 13.69 26,500 10.53
Options exercised................ -- -- (125) 10.00 -- --
Options canceled................. (11,500) 10.00 (9,875) 10.00 (93,300) 11.91
------- ------ ------- ------ ------- ------
Options outstanding -- ending.... 327,700 $10.16 706,450 $12.10 639,650 $12.06
======= ====== ======= ====== ======= ======
Options exercisable --year-end... 41,500 $10.12 78,401 $10.13 176,449 $11.86
======= ====== ======= ====== ======= ======
The following table summarizes information about stock options outstanding
at December 27, 1997:
OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVG. ---------------------------
NUMBER REMAINING WEIGHTED AVG. NUMBER WEIGHTED AVG.
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/27/97 LIFE PRICE AT 12/27/97 PRICE
-------------- ----------- ------------- ------------- ----------- -------------
$ 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
======= ======= ====== ======= ======
During fiscal year 1996, the Company adopted SFAS No. 123. Under the
provisions of the new standard, the Company elected to continue using the
intrinsic-value method of accounting for stock-based compensation plans granted
to employees under Accounting Principles Board Opinion No. 25 and provide
pro-forma disclosure for the fair-value based method of accounting for
compensation costs related to stock-option plans and other forms of stock-based
compensation under SFAS No. 123.
The Company estimated the weighted-average fair value of each option
granted during 1995, 1996 and 1997 at $8.27, $7.34 and $5.41, respectively. The
fair value of these options was computed at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995, 1996 and 1997, respectively: risk-free interest rates of
6.3%, 6.2% and 6.3%; dividend yields of 0.0% for all years
F-15
18
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
presented, volatility factors of the expected market price of the Company's
common stock of 33.0% for all years presented and a weighted-average expected
life of the options of 7, 7 and 5 years, respectively.
The Black-Scholes option valuation model was developed for use in computing
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the computed fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except per share data).
1995 1996 1997
------- -------- --------
Pro forma net loss.......................................... $(1,587) $(23,817) $(13,943)
Pro forma net loss per share -- basic and diluted........... $ (0.35) $ (4.10) $ (1.49)
In conjunction with the acquisition of NAD, the Company issued warrants to
Martin-Brower. At December 28, 1996 and December 27, 1997, the warrants were
exercisable for 283,425 shares of Class B common stock at $12.35 per share
during the period from April 1, 1997 through March 31, 2000, and upon
consummation of certain transactions.
On November 15, 1996, the Company completed the issuance of 3,400,000
shares of Class A common stock (at a price of $14.00 per share) through an
initial public offering, resulting in net proceeds to the Company of
approximately $43.2 million, after deducting underwriting discounts and
commissions, and other offering costs of approximately $4.4 million. The net
proceeds of the offering were used: (i) to prepay $15 million in outstanding
principal and $1.1 million in accrued interest under a subordinated note payable
to Onex; (ii) to prepay, at a discount, $10 million in outstanding principal and
$0.1 million in accrued interest under a subordinated note payable to
Martin-Brower for a total payment of $9.2 million and (iii) to repay $16.6
million of outstanding indebtedness under the Company's revolving-credit
facility, after deducting a $1.3 million payment concurrent with the offering
for the termination of a consulting agreement between the Company and certain
former owners of an acquired company. Also in connection with the initial public
offering, the Company incurred a noncash charge of $4 million resulting from the
issuance to Onex of 285,714 shares of Class B common stock valued at the initial
public-offering price in exchange for the agreement of Onex to relinquish its
rights to receive an annual fee, previously paid in cash, for management
services rendered to the Company.
Under the ProSource, Inc. 1997 Employee Stock Purchase Plan, which was
approved by the shareholders in April 1997, employees of the Company purchased a
total of 33,799 shares of Class A common stock at $6.035 per share in 1997. In
January 1998, an additional 30,336 shares of Class A common stock were purchased
by employees at $6.035 per share under this plan.
