<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 28, 1996
JP Foodservice, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 0-24954 52-1634568
- -------------------------------- ------------ ------------------
(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification No.)
</TABLE>
<TABLE>
<S> <C>
9830 Patuxent Woods Drive, Columbia, Maryland 21046
- --------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: 410-312-7100
<PAGE> 2
ITEM 5. OTHER EVENTS.
JP Foodservice, Inc. (the "Company") has filed a registration
statement on Form S-3 with the Securities and Exchange Commission to register
shares of Common Stock, $.01 par value, in connection with a public offering by
the Company. This Form 8-K is being filed for the purpose of incorporating the
financial statements filed herewith by reference into such registration
statement.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
Exhibit 24 -- Consent of KPMG Peat Marwick LLP, Independent
Auditors
Exhibit 99 -- Valley Industries, Inc. and Subsidiaries and Z
Leasing Company (A General Partnership) Combined
financial Statements January 31, 1994, 1995 and
1996 (With Independent Auditors Report Thereon)
</TABLE>
-2-
<PAGE> 3
SIGNATURE
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.
JP FOODSERVICE, INC.
By: /s/ Lewis Hay, III
-------------------------
Lewis Hay, III
Senior Vice President and
Chief Financial Officer
Date: July 1, 1996
-3-
<PAGE> 1
EXHIBIT 24
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Valley Industries, Inc. and Subsidiaries
and Z Leasing Company (A General Partnership):
We consent to the inclusion of our report dated June 17, 1996, with respect to
the combined balance sheets of Valley Industries, Inc. and Subsidiaries and Z
Leasing Company (A General Partnership) as of January 31, 1996, 1995, and 1994
and the related combined statements of earnings, stockholders' and partners'
equity, and cash flows for each of the years in the three year period ended
January 31, 1996 which report appears in the Form 8-K of JP Foodservice, Inc.
dated June 28, 1996.
Las Vegas, Nevada
June 27, 1996
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors, Stockholders and Partners
Valley Industries, Inc. and Subsidiaries and Z Leasing Company (A General
Partnership):
We have audited the accompanying combined balance sheets of Valley Industries,
Inc. and subsidiaries and Z Leasing Company (A General Partnership)
(collectively, the Company) as of January 31, 1994, 1995 and 1996, and the
related combined statements of earnings, stockholders' and partners' equity,
and cash flows for each of the years in the three-year period ended January 31,
1996. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Company as of January 31, 1994, 1995 and 1996, and the combined results of
their operations and their cash flows for each of the years in the three-year
period ended January 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
June 17, 1996
F-2
<PAGE> 2
<TABLE>
<CAPTION>
VALLEY INDUSTRIES, INC. AND SUBSIDIARIES AND Z LEASING COMPANY
(A GENERAL PARTNERSHIP)
Combined Balance Sheets
January 31, 1994, 1995 and 1996
- -------------------------------------------------------------------------------------------
1994 1995 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 43,348 43,411 422,323
Trade accounts receivable, net (Note 3 and 6) 7,914,638 9,734,596 11,346,721
Inventories (Notes 6 and 15) 4,203,034 5,062,972 5,922,436
Prepaid expenses and other assets 148,411 305,945 389,466
Income taxes receivable -- 62,634 --
- -------------------------------------------------------------------------------------------
Total current assets 12,309,431 15,209,558 18,080,946
- -------------------------------------------------------------------------------------------
Property and equipment, net (Notes 4 and 6) 8,191,428 8,242,757 8,417,116
Due from related parties 236,384 224,540 124,516
Other assets 116,502 529,590 554,268
- -------------------------------------------------------------------------------------------
Total assets $20,853,745 24,206,445 27,176,846
===========================================================================================
LIABILITIES AND STOCKHOLDERS' AND PARTNERS'
EQUITY
Current liabilities:
Revolving bank line of credit (Notes 6 and
13) $ 2,399,000 2,700,000 4,700,000
Bank overdraft 1,252,465 2,386,146 2,581,148
Accounts payable 3,920,009 4,804,239 5,412,148
Accrued payroll and related taxes 527,767 954,630 422,126
Other accrued liabilities 245,732 402,850 465,837
