SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-24954
U.S. Foodservice
(Exact name of registrant as specified in its charter)
Delaware 52-1634568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9830 Patuxent Woods Drive 21046
Columbia, Maryland (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (410) 312-7100
Not Applicable
(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 (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
The number of shares of the registrant's common stock, par value $.01
per share, outstanding at May 4, 1998 was 46,074,430 shares.
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U.S. FOODSERVICE, INC.
INDEX
Part I. Financial Information Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 28, 1997 and March 28, 1998 1
Condensed Consolidated Statements of Operations
Three and nine months ended March 29, 1997
and March 28, 1998 2
Condensed Consolidated Statements of Cash Flows
Nine months ended March 29, 1997
and March 28, 1998 3
Notes to Condensed Consolidated Financial Statements 4 - 6
Item 2. Management's Discussion and Analysis of Financial 7 - 9
Condition and Results of Operations
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 10
Item 6. Exhibits and Reports on Form 8-K 10
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
U.S. FOODSERVICE AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS June 28, March 28,
1997 1998
---------- ----------
Current assets
Cash and cash equivalents ................... $ 74,432 $ 53,924
Receivables, net ............................ 261,717 356,699
Inventories ................................. 314,897 363,803
Deferred tax asset .......................... 28,944 27,802
Other current assets ........................ 29,919 41,454
---------- ----------
Total current assets ................. 709,909 843,682
---------- ----------
Property and equipment, net ........................ 437,736 451,325
Deferred income taxes .............................. 13,665 15,854
Goodwill and other noncurrent assets ............... 570,873 582,514
---------- ----------
Total assets ....................................... $1,732,183 $1,893,375
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt ........ $ 22,492 $ 5,233
Current obligations under capital leases .... 5,690 5,809
Accounts payable ............................ 321,442 374,034
Accrued expenses ............................ 125,482 135,317
---------- ----------
Total current liabilities ............ 475,106 520,393
---------- ----------
Noncurrent liabilities
Long-term debt .............................. 621,788 749,154
Obligations under capital leases ............ 33,458 31,771
Other noncurrent liabilities ................ 22,685 42,440
---------- ----------
Total noncurrent liabilities ......... 677,931 823,365
---------- ----------
Total liabilities .................... 1,153,037 1,343,758
---------- ----------
Commitments and contingent liabilities
Stockholders' equity ............................... 579,146 549,617
---------- ----------
Total liabilities and stockholders' equity ......... $1,732,183 $1,893,375
========== ==========
SEE ACCOMPANYING NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1
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U.S. FOODSERVICE AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
March 29, March 28, March 29, March 28,
1997 1998 1997 1998
---------- ---------- ---------- ----------
Net sales .................. $1,238,937 $1,338,138 $3,863,109 $4,050,224
Cost of sales .............. 995,668 1,090,012 3,117,298 3,289,355
---------- ---------- ---------- ----------
Gross profit ............... 243,269 248,126 745,811 760,869
Operating expenses ......... 203,923 212,402 630,889 661,568
Restructuring costs ........ 15,678 53,715
Asset impairment ........... 3,395 35,530
Amortization of
intangible assets .......... 3,793 3,941 11,493 11,361
---------- ---------- ---------- ----------
Income (loss)
from operations ....... 35,553 12,710 103,429 (1,305)
Interest and other
financing expenses .... 19,289 15,669 56,880 54,914
Nonrecurring acquisition
charges ............... 5,400 17,822
---------- ---------- ---------- ----------
Income (loss) before income
taxes (benefit) and
extraordinary charge .. 16,264 (2,959) 41,149 (74,041)
Provision for income
taxes (benefit) ....... 7,174 301 19,328 (9,950)
---------- ---------- ---------- ----------
Income (loss) before
extraordinary charge .. 9,090 (3,260) 21,821 (64,091)
Extraordinary charge,
net of income
tax benefit ........... 9,712
---------- ---------- ---------- ----------
Net income (loss) .......... $ 9,090 $ (3,260) $ 21,821 $ (73,803)
========== ========== ========== ==========
Basic earnings (loss) per
common share:
Before extraordinary
charge ................ $ 0.21 $ (0.07) $ 0.50 $ (1.42)