11. CONTINGENCIES AND GUARANTEES
The Company has guaranteed the principal due on certain loans obtained by
its officers and employees in connection with the purchase of common stock under
the Stock Plan. At December 27, 1997, such guarantees amounted to approximately
$0.8 million and were covered by a letter of credit. At December 27, 1997, the
Company was also obligated for $15.0 million in other letters of credit issued
on behalf of the Company primarily as a guarantee of payment for obligations
arising from workers' compensation claims. At Decem-
F-16
19
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ber 27, 1997, the Company had $9.2 million available in unused letters of credit
under its Existing Credit Facilities.
The Company and its subsidiaries are parties to various legal actions
arising in the ordinary course of business. Management believes that the outcome
of such cases will not have a material adverse effect on the consolidated
results of operations or the financial position of the Company.
12. CONCENTRATIONS OF CREDIT RISK
Burger King Corporation ("BKC") owned and franchisee-owned Burger King
restaurants collectively accounted for 45%, 41% and 46% of the Company's sales
in fiscal years 1995, 1996 and 1997, respectively. Sales to BKC-owned
restaurants represented approximately 5% of sales for each of the aforementioned
years. Amounts due from BKC-owned restaurants at December 28, 1996 and December
27, 1997 were $5.5 million and $5.8 million, respectively.
In addition, sales to Darden Restaurants, Inc. (owner of Red Lobster and
Olive Garden restaurants) accounted for 18%, 20%, and 21% of the Company's sales
in fiscal years 1995, 1996 and 1997, respectively. Amounts due from Darden
Restaurants, Inc. at December 28, 1996 and December 27, 1997, were approximately
$41.1 million and $41.4 million, respectively.
Sales to company-owned and franchisee-owned Arby's restaurants accounted
for 10% of Company sales in fiscal years 1995 and 1996. No other customer or
restaurant concept accounted for more than 10% of the Company's sales in fiscal
years 1995, 1996 or 1997. The Company periodically performs credit evaluations
on its customers' financial condition and generally does not require collateral.
13. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
During the fourth quarter of 1997, the Financial Accounting Standards
Board's Emerging Issues Task Force reached a consensus on Issue No. 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project that Combines Business Process Reengineering and Information
Technology Transformation." The consensus requires that the cost of business
process reengineering activities, whether done internally or by third parties,
is to be expensed as incurred. As a result, any remaining unamortized portion of
previously capitalized business process reengineering costs is required to be
written off. The cumulative impact of initially conforming to this new standard
in the fourth quarter of 1997 was reported as a change in accounting principle
in the accompanying consolidated statements of operations, with a cumulative
charge, net of tax, of $6.4 million, or $0.69 per share.
14. NET LOSS PER SHARE
For all years presented in the accompanying consolidated statements of
operations, all stock options and other potential common shares were excluded
from the calculation of diluted loss per share, since they would produce
anti-dilutive results. As a result, there are no reconciling items to the
numerator and denominator of the basic and diluted loss per share computations.
F-17
20
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following were outstanding during fiscal 1997, but were excluded from
the computation of diluted net loss per common share for fiscal 1997.
RELATED NUMBER OF CONVERSION
COMMON STOCK SHARES PRICE PER SHARE EXPIRATION
------------------- --------------- ----------
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
15. SUBSEQUENT EVENT
On January 29, 1998, the Company signed a definitive merger agreement with
AmeriServe Food Distribution, Inc. ("AmeriServe"). Under the terms of the
agreement, AmeriServe has agreed to pay $15.00 in cash for each outstanding
share of the Company's common stock. In addition, under the agreement, all
outstanding options will be accelerated and option holders will receive $15.00
less the applicable exercise for each share issuable upon exercise of the
options. AmeriServe has indicated that it intends to refinance all of the
Company's outstanding debt.
The merger is subject to regulatory approvals and other customary
conditions to closing. Onex Corporation and certain of its affiliates, which own
approximately 61% of the Company's outstanding stock, representing approximately
85% of the voting power, have committed to vote in favor of the merger, which
will assure the necessary shareholder approval. The merger is expected to close
in the second quarter of fiscal 1998.
