<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
( ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
(X) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the nine-week transition period from April 28, 1996 to June 29, 1996
Commission File Number 0-8105
RYKOFF-SEXTON, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-2134693
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1050 Warrenville Rd.
Lisle, Illinois 60532
(Address of principal executive offices) (Zip Code)
(630) 964-1414
(Registrant's telephone number, including area code)
The Company's former fiscal year ended on the Saturday closest to April 30.
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the securities exchange act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes ( x ) No ( )
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock July 31, 1996
$.10 par value 27,708,405 shares
<PAGE>
RYKOFF-SEXTON, INC.
INDEX
PAGE
NO.
Part I. Financial Information
Item l. Financial Statements
Condensed Consolidated Balance Sheets
June 29, 1996 and April 27, 1996 1
Condensed Consolidated Statements of Income
Nine Weeks Ended June 29, 1996 and
Thirteen Weeks Ended July 29, 1995 2
Condensed Consolidated Statements of Cash Flows
Nine Weeks Ended June 29, 1996 and
Thirteen Weeks Ended July 29, 1995 3
Notes to Condensed Consolidated Financial
Statements 4-6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7-9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
RYKOFF-SEXTON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
ASSETS
June 29, April 27,
1996 1996
------------ ------------
Current Assets
Cash and cash equivalents $ 22,045 $ 10,825
Accounts receivable, net 33,914 182,312
Inventories 237,763 152,805
Prepaid expenses 30,942 19,893
Deferred income taxes 27,914 7,211
---------- ----------
Total current assets 352,578 373,046
Property, plant and equipment, net 277,961 177,918
Goodwill, net 448,649 41,188
Long-term receivables 81,126 ---
Deferred income taxes, net 31,010 4,881
Other assets, net 25,869 14,823
---------- ----------
Total assets $ 1,217,193 $ 611,856
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ --- $ 94,000
Accounts payable 219,988 120,828
Accrued insurance expenses and other 14,090 11,630
Accrued liabilities 102,886 36,573
Current portion of long-term debt 7,291 19,708
---------- ----------
Total current liabilities 344,255 282,739
---------- ----------
Long-term debt, less current portion 497,854 135,081
---------- ----------
Other long-term liabilities 39,039 1,536
---------- ----------
Shareholders' equity
Common stock, at stated value 2,801 1,513
Additional paid-in capital 297,620 95,236
Retained earnings 39,317 99,497
---------- ----------
339,738 196,246
Less: treasury stock, at cost 3,693 3,746
---------- ----------
Total shareholders' equity 336,045 192,500
---------- ----------
Total liabilities and
shareholders' equity $ 1,217,193 $ 611,856
---------- ----------
---------- ----------
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
RYKOFF-SEXTON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands Except Per Share Amounts)
Nine-Week
Transition
Period Ended Thirteen Weeks Ended
---------------- --------------------
June 29, 1996 July 29, 1995
---------------- --------------------
Net sales $ 519,903 $ 421,771
Cost of sales 426,486 324,540
---------- ----------
Gross profit 93,417 97,231
Warehouse, selling, general
and administrative expenses 115,349 89,677
Restructuring costs 57,600 ---
---------- ----------
Income (loss) from operations (79,532) 7,554
Interest expense, net 6,930 3,146
Other expenses 9,913 ---
---------- ----------
Income (loss) before income taxes (96,375) 4,408
Provision (benefit) for income taxes (36,195) 1,763
---------- ----------
Net income (loss) $ (60,180) $ 2,645
---------- ----------
Weighted average number of
shares outstanding 23,972 14,898
---------- ----------
Earnings (loss) per share $ (2.51) $ 0.18
---------- ----------
Cash dividends per share $ --- $ 0.03
---------- ----------
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
RYKOFF-SEXTON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
<TABLE>
<CAPTION>
Nine-Week
Transition
Period Ended Thirteen Weeks Ended
June 29, 1996 July 29, 1995
---------------- --------------------
<S> <C> <C>
Cash flows from operating activities --
Net income (loss) $ (60,180) $ 2,645
Adjustments to reconcile net income to net
cash provided by operating activities --
Depreciation and amortization 6,542 4,444
(Gain) loss on sale of receivables and property,
plant and equipment 6,191 (86)
(Increase) in deferred income
taxes (34,850) ---
Restructuring costs 57,600 ---
Other (97) (140)
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable 1,883 (8,160)
(Increase) in inventories (356) (12,323)
(Increase) decrease in prepaid