Extraordinary charge ... (0.22)
---------- ---------- ---------- ----------
Basic earnings (loss)
per common share ...... $ 0.21 $ (0.07) $ 0.50 $ (1.64)
========== ========== ========== ==========
Basic weighted average number
of shares of common stock
outstanding ........... 43,887,118 45,337,952 43,262,332 44,986,483
Diluted earnings (loss)
per common share:
Before extraordinary
charge ................ $ 0.20 $ (0.07) $ 0.50 $ (1.42)
Extraordinary charge ....... (0.22)
---------- ---------- ---------- ----------
Diluted earnings (loss)
per common share ...... $ 0.20 $ (0.07) $ 0.50 $ (1.64)
========== ========== ========== ==========
Diluted weighted average
number of shares of
common stock
outstanding ............ 44,635,061 45,337,952 43,980,497 44,986,483
SEE ACCOMPANYING NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
2
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U.S. FOODSERVICE AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
-----------------
March 29, March 28,
1997 1998
----------- -----------
Cash flows from operating activities
Net income (loss) .............................. $ 21,821 $ (73,803)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities
Depreciation and amortization ............. 45,092 47,226
Write-off of deferred financing costs ..... 9,152
Asset impairment .......................... 35,530
Restructuring reserve ..................... 53,715
Other adjustments ......................... (1) (2,083)
Changes in working capital, net of effects
from acquisitions ............................ (2,284) (96,865)
--------- ---------
Net cash provided by (used in) operating activities .. 64,628 (27,128)
--------- ---------
Cash flows from investing activities
Additions to property and equipment ............ (55,151) (76,230)
Proceeds from disposals of property ............ 6,936 12,028
Acquisitions of businesses, net of cash acquired (48,814) (48,903)
Other .......................................... 5,500
--------- ---------
Net cash used in investing activities ................ (91,529) (113,105)
--------- ---------
Cash flows from financing activities
Proceeds from public stock offering ............ 65,832
Treasury stock purchases ....................... (12,417)
Increase in long-term debt, net ................ (3,437) 108,031
Principal payments under capital
lease obligations .......................... (4,292) (4,547)
Financing costs ................................ (3,384)
Proceeds from employee stock purchases ......... 4,690 27,096
Other .......................................... (2,332) 4,946
--------- ---------
Net cash provided by financing activities ............ 60,461 119,725
--------- ---------
Net increase (decrease) in cash and cash equivalents . 33,560 (20,508)
Cash and cash equivalents
Beginning of period ............................ 34,269 74,432
--------- ---------
End of period .................................. $ 67,829 $ 53,924
========= =========
SEE ACCOMPANYING NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
3
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U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
In February 1998, the Company changed its corporate name to U.S. Foodservice
from JP Foodservice, Inc.
The condensed consolidated financial statements of U.S. Foodservice and its
consolidated subsidiaries (the "Company") at March 28, 1998 and for the
three-month and nine-month periods ended March 29, 1997 and March 28, 1998,
included herein are unaudited, but include all adjustments (consisting only of
normal recurring entries) which the Company's management believes to be
necessary for the fair presentation of the financial position, results of
operations and cash flows of the Company as of and for the periods presented.
Interim results are not necessarily indicative of results that may be expected
for the full year.
On December 23, 1997, in connection with an Agreement and Plan of Merger dated
June 30, 1997, as amended on September 3, 1997 and November 5, 1997 ( the
"Merger Agreement"), Rykoff-Sexton, Inc. ("Rykoff-Sexton") was merged into a
wholly-owned subsidiary of U.S. Foodservice (the "Acquisition"). In connection
with the Acquisition, U.S. Foodservice issued 22,657,498 shares of common stock
with an approximate value of $782 million, such that each outstanding share of
common stock of Rykoff-Sexton was exchanged for .775 shares of U.S. Foodservice
common stock. The transaction has been accounted for under the
pooling-of-interests method of accounting. Accordingly, these condensed
consolidated financial statements restate the previously reported financial
position, results of operations and cash flows of the Company, including
financial information for Rykoff-Sexton for all periods presented.