F-18
21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 28, DECEMBER 27,
1998 1997
----------------- ----------------
(UNAUDITED) *
ASSETS
------
Current assets:
Cash and cash equivalents $ 12,137 $ 12,501
Accounts receivable, net 217,534 222,247
Inventories 152,488 160,621
Deferred income taxes, net 7,498 7,190
Prepaid expenses and other current assets 8,001 8,434
------------- -------------
Total current assets 397,658 410,993
Property and equipment, net 66,506 59,961
Intangible assets, net 39,495 39,883
Deferred income taxes, net 30,036 28,802
Other assets 8,243 8,462
------------- -------------
Total assets $ 541,938 $ 548,101
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 261,680 $ 277,953
Accrued liabilities 26,863 27,012
------------- -------------
Total current liabilities 288,543 304,965
Long-term debt 185,300 174,200
Other noncurrent liabilities 5,093 4,521
------------- -------------
Total liabilities 478,936 483,686
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value - -
Class A common stock, $.01 par value 36 35
Class B common stock, $.01 par value 58 58
Additional paid-in capital 105,127 104,934
Accumulated deficit (42,216) (40,580)
Accumulated other comprehensive loss (3) (32)
------------- -------------
Total stockholders' equity 63,002 64,415
------------- -------------
Total liabilities and stockholders' equity $ 541,938 $ 548,101
============= =============
* Note: The balance sheet at December 27, 1997 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes to consolidated financial statements.
F-19
22
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED
--------------------------------------
MARCH 28, MARCH 29,
1998 1997
--------------------------------------
Net sales $ 989,764 $ 1,017,062
Cost of sales 911,564 936,404
------------- -------------
Gross profit 78,200 80,658
Operating expenses 77,978 78,098
------------- -------------
Income from operations 222 2,560
Interest expense, net (3,377) (2,115)
------------- -------------
(Loss) income before income taxes
and extraordinary charge (3,155) 445
Income tax benefit (provision) 1,519 (197)
------------- -------------
(Loss) income before extraordinary
charge (1,636) 248
Extraordinary charge, net of income
tax benefit of $4,073 in 1997 -- (6,262)
------------- -------------
Net loss $ (1,636) $ (6,014)
============= =============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED:
(Loss) income before extraordinary
charge $ (0.18) $ 0.03
Extraordinary charge, net -- (0.67)
-------------- --------------
Net loss per common share $ (0.18) $ (0.64)
============== ==============
Weighted average number of
shares outstanding: basic 9,349,924 9,337,519
Weighted average number of
shares outstanding: diluted 9,349,924 9,417,137
See accompanying notes to consolidated financial statements.
F-20
23
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
----------------------------------
MARCH 28, MARCH 29,
1998 1997
----------------------------------
Net loss $ (1,636) $ (6,014)
Other comprehensive income (loss):
Foreign-currency translation adjustments 29 (20)
------------- ------------
Comprehensive loss $ (1,607) $ (6,034)
============= ============
See accompanying notes to consolidated financial statements.
F-21
24
PROSOURCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED
---------------------------
MARCH 28, MARCH 29,
1998 1997
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,636) $ (6,014)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 3,014 2,958
Bad debt expense 453 380
Loss on early retirement of debt - 10,335
Deferred income tax benefit (1,542) (3,889)
Changes in operating assets and liabilities:
Decrease in accounts receivable 4,260 6,053
Decrease (increase) in inventories 8,133 (4,649)
Decrease (increase) in prepaid expenses and other assets 445 (1,228)
(Decrease) increase in accounts payable (16,273) 5,816
Increase (decrease) in accrued and other noncurrent liabilities 617 (7,034)
------------ ----------
Net cash (used in) provided by operating activities (2,529) 2,728
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,964) (6,553)
------------ ----------
Net cash used in investing activities (8,964) (6,553)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt 133,300 282,517
Repayments of long-term debt (122,200) (266,101)
Fees incurred in conjunction with long-term debt - (4,181)
Payments to acquire and retire treasury stock - (510)
------------ ----------
Net cash provided by financing activities 11,100 11,725
------------ ----------
Effect of exchange rate changes on cash 29 (20)
------------ ----------
Net (decrease) increase in cash and cash equivalents (364) 7,880
Cash and cash equivalents at beginning of period 12,501 2,763
------------ ----------
Cash and cash equivalents at end of period $ 12,137 $ 10,643
============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE PERIOD FOR:
Interest $ 3,527 $ 2,640
Income taxes, net of refunds $ 123 $ 207
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In January 1998, the Company issued 30,336 Class A common shares to employees
under the 1997 Employee Stock Purchase Plan at $6.035 per share in exchange for
accrued compensation totaling $184.