Income taxes payable 155,478 -- --
Current deferred tax liability, net (note 9) 74,869 13,824 117,314
Current portion of notes payable to related
parties (Note 11) 385,596 493,873 416,019
Short-term notes payable 116,500 121,053 145,114
Current portion of long-term debt and
capital lease obligations (Note 7) 772,892 893,444 865,906
- -------------------------------------------------------------------------------------------
Total current liabilities 9,850,308 12,770,059 15,125,612
- -------------------------------------------------------------------------------------------
Noncurrent liabilities:
Long-term debt and capital lease
obligations, less current portion (Note 7) 8,171,756 8,093,658 7,692,104
Notes payable to related parties (Note 11) 2,311,001 1,937,128 1,741,111
Noncurrent deferred tax liability (Note 9) 92,370 138,939 127,434
Minority interest (Note 2) 520,641 209,541 149,941
- -------------------------------------------------------------------------------------------
Total noncurrent liabilities 11,095,768 10,379,266 9,710,590
- -------------------------------------------------------------------------------------------
Total liabilities 20,946,076 23,149,325 24,836,202
- -------------------------------------------------------------------------------------------
Stockholders' and partners' equity (Notes 16
and 17):
Common stock, $.001 par value, 20,000,000
shares authorized, 8,474,576 shares issued 1,151,000 1,151,000 1,151,000
and outstanding in 1994, 10,000,000 shares
in 1995 and 1996
Retained earnings (107,331) (93,880) 1,189,644
- -------------------------------------------------------------------------------------------
1,043,669 1,057,120 2,340,644
Less treasury stock, common, at cost,
1,525,424 in 1994. (1,136,000) -- --
- -------------------------------------------------------------------------------------------
Total stockholders' and partners'
equity (92,331) 1,057,120 2,340,644
- -------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 8 and 14)
- -------------------------------------------------------------------------------------------
Total liabilities and stockholders'
and partners' equity $20,853,745 24,206,445 27,176,846
===========================================================================================
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE> 3
<TABLE>
<CAPTION>
VALLEY INDUSTRIES, INC. AND SUBSIDIARIES AND Z LEASING COMPANY
(A GENERAL PARTNERSHIP)
Combined Statements of Earnings
Fiscal Year Ended January 31, 1994, 1995 and 1996
- ---------------------------------------------------------------------------------------------------
1994 1995 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $84,495,826 $105,405,967 $121,503,567
Cost of sales 69,039,124 86,800,836 100,370,115
- ---------------------------------------------------------------------------------------------------
Gross profit 15,456,702 18,605,131 21,133,452
Operating expenses:
Delivery and sales expenses 8,352,557 9,893,361 11,005,766
General and administrative expenses 4,600,832 5,881,996 6,449,053
- ---------------------------------------------------------------------------------------------------
12,953,389 15,775,357 17,454,819
- ---------------------------------------------------------------------------------------------------
Earnings from operations 2,503,313 2,829,774 3,678,633
- ---------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 14,782 25,894 41,676
Interest expense (1,233,881) (1,222,714) (1,312,640)
Other income 72,566 386,401 39,187
Minority interest in earnings of subsidiary (34,699) (38,383) (12,260)
- ---------------------------------------------------------------------------------------------------
(1,181,232) (848,802) (1,244,037)
- ---------------------------------------------------------------------------------------------------
Earnings before provision for income 1,322,081 1,980,972 2,434,596
taxes
Provision for income taxes (note 9) 422,068 456,521 611,072
- ---------------------------------------------------------------------------------------------------
Net earnings $ 900,013 $ 1,524,451 $ 1,823,524
===================================================================================================
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE> 4
<TABLE>
<CAPTION>
VALLEY INDUSTRIES, INC. AND SUBSIDIARIES AND Z LEASING COMPANY
(A GENERAL PARTNERSHIP)
Combined Statements of Stockholders' and Partners' Equity
Years ended January 31, 1994, 1995 and 1996