expenses (4,805) 1,434
(Decrease) in accounts payable
and accrued liabilities (264) (15,875)
---------------- --------------------
Net cash (used in) operating activities (28,336) (28,061)
---------------- --------------------
Cash flows from investing activities --
Capital expenditures (3,945) (16,337)
Proceeds from sale of accounts receivable 110,000 ---
Proceeds from disposal of property, plant and
equipment 159 183
---------------- --------------------
Net cash provided by (used in) investing activities 106,214 (16,154)
---------------- --------------------
Cash flows from financing activities --
Principal payments of long-term debt (135,136) (46)
Repayment of acquired company debt and redemption of preferred stock (307,470) ---
Proceeds from credit facilities 372,000 42,000
Increase in deferred finance fee (8,901) ---
Issuance of common stock, net (6) 936
Dividends paid --- (438)
Other 12,855 (19)
---------------- --------------------
Net cash provided by (used in) financing activities (66,658) 42,433
---------------- --------------------
Net increase (decrease) in cash and cash equivalents 11,220 (1,782)
Cash and cash equivalents at beginning of period 10,825 4,959
---------------- --------------------
Cash and cash equivalents at end of period $ 22,045 $ 3,177
---------------- --------------------
Supplemental disclosures of cash flow information --
Cash paid during the period for:
Interest $ 10,459 $ 6,795
Income taxes --- 206
---------------- --------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
RYKOFF-SEXTON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is
suggested that these condensed consolidated financial statements be
read in conjunction with the financial statements and notes thereto
included in the Company's latest annual report on Form 10-K.
The condensed consolidated statements of income include the results
for the nine-week transition period ended June 29, 1996 and the
previously reported thirteen-week period ended July 29, 1995. The
Company believes it was not practicable to prepare financial
statements for the comparable nine-week period in fiscal 1996; nor
would such statements be more meaningful than the reported results for
the previously reported thirteen-week period ended July 29, 1995 due
to various non-recurring charges and the inclusion of the results of
US Foodservice Inc. ("US Foodservice") since the date of acquisition
(May 17, 1996) in the nine-week transition period ended June 29, 1996.
2. In connection with the merger more fully disclosed in Note 6, the
Company changed its fiscal year to the Saturday closest to June 30
from the Saturday closest to April 30.
The foregoing financial statements for the transition period from the
end of the previous fiscal year ended April 27, 1996 to June 29,1996,
have not been examined by independent public accountants and reflect,
in the opinion of the Company, all adjustments (which, except for
restructuring and other one-time charges, included only
normal recurring adjustments) necessary to present fairly the
information purported to be shown and are not necessarily indicative of
the results of the operations for the new fiscal year ending
June 28, 1997.
The restructuring charge of $57.6 million discussed in Note 7 and
various other one-time costs relating to operational consolidation
arising from the merger were recorded in the transition period ended
June 29, 1996. Operating results for the transition period were
affected by these one-time charges and should not be reflective of the
Company's operating performance in fiscal 1997.
3. Primary earnings per share of common stock have been computed on the
weighted average number of shares of common stock outstanding and
dilutive common stock equivalents.
4. Inventories are summarized as follows (amounts in thousands):
June 29, April 27,
1996 1996
---------- ----------
Finished Goods $ 231,839 $ 145,899
Raw Materials 5,924 6,906
---------- ----------
$ 237,763 $ 152,805
---------- ----------
4
<PAGE>
All inventories are stated at the lower of cost or market with
approximately 11% at June 29, 1996 determined by the last-in, first-
out ("LIFO") cost method and the remainder by the first-in, first-out
("FIFO") cost method.
5. In October 1994, the Company sold all of the stock of Tone Brothers,
Inc. ("Tone") to Burns Philp, Inc. ("Burns Philp"). The sale
agreement provided for arbitration in the case of a dispute and on
April 16, 1995, Burns Philp filed a notice of arbitration in which it
claimed contract and fraud damages in excess of $57 million in
connection with the purchase of Tone. In management's opinion, based
on consultation with legal counsel, the sale agreement should limit
any claims for breach of representations under the sale agreement to a
maximum of $25 million.