For the period ended March 28, 1998, the Company recognized $10 of compensation
expense associated with the Directors Stock Option Plan.
See accompanying notes to consolidated financial statements.
F-22
25
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. These consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the ProSource Inc. (the "Company") Annual Report on Form
10-K/A for the fiscal year ending December 27, 1997.
The Company operates on a 52-to 53-week accounting year ending on the last
Saturday of each calendar year. Operating results for the thirteen weeks ended
March 28, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 26, 1998 due, in part, to seasonal
fluctuations in the Company's business, the potential addition or loss of
customers, and changes in economic conditions.
Certain amounts previously presented in the financial statements of prior
periods have been reclassified to conform to the current period's presentation.
(2) EXTRAORDINARY CHARGE
In March, 1997, the Company entered into two five-year loan agreements
aggregating $225 million 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.
(3) 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.
The Company adopted this statement in the first quarter of fiscal 1998 and has
reflected the components of its comprehensive loss in the accompanying
consolidated statements of comprehensive loss.
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. The Company plans to adopt this statement in
the fourth quarter of fiscal 1998 and does not believe the adoption will
materially impact the Company's results of operations, cash flows or financial
position.
(4) CONTINGENCIES
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.
F-23
26
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(5) NET LOSS PER COMMON SHARE
For all periods presented in the accompanying consolidated statements of
operations, there are no reconciling items to the numerator of the basic and
diluted net loss per common share computations. For the period ended March 28,
1998, 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
denominator of the basic and diluted loss per share computations for the period
ended March 28, 1998.
The following table sets forth the reconciliation of the denominator of
the basic and diluted net loss per common share computation for the period
ended March 29, 1997:
Denominator for basic net loss
per common share -
Weighted average shares 9,337,519
Effect of dilutive securities:
Employee stock options 69,654
Stock warrants 9,964
-----------
Dilutive potential common shares 79,618
-----------
Denominator for diluted net
loss per common share -
adjusted weighted average
shares and assumed conversions 9,417,137
===========
The following were outstanding as of March 28, 1998, but excluded from
the computation of diluted net loss per common share for the period ended March
28, 1998.
Related Number of Conversion
Common Shares Price per Share Expiration
Options - 1995 Option Plan 295,150 shares - Class B $10.00 or $11.00 December 2000
Options - 1996 Option Plan 334,000 shares - Class B $14.00 November 2006 and 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
F-24
27
PROSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(6) MERGER
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 price 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. The Federal Trade Commission has informed the Company
that the waiting period under the Hart Scott Redline Antitrust Improvements Act
of 1976 has expired. 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 special
shareholder meeting to vote on the merger is scheduled for May 20, 1998 and the
merger is expected to close by the end of May 1998.
F-25
28
AMERISERVE FOOD DISTRIBUTION, INC.
PRO FORMA FINANCIAL INFORMATION
INTRODUCTORY INFORMATION
On May 21, 1998, AmeriServe Food Distribution, Inc. (the Company or AmeriServe),
a Delaware corporation and wholly owned subsidiary of Nebco Evans Holding
Company (NEHC), became the owner of all of the capital stock of ProSource, Inc.,
a Delaware corporation (ProSource), pursuant to the merger (the Merger) of
Steamboat Acquisition Corp., a Delaware corporation and wholly owned subsidiary
of the Company (Merger Sub), with and into ProSource with ProSource as the
surviving corporation. At the effective time of the Merger, ProSource became a
wholly owned subsidiary of the Company and an indirect wholly owned subsidiary
of NEHC.