Both U.S. Foodservice and Rykoff-Sexton have fiscal years which end on the
Saturday closest to June 30. The condensed consolidated balance sheet as of June
28, 1997, combines the condensed consolidated balance sheets of U.S. Foodservice
and Rykoff-Sexton as of such date. The condensed consolidated financial
statements for the three-month and nine-month periods ended March 29, 1997 and
March 28, 1998, combine the results of U.S. Foodservice for such periods with
the results of Rykoff-Sexton for the same three-month and nine-month periods.
The results of operations previously reported by the separate enterprises and
the combined amounts presented in the accompanying condensed consolidated
statement of operations for the three-month and nine-month periods ended March
29, 1997 are as follows (dollars in thousands):
Three Months Nine Months
Ended Ended
March 29, March 29,
1997 1997
------------- --------------
Net sales:
Rykoff-Sexton $ 831,272 $ 2,618,480
U.S. Foodservice 407,665 1,244,629
------------- --------------
Combined $ 1,238,937 $ 3,863,109
============= ==============
Net income:
Rykoff-Sexton $ 4,009 $ 9,972
U.S. Foodservice 5,081 11,849
------------- --------------
Combined $ 9,090 $ 21,821
============= ==============
4
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NOTE 2 - ACQUISITION RELATED COSTS
In connection with the Acquisition, the Company incurred restructuring costs,
asset impairment charges, transaction costs and certain other operating charges
resulting from the integration of the two businesses ("the Acquisition Related
Costs") during the fiscal quarter ended March 28, 1998 in addition to the
Acquisition Related Costs incurred during the fiscal quarter ended December 27,
1997. These costs and charges are further described as follows:
Restructuring Costs
The Company recognized restructuring charges, related to the Acquisition, of
$15.7 million, of which $1.4 million were non-cash charges, during the third
fiscal quarter in addition to the $41.0 million of restructuring costs, of which
$16.0 million were non-cash charges, recognized during the second fiscal
quarter, related to the Acquisition. These restructuring costs consist primarily
of change in control payments, severance, idle facility and facility closure
costs related principally to the Acquisition and the Company's plan to
consolidate and realign certain operating units and consolidate various overhead
functions. As of March 28, 1998, $15.9 million of severance and $7.0 million of
idle facility and facility closure costs have yet to be expended. The Company
does not expect to recognize any additional charges related to the
restructuring.
Asset Impairment
The Company recognized non-cash asset impairment charges of $3.4 million during
the third fiscal quarter in addition to the $32.1 million recognized during the
second fiscal quarter related to the Company's plan to consolidate and realign
certain operating units and install new management information systems at each
of the Company's operating units. These charges consist of writedowns to net
realizable value of assets and facilities related to operating units that are
being consolidated or realigned.
Nonrecurring Acquisition Costs
During the nine-month period ended March 28, 1998, the Company incurred
nonrecurring acquisition costs related to the Acquisition. These costs, which
totaled $17.8 million, consist primarily of fees for financial advisory, legal,
accounting and other professional services.
Other Operating Charges
The Company charged $6.1 million and $2.5 million to cost of goods sold and
$15.6 million and $3.8 million to operating expenses for writedowns of
inventory, receivables and other current assets resulting from operating unit
consolidation and realignment during the fiscal quarters ended December 27, 1997
and March 28, 1998, respectively.
NOTE 3 - OTHER ACQUISITIONS
Sorrento Acquisition
Effective January 23, 1998, the Company completed the Acquisition of Sorrento
Food Service, Inc., a broadline foodservice distributor located in Buffalo, New
York. The excess purchase price over fair value of net assets acquired is
approximately $18.2 million and will be amortized using the straight-line method
over 40 years.
Westlund Acquisition
Effective March 20, 1998, the Company completed the acquisition of Westlund
Provisions, Inc., a foodservice distributor specializing in meats, located in
Minneapolis, Minnesota. The purchase price approximates the fair value of net
assets acquired.