After extensive investigation and discovery, the matter was presented
to the arbitration tribunal in February 1996 and final argument was
presented in April 1996. The matter has been fully briefed and is
awaiting decision by the tribunal. While the Company believes it
presented very significant factual and legal defenses to the claims,
the outcome of this matter is currently uncertain; however, in
management's opinion, based on consultation with legal counsel, the
resolution of this matter will not have a material effect on the
Company's consolidated financial position or its results of
operations.
6. On May 17, 1996, the Company consummated its previously announced
agreement to merge with US Foodservice, a privately held broadline
foodservice distribution company. As part of the merger agreement,
US Foodservice stockholders received 1.457 shares of Rykoff-Sexton
common stock for each outstanding share of Class A and Class B
common stock of US Foodservice. Options and warrants to
acquire approximately one million shares of US Foodservice common
stock were converted into options and warrants to acquire
Rykoff-Sexton common stock on the same basis. The number of shares
issued in connection with the merger was 12,880,519, which was based
on the low end of the conversion formula of $17.16 per share per the
merger agreement. For financial reporting purposes, the shares
issued have been recorded at $15.40 per share which represents the
closing market price as defined in the merger agreement. In
addition, all outstanding shares of US Foodservice $15 cumulative
redeemable exchangeable preferred stock were purchased by
Rykoff-Sexton for $26.6 million.
In connection with the merger, Rykoff-Sexton entered into a new bank
credit facility with a syndicate of financial institutions providing
for loans and other credit facilities equal to $485 million. Rykoff-
Sexton also entered into an accounts receivable securitization
facility with two banks totaling an additional $110 million. Under
this program, the Company will sell certain of its trade accounts
receivable on an ongoing basis. The Company also assumed an existing
$90 million accounts receivable securitization facility already in
place at US Foodservice. The initial net proceeds of the new credit
facility and the receivables securitization were used to refinance and
pay off existing bank debt and certain other indebtedness of Rykoff-
Sexton, refinance substantially all of US Foodservice's outstanding
debt, repurchase US Foodservice preferred stock, provide initial
financing for Rykoff-Sexton's ongoing working capital needs and pay
related fees and expenses. Long-term receivables included on the June
29, 1996 balance sheet represent residual amounts to be collected upon
termination of the accounts receivable securitization facility.
5
<PAGE>
For financial statement purposes the acquisition was accounted for as
a purchase and, accordingly, US Foodservice's results are included in
the consolidated financial statements since the date of acquisition.
The aggregate purchase price was approximately $217 million which
includes costs of acquisition. The aggregate purchase price, which
was financed through the issuance of common stock and proceeds from
the new bank credit facility, has been preliminarily allocated to the
assets and liabilities of US Foodservice based upon their respective
fair market values. The excess of the purchase price over assets
acquired approximated $409 million and is being amortized over the
expected period of benefit of 40 years.
In connection with the merger and integration plan, the Company
assumed restructuring and integration liabilities totaling $9 million.
These liabilities relate primarily to severance and other costs
for branch closure and integration activities pursuant to the merger
and integration plan. It is anticipated that these expenditures will
be paid primarily in fiscal 1997.
Pro forma net income and net income per share figures have not been
included as they are not considered to be meaningful due to the
various one-time charges recorded in the transition period ended June
29, 1996.
Pro forma sales for the twelve months ended June 29, 1996, assuming
the US Foodservice acquisition was made July 1, 1995 and Rykoff-Sexton
sales are reported on a calendar quarter basis, are summarized as
follows (amounts in thousands):
September 30, 1995 $ 891,396
December 30, 1995 904,959
March 30, 1996 867,177
June 29, 1996 903,223
---------------
$ 3,566,755
---------------
7. In connection with the US Foodservice merger consummated on May 17,
1996, the Company recorded a restructuring charge of $57.6 million
($35.7 million after tax or $1.49 per share) in the transition
period ended June 29, 1996. These charges relate to the impairment
of property, plant and equipment and other assets occurring as a
result of closure of duplicate facilities and other integration
activities totaling $20.1 million on a pre-tax basis; and expected
expenditures to reposition operations and close facilities,
including severance, rent and other costs totaling $37.5 million on
a pre-tax basis. It is anticipated that the pre-tax cash outlay
related to the above noted future restructuring expenditures would
be approximately $20 million in fiscal 1997, and the remainder in
years thereafter (primarily related to non-cancellable operating
lease commitments). The amount of spending against the restructuring
reserve was not significant as of June 29, 1996.