The Merger was consummated pursuant to an Agreement and Plan of Merger (the
Merger Agreement), dated as of January 29, 1998, by and among the Company,
Merger Sub and ProSource. The Merger Agreement was approved and adopted by the
stockholders of ProSource at a special meeting held on May 20, 1998. In the
Merger, each share of ProSource Class A Common Stock, par value $0.01 per share,
and each share of ProSource Class B Common Stock, par value $0.01 per share was
converted into the right to receive $15.00 in cash without interest. The total
cash outlay in connection with the Merger was $313.5 million including the
acquisition of the capital stock, the repayment of $159.5 million of outstanding
indebtedness of ProSource and the direct costs of the Merger. The sources of
funds used in the Merger included cash on hand, a $50 million capital
contribution to the Company from NEHC and $125 million in proceeds from the sale
of certain trade receivables of ProSource under the Company's existing accounts
receivable securitization program with Bank of America, a commercial paper
conduit administered by Bank of America NT&SA and a group of other banks.
Effective June 11, 1997, the Company acquired certain operations of the PFS
Division of PepsiCo, Inc. (PFS) in an asset purchase transaction for
approximately $842 million in cash including direct costs. Financing of the
acquisition was effectively provided by proceeds from the issuances of $500
million 10 1/8% Senior Subordinated Notes due July 15, 2007 and $350 million
8 7/8% Senior Notes due October 15, 2006. Other financing activities at the time
of the acquisition included an equity contribution to the Company from NEHC of
$130 million, repayment of $134 million in outstanding borrowings under a
previously existing credit facility and the sale of certain trade receivables of
the Company and PFS under the accounts receivable securitization program
providing proceeds of $225 million. The excess of proceeds received from
financing activities over the PFS acquisition cost provided cash on hand to fund
costs of integrating the PFS operations and to later partially fund the
ProSource acquisition.
In connection with the acquisition of PFS and the Merger, the Company
anticipated receiving additional proceeds under the accounts receivable
securitization program of approximately $80 million. This transaction was
completed in July 1998. The Company utilized a portion of its available credit
facilities to fund working capital requirements until the July 1998 transaction.
In connection with a January 1996 acquisition, NEHC and the Company each
acquired a minority interest in the Harry H. Post Company (Post). In late 1996,
the Company sold its interest in Post to NEHC in exchange for NEHC preferred
stock. NEHC included Post in its consolidated results until July 1997, at which
time NEHC transferred its entire investment in Post to the Company in exchange
for the preferred stock and the Company began including Post in its consolidated
results.
The Unaudited Pro Forma Consolidated Statements of Operations for the Year Ended
December 27, 1997 and the Six Months Ended June 27, 1998 assume the acquisitions
of ProSource and PFS, which have been accounted for under the purchase method,
were consummated at the beginning of fiscal 1997, and the inclusion of Post in
the Company's consolidated results was effective as of the beginning of fiscal
1997.
An Unaudited Pro Forma Consolidated Balance Sheet has not been presented because
the acquisition of ProSource is reflected in the Company's Consolidated Balance
Sheet as of June 27, 1998 included in the Company's previously filed Quarterly
Report on Form 10-Q for the quarter ended June 27, 1998.
In connection with the acquisitions of PFS and ProSource, the Company has
identified a number of consolidation and integration actions designed to improve
the efficiency and effectiveness of the combined organization's warehouse and
transportation network and operations support infrastructure. These actions
include construction of new strategically located warehouse facilities, closures
of a number of existing warehouse facilities and expansions of others,
dispositions of property and equipment, conversions of computer systems,
centralization of support functions, reductions in workforce and relocation of
employees. The ultimate cost savings expected to be achieved after completion of
these actions, which are underway and are expected to be substantially completed
by mid-2000, are estimated to be approximately $100 million annually. No pro
forma adjustments for such cost savings are reflected in the Unaudited Pro Forma
Consolidated Statements of Operations.
P-1
29
AMERISERVE FOOD DISTRIBUTION, INC.