- -------------------------------------------------------------------------------------
TREASURY
COMMON RETAINED STOCK,
STOCK EARNINGS COMMON TOTAL
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at February 1, 1993 $ 1,151,000 $ (902,344) $(1,136,000) $ (887,344)
Dividends and distributions (105,000) (105,000)
Net earnings 900,013 900,013
- -------------------------------------------------------------------------------------
Balance at January 31, 1994 1,151,000 (107,331) (1,136,000) (92,331)
- -------------------------------------------------------------------------------------
Treasury stock issued (1,136,000) 1,136,000
Dividends and distributions (375,000) (375,000)
Net earnings 1,524,451 1,524,451
- -------------------------------------------------------------------------------------
Balance at January 31, 1995 1,151,000 (93,880) -- 1,057,120
- -------------------------------------------------------------------------------------
Dividends and distributions (540,000) (540,000)
Net earnings 1,823,524 1,823,524
- -------------------------------------------------------------------------------------
Balance at January 31, 1996 $ 1,151,000 $ 1,189,644 $ -- $2,340,644
=====================================================================================
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE> 5
<TABLE>
<CAPTION>
VALLEY INDUSTRIES, INC. AND SUBSIDIARIES AND Z LEASING COMPANY
(A GENERAL PARTNERSHIP
Combined Statements of Cash Flows
Years ended January 31, 1994, 1995 and 1996
- -------------------------------------------------------------------------------------------------
1994 1995 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 900,013 $ 1,524,451 $ 1,823,524
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property and equipment 1,071,076 1,048,645 1,022,071
(Gain) loss on sale of property and equipment 6,729 (306,099) 3,938
Minority interest in earnings of subsidiary 34,699 38,383 12,260
Provision for bad debts 111,239 109,714 251,824
Increase (decrease) in deferred income taxes 111,175 (14,476) 91,985
Changes in operating assets and liabilities:
Increase in trade accounts receivable (2,275,535) (1,929,672) (1,863,949)
Increase in inventories (1,350,692) (859,938) (859,464)
Increase in prepaid expenses and other assets (101,781) (220,622) (108,199)
Increase (decrease) in income tax
payable/receivable 292,949 (218,112) 62,634
Increase in accounts payable 381,934 845,847 595,649
Increase (decrease) in accrued expenses 131,411 583,981 (469,517)
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (686,783) 602,102 562,756
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 9,450 317,455 9,000
Purchase of property and equipment (609,097) (865,538) (701,685)
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (599,647) (548,083) (692,685)
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in bank overdraft 257,805 1,133,681 195,002
(Increase) decrease in due from related parties (236,384) 11,844 100,024
Decrease in notes payable to related parties (458,247) (265,596) (273,871)
Increase (decrease) in short-term notes payable (65,140) 4,553 24,061
Net borrowings under line-of-credit agreement 1,899,000 301,000 2,000,000
Proceeds from issuance of long-term debt 2,220,994 450,272 --
Payments on long-term debt and capital lease
obligations (2,944,683) (1,003,610) (936,775)
Dividends and Distributions (105,000) (375,000) (540,000)
Issuance of minority interest preferred stock 116,000 -- --
Purchase of minority interest preferred stock into
treasury (33,300) (311,100) (59,600)
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 651,045 (53,956) 508,841
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (635,385) 63 378,912
Cash and cash equivalents:
Beginning of year 678,733 43,348 43,411
- -------------------------------------------------------------------------------------------------
End of year $ 43,348 $ 43,411 $ 422,323
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE> 6
VALLEY INDUSTRIES, INC. AND SUBSIDIARIES AND Z LEASING
COMPANY (A GENERAL PARTNERSHIP)
Notes to Combined Financial Statements
January 31, 1994, 1995 and 1996
- --------------------------------------------------------------------------------
(1) ORGANIZATION AND BUSINESS
Valley Industries, Inc. ("Industries") was formed on January 27, 1988 through a
stock exchange with the then existing shareholders of E & H Distributing Co.,
Inc. dba Valley Food Distributors of Nevada ("Foods"). Industries functions
principally as a holding company. Foods was incorporated on February 1, 1955,