5
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NOTE 4 - RYKOFF-SEXTON DEFINED BENEFIT PLAN CURTAILMENT
Prior to the Acquisition, Rykoff-Sexton maintained non-contributory pension
plans for its salaried, commissioned and certain hourly employees. During the
fiscal quarter ended March 28, 1998, the Company recognized a curtailment gain
of $4.5 million reflecting the freezing of benefits from one of these defined
benefit plans.
NOTE 5 - PRIOR NONRECURRING ACQUISITION COSTS
During the nine months ended March 29, 1997, the Company recorded a nonrecurring
cost of $5.4 million with respect to legal and other professional fees required
to complete certain acquisitions.
NOTE 6 - PRIOR RESTRUCTURING CHARGES
In connection with its acquisition of US Foodservice, Inc. on May 17, 1996,
Rykoff-Sexton recorded a restructuring charge of $57.6 million ($35.7 million
after tax) in the transition period ended June 29, 1996. Approximately $10.7
million related to severance and termination benefit costs, $20.2 million
related to lease-related costs and $26.7 million related to other exit costs,
including the closure of duplicate facilities and other integration activities.
During the fiscal quarter ended March 28, 1998, the Company charged $0.8 million
against the restructuring liability, leaving a balance of $17.4 million for
future costs to be incurred. The $0.8 million utilization primarily consisted of
$0.1 million in severance payments, $0.7 million in lease-related costs and the
balance for closure costs, asset writedowns and other obligations arising from
the Company's restructuring program. Most of the remaining cash outlays are
estimated to be paid in subsequent years and are primarily related to
non-cancelable operating lease commitments.
NOTE 7 - EXTRAORDINARY CHARGE
During the nine-month period ended March 28, 1998 and subsequent to the
Acquisition, the Company applied the proceeds of its new senior bank credit
facility to refinance substantially all of its indebtedness (excluding capital
leases, $130 million of public notes, and approximately $30 million of other
indebtedness) in order to lower significantly its overall borrowing costs. As a
result of this refinancing, the Company recorded an extraordinary charge of $9.7
million (net of $6.3 million income tax benefit) related to the write-off of
deferred financing costs with respect to the extinguished debt and additional
payments to holders of the Company's senior notes due 2004, which were paid in
full, in accordance with the senior note terms.
NOTE 8 - BASIC AND FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE
During the nine-month period ended March 28, 1998, the Company adopted the
provisions of Statement of Financial Accounting Standard No. 128, "Earnings Per
Share" (FAS 128). FAS 128 established new definitions for calculating and
disclosing basic and diluted earnings per share. In accordance with FAS 128, all
prior periods have been restated to conform to the new methodology. The restated
amounts do not differ materially from amounts previously reported.
NOTE 9 - CONTINGENCIES
From time to time, the Company is involved in litigation and proceedings arising
out of the ordinary course of business. There are no pending material legal
proceedings or environmental investigations to which the Company is a party or
to which the property of the Company is subject as of the date of this report.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Statements in this Management's Discussion with respect to management's
expectations regarding the Company's liquidity needs and resources constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements are subject to risks and uncertainties that could cause the Company's
actual results to differ materially. Such risks and uncertainties include the
sensitivity of the Company's business to national and regional economic
conditions, the effects of inflation and deflation in food prices, the highly
competitive markets in which the Company operates and the Company's ability to
integrate acquired businesses. The Company's Current Report on Form 8-K, filed
with the Securities and Exchange Commission on April 23, 1997, discusses some of
the important factors that could cause the Company's actual results to differ
materially from those in such forward-looking statements.
Overview
Effective December 23, 1997, Rykoff-Sexton was merged into a wholly-owned
subsidiary of U.S. Foodservice (the "Acquisition"). The Company has accounted
for the combination under the pooling-of-interests method. Accordingly, the
condensed consolidated statements of operations for the three-month and
nine-month periods ended March 29, 1997 and the three-month period ended
September 27, 1997, respectively, have been restated to include the results of
Rykoff-Sexton for the three-month and nine-month periods ended March 29, 1997
and the three-month period ended September 27, 1997, respectively.