INTRODUCTORY INFORMATION (Continued)
The Company has begun to incur certain incremental, nonrecurring expenses
associated with actions to consolidate and integrate the PFS, ProSource and
previous acquisitions. These integration costs, which are expected to total
$25-50 million over the consolidation and integration period, consist primarily
of start-up costs of new facilities and other temporary inefficiencies arising
from the warehouse and transportation network reconfiguration, as well as
computer system conversion, employee relocation and other costs to realign the
operations support infrastructure. Integration costs actually incurred are
included in "Impairment, restructuring and other unusual charges" in the
accompanying Unaudited Pro Forma Consolidated Statements of Operations. No pro
forma adjustments are reflected in these pro forma financial statements for
additional estimated integration costs that would have been incurred had the
acquisitions of PFS and ProSource occurred at the beginning of fiscal 1997.
These pro forma financial statements are based upon the respective historical
consolidated financial statements of the Company and ProSource and should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 27, 1997 and its Quarterly Reports on Form 10-Q for the quarters ended
March 27, 1998 and June 27, 1998, as well as ProSource's Annual Report on Form
10-K for the fiscal year ended December 27, 1997 and its Quarterly Report on
Form 10-Q for the quarter ended March 27, 1998.
The unaudited pro forma information presented does not purport to be indicative
of the results that actually would have been obtained if the combined operations
had been conducted during the periods presented and is not intended to be a
projection of future results. The information presented is based on preliminary
estimates of values of net assets acquired in the ProSource transaction and may
change as valuations are completed.
This report contains certain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933. Actual results could differ materially from those
projected in such forward-looking statements and readers are cautioned not to
place undue reliance on the forward-looking statements which speak only as of
the date hereof. The Company undertakes no obligation to update these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence or nonoccurrence of anticipated events.
P-2
30
AMERISERVE FOOD DISTRIBUTION, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 27, 1997
(IN THOUSANDS)
PRO FORMA
ADJUSTMENTS
FOR
HISTORICAL HISTORICAL HISTORICAL HISTORICAL ACQUISITIONS &
AMERISERVE PFS POST PROSOURCE TRANSACTIONS PRO FORMA
----------- ----------- ----------- ----------- -------------- --------------
Net sales ......................... $ 3,446,191 $ 1,498,345 $ 65,467 $ 3,901,165 $ (3,577)(a) $ 8,913,413
5,822 (b)
Cost of goods sold ................ 3,104,012 1,342,659 58,731 3,591,368 (3,387)(a) 8,093,383
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ...................... 342,179 155,686 6,736 309,797 5,632 820,030
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Distribution, selling
and administrative ............ 266,692 112,131 5,752 290,849 (5,550)(c) 669,064
(1,000)(d)
190 (a)
Depreciation .................... 17,163 8,814 315 8,823 (2,613)(e) 32,502
Amortization .................... 16,765 -- 65 2,408 15,275 (f) 34,513
Impairment, restructuring and
other unusual charges ......... 52,449 -- -- -- 40,904 (g) 93,353
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses .......... 353,069 120,945 6,132 302,080 47,206 829,432
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) ........... (10,890) 34,741 604 7,717 (41,574) (9,402)
Interest expense, net ............. (46,173) (8,041) (804) (9,193) (20,337)(h) (84,548)
Loss on sale of accounts
receivable ...................... (6,757) -- -- -- (23,343)(i) (30,100)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes ........................... (63,820) 26,700 (200) (1,476) (85,254) (124,050)
Provision (credit) for income
taxes ........................... 1,030 9,924 -- (485) (9,994)(j) 475
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item .............. $ (64,850) $ 16,776 $ (200) $ (991) $ (75,260) $ (124,525)
=========== =========== =========== =========== =========== ===========
See accompanying Introductory Information and notes to unaudited pro forma
consolidated statement of operations.
P-3
31
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 27, 1997
(IN THOUSANDS)
(a) Represents elimination of intercompany sales between AmeriServe and Post.
(b) Represents amortization of liability arising in ProSource purchase price
allocation for below market customer contracts.