is a wholly owned subsidiary of Industries, and is the principal operating
subsidiary of Industries. Foods is a wholesaler of groceries, bakery and other
related items to hotels, restaurants, and grocery stores primarily in Nevada. Z
Leasing Company ("Z Leasing") is a general partnership that was formed January
1, 1983. It is owned by the same six individuals that own the outstanding
common stock, directly or indirectly, of Industries. Z Leasing owns, and leases
to Foods, the distribution and warehouse facility used by Foods in its
operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION AND COMBINATION
The combined financial statements include the combined accounts of Industries,
Foods and Z Leasing (collectively, the Company). All entities included in the
combination are under the common management and control of the stockholders of
Industries. The combined financial statements have been presented on a combined
basis because the owners of the combined entities have entered into an
agreement the result of which will be a business combination with an unrelated
public company. Significant intercompany transactions have been eliminated in
the combination.
B. CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
C. REVENUE AND RECEIVABLES
Revenue is recognized when product is delivered to the customer. Allowances are
provided for estimated uncollectible receivables based on historical experience
and review of specific accounts.
Receivables from suppliers for promotional allowances or rebates are recorded
when the Company has received product in sufficient quantity to be entitled to
the allowance.
D. INVENTORIES
Inventories, consisting principally of fresh, frozen and packaged foods, and
are valued at the lower of cost or market using the first-in, first-out (FIFO)
method.
F-7
<PAGE> 7
VALLEY INDUSTRIES, INC. AND SUBSIDIARIES AND Z LEASING
COMPANY (A GENERAL PARTNERSHIP)
Notes to Combined Financial Statements, Continued
- --------------------------------------------------------------------------------
E. PROPERTY AND EQUIPMENT
Property and equipment, including significant betterments to existing
facilities, are stated at cost, less accumulated depreciation. Expenditures for
maintenance and repairs are expensed when incurred. Property and equipment
under capital leases are stated at the present value of minimum lease payments.
Related costs and accumulated depreciation are eliminated from the accounts
upon disposition of an asset and the resulting gain or loss is reflected in the
statement of earnings.
Depreciation is computed by straight-line and accelerated methods at rates
adequate to recover the cost of the applicable assets over their estimated
useful lives as follows:
<TABLE>
<S> <C>
Machinery, computers and other equipment 2-7 years
Vehicles 3-5 years
Furniture and fixtures 2-7 years
Building improvements 5-31 years
</TABLE>
Property and equipment held under capital leases and leasehold improvements
are amortized on a straight-line basis over the shorter of the lease term or
estimated useful life of the asset.
F. INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Since Z Leasing is a partnership, the partners separately account for the
partnership's items of income, deductions, losses, and credits. Accordingly, no
provision for federal or state income taxes is included in the accompanying
combined financial statements for net income related to the operations of Z
Leasing. However, pro forma income tax adjustments applicable to Z Leasing are
as follows, for the years ended January 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Combined net earnings $ 900,013 1,524,451 1,823,524
Pro forma income tax adjustments:
Current 65,875 184,436 236,710
Deferred -- 58,469 (3,146)
- -----------------------------------------------------------------------------------
68,875 242,905 233,564
Pro forma combined net earnings after pro
forma income tax adjustments related to Z
Leasing earnings $ 834,138 1,281,546 1,589,960
===================================================================================
</TABLE>
F-8
<PAGE> 8
VALLEY INDUSTRIES, INC. AND SUBSIDIARIES AND Z LEASING
COMPANY (A GENERAL PARTNERSHIP)
Notes to Combined Financial Statements, Continued
- --------------------------------------------------------------------------------
G. USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
H. PER SHARE DATA
Per share data is not relevant since the Company is a presentation of the
combined operations of corporations and a partnership.