8. The financial statements for the prior period reflect certain
reclassifications to conform with classifications adopted in the
current year, including the reclassification of certain items
previously included in operating expense to cost of sales to conform
the accounting treatment of the Company and US Foodservice.
6
<PAGE>
RYKOFF-SEXTON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BASIS OF PRESENTATION
This report discusses the results for the nine-week transition period ended
June 29, 1996. Due to the acquisition of US Foodservice, various
non-recurring charges and the change in the Company's year-end, comparative
results are more difficult to analyze. To aid in the analysis of operating
results, the discussion will compare the financial results for the nine-week
transition period with the reported results for the thirteen-week period
ended July 29, 1995 by analyzing the results as a percentage of net sales.
The Company believes it is not practicable to prepare financial statements
for the comparable nine-week period in fiscal 1996, nor would such statements
be more meaningful than the reported results for the previously reported
thirteen-week period ended July 29, 1995 due to various non-recurring charges
and the inclusion of the results of operations of US Foodservice since the
date of acquisition (May 17, 1996) in the nine-week transition period ended
June 29, 1996.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine-Week
Transition
Period Ended Thirteen Weeks Ended
June 29, 1996 % of Sales July 29, 1995 % of Sales
---------------- ---------- -------------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 519,903 100.0% $ 421,771 100.0%
Cost of sales 426,486 82.0% 324,540 76.9%
---------------- --------------------
Gross profit 93,417 18.0% 97,231 23.1%
Warehouse, selling, general
and administrative expenses 115,349 22.2% 89,677 21.3%
Restructuring costs 57,600 11.1% --- 0.0%
---------------- --------------------
Income (loss) from operations (79,532) (15.3)% 7,554 1.8%
Interest expense, net 6,930 1.3% 3,146 0.7%
Other expenses 9,913 1.9% --- ---%
---------------- --------------------
Income (loss) before income taxes (96,375) (18.5)% 4,408 1.0%
Provision (benefit) for income taxes (36,195) (7.0)% 1,763 0.4%
---------------- --------------------
Net income (loss) $ (60,180) (11.6)% $ 2,645 0.6%
---------------- --------------------
</TABLE>
7
<PAGE>
In connection with the US Foodservice merger, the Company changed its fiscal
year to the Saturday closest to June 30 from the Saturday closest to April 30.
The financial information presented covers the nine-week transition period from
the end of the previous fiscal year ended April 27, 1996 to June 29, 1996.
Operating results for US Foodservice have been included since the date of the
merger.
The Company's gross profit margin is 18.0% for the nine-week period ended
June 29, 1996 compared with 23.1% for the thirteen-week period ended July 29,
1995. The decline resulted from several factors, including the acquisition of
US Foodservice which has a lower gross profit margin; the continuing transition
of the Company from a niche distributor to a broadline distributor which
offers customers products such as meat, produce and seafood which typically
carry a lower margin; and one-time charges to cost of sales relating to
product consolidations and realignment of inventory in accordance with the
Company's integration plans.
Warehouse, selling, general and administrative expenses as a percentage of net
sales for the 9-week transition period ended June 29, 1996 were 22.2% compared
with 21.3% in the thirteen weeks ended July 29, 1995. The increase in
operating expenses was primarily due to the recording of one-time charges by
various distribution centers of the Company relating to operational
consolidation arising from the merger. Operating results for the transition
period, which were adversely affected by these one-time charges, should not
be indicative of the Company's operating performance in fiscal 1997.
Additionally, the Company recorded a restructuring charge of $57.6 million in
the transition period ended June 29, 1996. These charges are primarily
attributable to closures of duplicate facilities, severance and other related
integration costs. Other one-time operating cost exceeding $18 million have
been included in operating income.
Net interest expense for the transition ended June 29, 1996 increased to $6.9
million from $3.1 million in the thirteen weeks ended July 29, 1995. The
increase in interest expense was primarily due to new term loans resulting from
the new bank credit facility described in Note 6 to the financial statements.
Other expenses of $9.9 million in the transition period ended June 29, 1996
relate primarily to one-time fees and the initial loss totaling $8.4 million
arising from sales of receivables under an asset securitization program.