(c) Represents net cost reductions in accordance with the terms of the PFS
Asset Purchase Agreement for the following items:
Reduction in lease expense for existing PFS facilities retained by
PepsiCo, Inc. under a one year lease agreement........................... $ 4,100
Net reduction in data processing costs charged by PepsiCo, Inc.
to PFS under the terms of a one year data processing
service contract......................................................... 4,100
Reduction of employee retirement expense due to the termination
of pension and retirement plans of PepsiCo, Inc., net of amounts
to be paid under AmeriServe's plans..................................... 1,900
Compensation of certain PFS employees retained by PepsiCo,Inc... 1,000
------------
Net cost savings............................................................ 11,100
Cost reductions in historical AmeriServe.................................... (5,550)
------------
$ 5,550
============
(d) Represents elimination of expenses incurred by ProSource in attempt to
acquire PFS.
(e) Represents reduction of depreciation expense as a result of the impairment
of certain assets, due primarily to the planned closures of certain
warehouse facilities as follows:
Impairment identified at time of PFS acquisition............................ $ 2,800
Impairment identified at time of ProSource acquisition...................... 1,213
Depreciation reduction in historical AmeriServe............................. (1,400)
------------
$ 2,613
============
(f) Represents the additional amortization of goodwill and other intangibles
related to the purchase price allocations for PFS and ProSource as follows:
Amortization related to acquired PFS intangibles............................ $ 20,438
Amortization related to acquired ProSource intangibles...................... 7,963
Reduction in amortization due to writedowns of existing
ProSource intangibles..................................................... (2,114)
Additional amortization in historical AmeriServe............................ (11,012)
------------
$ 15,275
============
(g) Represents impairment, restructuring and other unusual charges recorded
in 1998, excluding $6,400 that represents one-time costs related
to the discontinuance of the Wendy's business.
P-4
32
AMERISERVE FOOD DISTRIBUTION, INC.
(h) Represents the net increase in net interest expense as follows:
Principle
Amount Interest
of Debt Expense
---------- ----------
Annual pro forma AmeriServe interest expense:
8 7/8% Senior Notes due 2006 ....................... $ 350,000 $ 31,063
10 1/8% Senior Subordinated Notes due 2007 .......... 500,000 50,625
Letter of credit fees ............................... 12,000 300
Capital leases at 9.5% .............................. 29,238 2,777
Amortization of deferred financing costs ............ 2,566
----------
Total interest expense ................................ 87,331
Net interest expense in historical AmeriServe,
PFS and Post ........................................ (55,018)
Elimination of interest expense in historical
ProSource due to repayment of indebtedness ......... (11,976)
----------
$ 20,337
==========
(i) Represents the net increase in loss on sale of accounts receivable as
follows:
Annual discount (7%) on proceeds of $225,000 from the
sale of AmeriServe and PFS accounts receivable ..... $ 15,750
Annual discount (7%) on proceeds of $125,000 from
the sale of ProSource accounts receivable .......... 8,750
Annual discount (7%) on additional proceeds from sales
of accounts receivable received in July 1998 ...... 5,600
Loss on sale of accounts receivable in historical
AmeriServe ........................................ (6,757)
----------
$ 23,343
==========
(j) Represents elimination of federal income taxes to reflect tax losses. The
Company's net deferred tax assets are offset entirely by a valuation
allowance, reflecting the Company's significant net operating loss
carryforward position. The pro forma provision represents the current
provision for state income taxes of $475.