I. MINORITY INTEREST
Minority interest represents 8% cumulative, non-voting preferred stock of
Foods held by persons outside of the Company. 50,000 shares are authorized,
9,836 shares issued, and 4,599, 7,846 and 8,442 shares in treasury at January
31, 1994, 1995 and 1996, respectively.
(3) ACCOUNTS RECEIVABLE
Receivables at January 31, 1994, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
1994 1995 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer accounts and notes $7,469,888 $8,767,616 $10,115,563
Less allowance for doubtful accounts (150,425) (155,030) (189,596)
- ---------------------------------------------------------------------------------------------
7,319,463 8,612,586 9,925,967
From suppliers 595,175 1,122,010 1,420,754
- ---------------------------------------------------------------------------------------------
$7,914,638 $9,734,596 $11,346,721
=============================================================================================
</TABLE>
(4) PROPERTY AND EQUIPMENT
The components of property and equipment at January 31, 1994, 1995 and 1996
are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 1,283,596 $ 1,238,596 $ 1,238,596
Buildings 5,772,099 5,482,021 6,081,194
Machinery and equipment 1,314,912 1,659,945 2,010,545
Vehicles 4,054,379 4,670,752 4,924,841
Furniture and fixtures 154,260 229,070 249,872
Leasehold improvements 504,210 552,280 487,075
Computer equipment 355,256 405,556 414,014
- --------------------------------------------------------------------------------------------
13,438,712 14,238,220 15,406,137
Less accumulated depreciation (5,247,284) (5,995,463) (6,989,021)
- --------------------------------------------------------------------------------------------
$ 8,191,428 $ 8,242,757 $ 8,417,116
============================================================================================
</TABLE>
F-9
<PAGE> 9
VALLEY INDUSTRIES, INC. AND SUBSIDIARIES AND Z LEASING
COMPANY (A GENERAL PARTNERSHIP)
Notes to Combined Financial Statements, Continued
- --------------------------------------------------------------------------------
(5) NONCASH FINANCING AND INVESTING ACTIVITIES
Noncash investing and financing activities for the years ended January 31,
1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Acquisition of equipment through financing
arrangements $ -- 595,792 507,683
Note received in connection with sale of
property and equipment 350,000
Disclosure of cash flow information:
Cash paid for interest 1,236,160 1,219,655 1,304,511
Cash paid for income taxes 261,846 762,000 495,000
</TABLE>
(6) REVOLVING BANK LINE OF CREDIT
The Company has a line of credit arrangement with a commercial bank, expiring
June 30, 1996 permitting borrowings up to a maximum of $6,000,000. The interest
rate is prime plus 1.0%. Prime rate at January 31, 1996 was 8.5%. Collateral on
the line of credit consists of accounts receivable, inventories and equipment.
Subsequent to January 31, 1996, this line of credit was replaced with a new
line of credit with a different financial institution (see Note 13).