As a result of the Acquisition and in connection with the Company's plan to
consolidate and realign certain operating units and functions in the combined
company, the Company incurred restructuring costs, asset impairment charges,
transaction costs and certain other costs (the "Acquisition Related Costs") of
approximately $16.5 million and $99.9 million (net of related tax benefits) for
the three-month and nine-month periods ended March 28, 1998, respectively. The
Acquisition Related Costs reduced diluted earnings per share by $0.36 and $2.22
for the three-month and nine-month periods ended March 28, 1998, respectively.
The Acquisition Related Costs are presented in various categories within the
statements of operations, and the impact of these costs is separately discussed.
The Company does not expect to recognize any additional Acquisition Related
Costs.
Net Sales
The Company's net sales of $1.34 billion for the three months ended March 28,
1998 (the "1998 fiscal quarter") represented a 8.0% increase from the $1.24
billion net sales level achieved for the three months ended March 29, 1997 (the
"1997 fiscal quarter"). For the nine months ended March 28, 1998 (the "1998
fiscal nine-month period"), net sales increased 4.8% to $4.05 billion from $3.86
billion for the nine months ended March 29, 1997 (the "1997 fiscal nine-month
period").
Growth in both chain account and street sales contributed to the increase in
sales. Chain account sales increased 4.4% for the 1998 fiscal quarter and 3.5%
for the 1998 fiscal nine-month period. An increase of 10.3% in street sales for
the 1998 fiscal quarter and 5.7% for the 1998 fiscal nine-month period resulted
principally from the growth of the street sales force and the acquisitions of
Mazo-Lerch Company ("Mazo Lerch") in the fourth quarter of fiscal 1997, Outwest
Meat Company ("Outwest") in the second quarter of fiscal 1998 and Sorrento Food
Service, Inc. ("Sorrento") and Westlund Provisions, Inc. ("Westlund") in the
1998 fiscal quarter. As a percentage of net sales, street sales increased to
62.2% from 60.9% for the 1998 fiscal quarter and to 61.6% from 61.1% for the
1998 fiscal nine-month period.
The acquisitions of Mazo Lerch, Outwest, Sorrento and Westlund accounted for
sales growth of 3.2% and 2.1% for the 1998 fiscal quarter and 1998 fiscal
nine-month period, respectively.
Gross Profit
The Company's gross profit decreased to 18.5% in the 1998 fiscal quarter and to
18.8% in the 1998 fiscal nine-month period from 19.6% in the 1997 fiscal quarter
and 19.3% in the 1997 fiscal nine-month period. The decrease was primarily
attributable to a continuing shift in product mix from certain high-margin items
to higher turnover, lower-margin items ("center-of-the-plate" or entree
products) in the former Rykoff-Sexton operations, as well as decreased margins
at certain of the operating units that were closed as part of the restructuring
plan. Non-cash charges of $2.5 million and $8.6 million for writedowns of
inventory in the 1998 fiscal quarter and the 1998 fiscal nine-month period,
respectively, at operating units undergoing consolidation or realignment as part
of the Acquisition plan, also caused a decline in the Company's margins for the
1998 fiscal quarter and 1998 fiscal nine-month period. The effect on gross
profit of the shift in product mix was offset in part by an increase in street
sales as a percentage of net sales in the
7
<PAGE>
1998 fiscal quarter and the growth of the Company's private and signature brand
product sales in both current periods. Sales of these products, which generally
have higher gross margins than national brand products of comparable quality,
increased by 7.4% in the 1998 fiscal quarter and 4.7% for the 1998 fiscal
nine-month period over the corresponding periods in the prior fiscal year.
Operating Expenses
Operating expenses increased by 4.2% ($8.5 million) in the 1998 fiscal quarter
and by 4.9% ($30.7 million) in the 1998 fiscal nine-month period over the
corresponding periods in the prior fiscal year. These increases were primarily
attributable to $3.8 million and $19.4 million of non-cash charges recognized in
the 1998 fiscal quarter and 1998 fiscal nine-month period, respectively,
primarily consisting of writedowns of receivables and other assets at operating
units undergoing consolidation or realignment as part of the Acquisition plan.