P-5
33
AMERISERVE FOOD DISTRIBUTION, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 27, 1998
(in thousands)
HISTORICAL PRO FORMA
PROSOURCE ADJUSTMENTS
DECEMBER 28, FOR
HISTORICAL 1997 THROUGH ACQUISITIONS &
AMERISERVE MAY 21, 1998 TRANSACTIONS PRO FORMA
----------- ------------ --------------- --------------
Net sales .............................. $ 2,769,949 $ 1,660,073 $ 2,450 (a) $ 4,432,472
Cost of goods sold ..................... 2,502,746 1,528,693 -- 4,031,439
----------- ----------- ----------- -----------
Gross profit ........................... 267,203 131,380 2,450 401,033
----------- ----------- ----------- -----------
Operating expenses:
Distribution, selling
and administrative ................. 212,044 123,019 2,050 (b) 337,113
Depreciation ......................... 12,547 3,955 (2,020)(c) 14,482
Amortization ......................... 14,059 901 1,847 (d) 16,807
Impairment, restructuring and
other unusual charges .............. 47,304 -- (40,904)(e) 6,400
----------- ----------- ----------- -----------
Total operating expenses ............... 285,954 127,875 (39,027) 374,802
----------- ----------- ----------- -----------
Operating income (loss) ................ (18,751) 3,505 41,477 26,231
Interest expense, net .................. (36,532) (5,258) 1,078 (f) (40,712)
Loss on sale of accounts
receivable ........................... (9,015) -- (6,446)(g) (15,461)
----------- ----------- ----------- -----------
Loss before income taxes ............... (64,298) (1,753) 36,109 (29,942)
Provision (credit) for income
taxes ................................ 524 (685) 770 (h) 609
----------- ----------- ----------- -----------
Net loss ............................... $ (64,822) $ (1,068) $ 35,339 $ (30,551)
=========== =========== =========== ===========
See accompanying Introductory Information and notes to unaudited pro forma
consolidated statement of operations.
P-6
34
AMERISERVE FOOD DISTRIBUTION, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS JUNE 27, 1998
(IN THOUSANDS)
(a) Represents amortization of liability arising in ProSource purchase price
allocation for below market customer contracts.
(b) Represents elimination of cost savings due to expiration of one-year lease
agreement for existing PFS facilities retained by PepsiCo Inc. under the
PFS Asset Purchase Agreement.
(c) Represents reduction of depreciation expense as a result of the impairment
of certain assets, due primarily to the planned closures of certain
warehouse facilities, related to the ProSource acquisition as follows:
ProSource warehouse facilities............................... $ 2,145
AmeriServe (including PFS) warehouse facilities.............. 549
Depreciation reduction in historical AmeriServe.............. (674)
----------
$ 2,020
==========
(d) Represents the additional amortization of goodwill and other intangibles
related to the purchase price allocation for ProSource as follows:
Amortization related to acquired intangibles................. $ 3,681
Reduction in amortization due to writedowns of existing
ProSource intangibles...................................... (1,030)
Additional amortization in historical AmeriServe............. (804)
----------
$ 1,847
==========
(e) Represents impairment, restructuring and other unusual charges recorded in
1998, excluding $6,400 that represents one-time costs related to the
discontinuance of the Wendy's business.
(f) Represents decrease to net interest expense as follows:
Elimination of interest income on excess cash used in the
ProSource acquisition...................................... $ (4,450)
Elimination of interest on borrowings against credit
facilities replaced by discount on additional proceeds
from sales of accounts receivable (see note g)............. 308
Elimination of interest expense in historical ProSource...... 5,220
----------
$ 1,078
==========
(g) Represents discount on additional proceeds from sales of accounts
receivable as follows:
$125 million at time of ProSource acquisition (7% for
5 months).................................................. $ 3,646
$80 million received in July 1998 (7% for 6 months).......... 2,800
---------
$ 6,446
=========
(h) Represents elimination of credit for federal income taxes in historical
ProSource, netting a current provision for state income taxes of $85. The
Company's net deferred tax assets are offset by a valuation allowance,
reflecting the Company's significant net operating loss carryforward
position.
P-7
35
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT ACCOUNTANT'S CONSENT
The Board of Directors
ProSource, Inc.:
We consent to the inclusion of our report dated February 20, 1998 with respect
to 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 report appears in
the Form 8-K/A of AmeriServe Food Distribution, Inc. dated May 21, 1998.
/s/ KPMG PEAT MARWICK LLP
July 31, 1998
E - 1
36
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
AmeriServe Food Distribution, Inc. (Registrant)
Date: August 4, 1998 /s/ Diana M. Moog,
Executive Vice President and
Chief Financial Officer