F-10
<PAGE> 10
VALLEY INDUSTRIES, INC. AND SUBSIDIARIES AND Z LEASING
COMPANY (A GENERAL PARTNERSHIP)
Notes to Combined Financial Statements, Continued
- --------------------------------------------------------------------------------
(7) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations at January 31, 1994, 1995 and
1996 consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
- ----------------------------------------------------------- -------------------------------
<S> <C> <C> <C>
Notes payable to financing company, secured
by fleet vehicles; maturing at various
dates from 1997 to 2000, interest
rates from 7% to 11%; aggregate
monthly principal and interest
payments of $44,005 $1,402,123 $1,176,453 $ 797,958
Notes payable to former employees, unsecured,
interest rate of 8%; maturity at various
dates from 1996 to 1997. 54,139 33,314 16,166
Notes payable to financing company, secured
by fleet vehicles; maturing in 1997;
interest at 6.9%; aggregate monthly
principal and interest payments of $734. 17,293 9,862 1,454
Notes payable to bank, secured by real estate;
maturing at various dates from 2003 to
2009; interest from 9% to 10%; aggregate
monthly principal and interest payments of
$60,969. 7,179,271 7,045,562 6,900,182
Notes payable to unrelated party, unsecured;
maturing in August 1996; interest
at 11%; monthly principal and interest
payments of $11,247. 291,822 183,941 64,468
Capital lease obligations (note 8) -- 537,970 777,782
- --------------------------------------------------------------------------------------------
8,944,648 8,987,102 8,558,010
Less current portion (772,892) (893,444) (865,906)
- --------------------------------------------------------------------------------------------
Long-term debt and capital lease obligations,
less current portion $8,171,756 $8,093,658 $7,692,104
============================================================================================
</TABLE>
The aggregate maturities of long-term debt and capital lease obligations for
each of the five years subsequent to January 31, 1996 are as follows:
<TABLE>
<CAPTION>
Years ended January 31:
<S> <C>
1997 $ 865,906
1998 598,391
1999 509,209
2000 394,247
2001 221,632
Thereafter 5,968,625
-------------------------------------------------------------------
Total $8,558,010
===================================================================
</TABLE>
F-11
<PAGE> 11
VALLEY INDUSTRIES, INC. AND SUBSIDIARIES AND Z LEASING
COMPANY (A GENERAL PARTNERSHIP)
Notes to Combined Financial Statements, Continued
- --------------------------------------------------------------------------------
(8) LEASES
The Company entered into a noncancelable operating lease for vehicles and
machinery in February 1996 providing for rental payments that include minimum
monthly rentals of $9,571 plus contingent rentals based on mileage. This lease
expires November 2001.
The Company entered into a master operating lease agreement for computer
equipment which consists of three components ("schedules"): two for hardware
and one for software. Regular lease payments of $8,468 commenced for the first
lease schedule in August of 1995 for a period of 48 months.
Subsequent to January 31, 1996, the Company finalized the second and third
lease schedules. Regular lease payments of $3,635 and $6,103, respectively,
commenced for the second and third lease schedules for periods of 48 months and
36 months, respectively.
Included in property and equipment at January 31, 1996 and 1995 are vehicles
held under capital leases totaling $980,372 and $595,793, respectively. For the
years ended January 31, 1996 and 1995, amortization of $168,267 and $55,491,
respectively, is included in vehicle and equipment depreciation expense.
Set forth below are the future minimum lease payments as of January 31, 1996
under capital leases and operating leases with noncancelable terms beyond one
year.