The decline in the effective tax rate to a 38% benefit for the transition
period ended June 29, 1996 from a 40% provision for the thirteen weeks ended
July 29, 1995 was primarily attributable to a valuation allowance related to
potentially non-deductible state operating losses.
8
<PAGE>
RESULTS OF OPERATIONS - OUTLOOK FOR FISCAL 1997
The merger with US Foodservice provides the Company with an added avenue to
improve operating results. The Company's management is consolidating
overlapping distribution centers and offices. Plans to achieve other
significant operating efficiencies and marketing benefits are also in
progress.
With the integration process in place, the Company has set an objective of
achieving synergies in excess of $10 million in fiscal year 1997. Management
believes that the bulk of these synergies should be derived primarily from
enhanced purchasing leverage and more favorable sales and marketing allowances;
opportunities to increase sales of self-manufactured items; consolidation of
overlapping distribution centers and offices; and elimination of costs
associated with redundant departments and functions.
LIQUIDITY AND CAPITAL RESOURCES
During the nine-week transition period ended June 29, 1996, the Company
refinanced its debt in conjunction with its merger with US Foodservice.
Under the new Credit Agreement, the Company has relationships with commercial
banks and other lenders that have committed to provide a revolving line of
credit up to $150 million. As of July 31, 1996 the unused balance of this
facility was approximately $100 million. The Company has used its bank
credit line principally for capital expenditures, debt repayment, payment of
dividends and acquisitions. Going forward, the Company expects that its
future capital expenditures, debt payments and cash dividends will be
financed through a combination of cash flow generated from operating
activities and use of its credit line.
During the transition period ended June 29, 1996, the Company invested $3.9
million in capital expenditures. The Company has ongoing plans to incur
capital expenditures for the construction of new and more efficient
distribution centers and expansion of freezer and cooler facilities.
Management believes that the Company will be able to generate cash flows from
operations, and have sufficient capital resources to meet its operating needs as
well as debt obligations and other cash outlays for the foreseeable future. As
the combination of the merged operations progresses, the Company expects to make
expenditures totaling $29 million for severance, rent and other costs to
reposition operations and close facilities. These payments have been provided
for in the restructuring charge recorded in the transition period ended June 29,
1996 and in the accounting for the purchase of US Foodservice.
In fiscal 1997, the Company has available net operating loss carryback of about
$16 million related to fiscal 1996 and expects to receive cash refunds of
approximately $5.8 million.
The Company believes that the outcome of the arbitration proceedings described
in Note 5 to the financial statements will not have a significant impact on its
liquidity and capital resources.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
During the transition period ended June 29, 1996, the Company filed a Form
8-K dated May 30, 1996 reporting the following items:
Item 2. Acquisition or Disposition of Assets.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
10
<PAGE>
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.
RYKOFF-SEXTON, INC.
Date: August 12, 1996 /S/ MARK VAN STEKELENBURG
--------------------------
Mark Van Stekelenburg
Chairman and Chief
Executive Officer
Date: August 12, 1996 /S/ RICHARD J. MARTIN
--------------------------
Richard J. Martin
Senior Vice President and
Chief Financial Officer
Date: August 12, 1996 /S/ JAMES C. WONG
---------------------------
James C. Wong
Treasurer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-START> APR-28-1996
<PERIOD-END> JUN-29-1996
<CASH> 22,045
<SECURITIES> 0
<RECEIVABLES> 41,830
<ALLOWANCES> 7,916
<INVENTORY> 237,763
<CURRENT-ASSETS> 352,578
<PP&E> 423,661
<DEPRECIATION> 145,700
<TOTAL-ASSETS> 1,217,193
<CURRENT-LIABILITIES> 344,255
<BONDS> 497,854
0
0
<COMMON> 2,801
<OTHER-SE> 333,244
<TOTAL-LIABILITY-AND-EQUITY> 1,217,193
<SALES> 519,903
<TOTAL-REVENUES> 519,903
<CGS> 426,486
<TOTAL-COSTS> 115,349
<OTHER-EXPENSES> 67,513
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,930
<INCOME-PRETAX> (96,375)
<INCOME-TAX> (36,195)
<INCOME-CONTINUING> (60,180)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60,180)
<EPS-PRIMARY> (2.51)
<EPS-DILUTED> (2.51)
</TABLE>