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
- -------------------------------------------------------------------------------------
Years ended January 31:
<S> <C> <C>
1997 $ 336,573 $ 246,319
1998 329,673 246,319
1999 308,973 246,319
2000 183,997 166,819
2001 114,852 4,800
- -------------------------------------------------------------------------------------
$ 1,274,068 $ 910,576
Less interest portion -- (132,794)
- -------------------------------------------------------------------------------------
Total $ 1,274,068 $ 777,782
=====================================================================================
</TABLE>
(9) INCOME TAXES
The provision for federal income taxes is comprised of the following for the
years ended January 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 310,893 $ 470,997 $ 519,087
Deferred 111,175 (14,476) 91,985
- --------------------------------------------------------------------------------------
Total $ 422,068 $ 456,521 $ 611,072
======================================================================================
</TABLE>
F-12
<PAGE> 12
VALLEY INDUSTRIES, INC. AND SUBSIDIARIES AND Z LEASING
COMPANY (A GENERAL PARTNERSHIP)
Notes to Combined Financial Statements, Continued
- --------------------------------------------------------------------------------
Total income taxes for the years ended January 31, 1994, 1995 and 1996 differ
from the "expected" income taxes (computed by applying the U.S. Federal
corporate tax rate of 34%) as follows:
<TABLE>
<CAPTION>
1994 1995 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" income taxes $461,305 $ 688,470 $ 831,931
Nondeductible expenses 26,638 10,956 12,705
Nontaxable income, principally Partnership
earnings (65,875) (242,905) (233,564)
- ------------------------------------------------------------------------------------
$422,068 $ 456,521 $ 611,072
====================================================================================
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at January 31, 1994,
1995 and 1996 are presented below:
<TABLE>
<CAPTION>
1994 1995 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 51,145 $ 52,710 $ 64,463
Deferred costs due to accrual for
self insured workers compensation
claims -- 57,800 --
Compensated absences, accrued for
financial reporting purposes, not
currently deductible -- -- 9,520
Other -- 735 --
- ----------------------------------------------------------------------------------
Gross deferred tax assets 51,145 111,245 73,983
Less valuation allowance -- -- --
- ----------------------------------------------------------------------------------
Net deferred tax assets 51,145 111,245 73,983
- ----------------------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment principally
due to difference in depreciation 92,370 80,470 72,111
Inventory(change in inventory
valuation (Note 15) 126,014 125,069 191,297
Deferred gain -- 58,469 55,323
- ----------------------------------------------------------------------------------
Gross deferred tax
liabilities 218,384 264,008 318,731
- ----------------------------------------------------------------------------------
Net deferred tax liabilities $167,239 $152,763 $244,748
==================================================================================
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
F-13
<PAGE> 13
VALLEY INDUSTRIES, INC. AND SUBSIDIARIES AND Z LEASING
COMPANY (A GENERAL PARTNERSHIP)
Notes to Combined Financial Statements, Continued
- --------------------------------------------------------------------------------
(10) PROFIT SHARING AND SALARY REDUCTION PLAN
The Company has a profit sharing and salary reduction plan that covers
substantially all full-time non-union employees. The Company matches the lesser
of 50% of the employee's salary reduction or 8.33% of the employee's salary,
reduced by the employee's salary reduction. Additional amounts may be
contributed at the discretion of the Company's Board of Directors. For the
years ended January 31, 1994, 1995 and 1996, matching contributions charged to
expense totaled $173,633, $190,047 and $243,019, respectively.
(11) RELATED PARTY TRANSACTIONS
The following is a summary of related party transactions and outstanding
related party balances at January 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Notes from related parties, interest at rates
between 9% and 10%; unsecured, with maturity
dates to September 1998 87,959 103,623 --
Notes due from shareholders, interest rates
between 9% and 10%; unsecured, with maturity
dates to September 1998 148,425 120,917 124,516
- --------------------------------------------------------------------------------------
Due from related parties 236,384 224,540 124,516
- --------------------------------------------------------------------------------------
Notes to related parties, interest at rates
between 6% and 11.5%; unsecured, with
maturity dates to May 2002 1,866,681 1,601,085 1,379,496
Notes to shareholders, interest at 10%;
unsecured, maturing on January 1, 2005. These
notes were interest bearing only until April
1995, at which time the Company began
making monthly principal and interest
payments of $10,885. 829,916 829,916 777,634
- --------------------------------------------------------------------------------------
Notes payable to related parties 2,696,597 2,431,001 2,157,130
Less current portion 385,596 493,873 416,019
- --------------------------------------------------------------------------------------
Notes payable to related parties, less current
portion 2,311,001 1,937,128 1,741,111
======================================================================================
</TABLE>
The Company sells groceries to a related company. For the years ended January
31, 1994, 1995 and 1996 sales totaled $521,524, $1,399,384 and $1,501,122,
respectively.
F-14
<PAGE> 14
VALLEY INDUSTRIES, INC. AND SUBSIDIARIES AND Z LEASING
COMPANY (A GENERAL PARTNERSHIP)
Notes to Combined Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS, TRADE RECEIVABLES, DUE FROM RELATED PARTIES, PREPAID
EXPENSES, ACCOUNTS PAYABLE, BANK OVERDRAFT, ACCRUED LIABILITIES AND SHORT-TERM
NOTES PAYABLE
The carrying amount approximates fair value because of the short maturity of
these instruments.
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS AND NOTES PAYABLE TO RELATED
PARTIES
The fair values of the Company's notes payable and capital lease obligations
and notes payable to related parties are estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities. The estimated fair market
values of the notes payable and capital lease obligations and notes payable to
related parties, respectively, at January 31, 1996 are approximately $8,400,000
and $2,060,000 using a market rate of 9.5%.
(13) SUBSEQUENT EVENTS
In April 1996, the Company entered into a revolving line of credit with a
commercial bank expiring May 31, 1998 permitting borrowings up to a maximum of
$10,000,000. The interest rate is based on the banks "reference rate" plus .25%
and/or the LIBOR rate plus 2%. In June 1996, the Company formed a wholly owned
subsidiary of Foods, Nevada Baking Company, Inc., and through this subsidiary
purchased an unrelated company operating in the bakery business for $5,100,000.
(14) CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's combined financial position, results of operations or liquidity.
F-15
<PAGE> 15
VALLEY INDUSTRIES, INC. AND SUBSIDIARIES AND Z LEASING
COMPANY (A GENERAL PARTNERSHIP)
Notes to Combined Financial Statements, Continued
- --------------------------------------------------------------------------------
(15) OTHER MATTERS
For purposes of these combined financial statements, Foods changed its method
of determining the cost of inventories from the LIFO method to the FIFO method.
This change was made so that the Company's accounting policies would conform to
those of an acquiring company for purposes of a business combination. This
change has been applied by retroactively restating the financial statements of
Foods which are included in the combined accounts comprising these combined
financial statements. This change results in increasing (decreasing) net income
for Foods by approximately ($83,000), $3,000 and ($195,000) for the years ended
January 31, 1994, 1995 and 1996, respectively, from net income previously
reported in stand alone financial statements of Foods. The balance of retained
earnings of Foods for the year ended January 31, 1993 has been adjusted by
$287,982 (net of related income taxes of $97,914) for the effect of applying
retroactively the new method of valuing inventories.
(16) INCENTIVE COMPENSATION PLAN
Effective February 1, 1995, Industries implemented an incentive compensation
plan (the Plan) governed by a Compensation Committee comprised of certain
members of the Board of Directors. The Committee determines in its sole
discretion subject to the provisions of the Plan, the persons who shall
participate in the Plan, and the number of Units to be awarded each
participant. Units are essentially "phantom" options whose value is tied to
the share value of Industries' common stock as determined annually by the
Shareholders pursuant to their buy/sell agreement. Up to 1,000,000 units may be
awarded, in the aggregate, as of any particular time. Units vest 20% multiplied
by the number of anniversaries that have occurred since the Award Date for that
Unit. The only units awarded by the Board of Directors were 80,000 in April
1995. The per unit value at the date of award was $1.42. Compensation expense
related to this plan is not material to the Company's results of operations for
the year ended January 31, 1996. No units were vested as of January 31, 1996.
In connection with the proposed business combination, the Board of Directors of
the Company intend to terminate this plan.
(17) STOCK SPLIT AND PARTNERSHIP EQUITY
On February 1, 1995, the Company's Board of Directors declared a
14,124.2937-for-1 stock split distributable to shareholders on that date. All
references in these financial statements to number of shares have been restated
to reflect the stock split.
For purposes of these combined financial statements., partnership equity of Z
Leasing is classified as a component of paid-in capital (or retained earnings
if paid-in capital is zero or less) in the accompanying combined balance
sheets. Since this partnership equity was previously taxed to the partners of
Z Leasing, it has been treated as a distribution to the partners and a capital
contribution from the partners in the same amount.
F-16