Excluding the effects of these non-cash charges, operating expenses increased by
2.3% ($4.7 million) in the 1998 fiscal quarter and by 1.8% ($11.3 million) in
the 1998 fiscal nine-month period over the prior corresponding periods. As a
percentage of net sales, operating expenses decreased to 15.6% in the 1998
fiscal quarter from 16.5% in the 1997 fiscal quarter and decreased to 15.9% in
the 1998 fiscal nine-month period from 16.3% in the prior corresponding period.
This decrease was primarily attributable to the operating efficiencies realized
from the Company's prior acquisitions, an increase in the average size of
customer deliveries and the curtailment gain recognized on the suspension of all
participation and benefit accruals under a Rykoff-Sexton defined benefit plan.
Restructuring Costs
The Company recognized restructuring charges of $15.7 million, of which $1.4
million were non-cash charges, in the 1998 fiscal quarter and $53.7 million, of
which $17.4 million were non-cash charges, in the 1998 fiscal nine-month period,
related to the Acquisition. These costs consist primarily of change in control
payments, severance, idle facility and facility closure costs related
principally to the Acquisition and the Company's plan to consolidate and realign
certain operating units and consolidate various overhead functions.
Asset Impairment
The Company recognized non-cash asset impairment charges of $3.4 million for the
1998 fiscal quarter and $35.5 million for the 1998 fiscal nine-month period
related to the Company's plan to consolidate and realign certain operating units
and install new management information systems at each of the Company's
operating units. These charges consist of writedowns to net realizable value of
assets and facilities related to operating units that are being consolidated or
realigned and assets related to management information systems being replaced.
Income from Operations
Income from operations (after amortization charges of $3.9 million in the 1998
fiscal quarter and $3.8 million in the 1997 fiscal quarter) decreased 64.3%
($22.8 million) in the 1998 fiscal quarter from the 1997 fiscal quarter. For the
1998 fiscal nine-month period, income from operations decreased 101.3% ($104.7
million) from the corresponding prior period. The decrease in the 1998 periods
was primarily attributable to the Acquisition Related Costs.
Excluding the Acquisition Related Costs, income from operations (after
amortization charges of $3.9 million in the 1998 fiscal quarter and $3.8 million
in the 1997 fiscal quarter) increased 7.2% ($2.6 million) in the 1998 fiscal
quarter over the 1997 fiscal quarter. For the 1998 fiscal nine-month period,
income from operations increased 12.0% ($12.4 million) over the corresponding
prior period. This increase was primarily attributable to operating efficiencies
realized from prior acquisitions and to an increase in the average size of
customer deliveries.
Nonrecurring Acquisition Costs
During the 1998 fiscal nine-month period, the Company incurred nonrecurring
costs related to the Acquisition. These charges consist primarily of fees for
financial advisory, legal, accounting and other professional services.
During the 1997 fiscal nine-month period, the Company recorded a nonrecurring
charge of $5.4 million with respect to legal and other professional fees
required to complete certain acquisitions.
8
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Income Taxes
During the three-month and nine-month periods ended March 28, 1998, the Company
recognized tax expense (benefit) with respect to its operating loss at effective
rates of 10.2% and (13.4)%, respectively. These rates reflect the effect on the
income tax provision of the tax deductibility of certain of the Acquisition
Related Costs and the amortization of goodwill. The Company's effective tax rate
before the effect of the Acquisition Related Costs was 40.9% for the 1998 fiscal
quarter and 41.2% for the 1998 fiscal nine-month period.
Extraordinary Charge
Subsequent to the Acquisition, the Company applied the proceeds of its new
senior bank credit facility (the "New Credit Facility") to refinance
substantially all of its indebtedness (excluding capital leases, approximately
$130 million of public notes and approximately $30 million of other
indebtedness) in order to lower significantly its overall borrowing costs. As a
result of this refinancing during the 1998 fiscal nine-month period, the Company
recorded an extraordinary charge of $9.7 million (net of $6.3 million income tax
benefit) related to the write-off of deferred financing costs with respect to
the extinguished debt and additional payments to holders of the Company's senior
notes due 2004, which were paid in full, in accordance with the related senior
note terms.
Liquidity and Capital Resources
As of March 28, 1998, the Company's total long-term indebtedness, including
current portion, was $792 million, with an overall weighted average interest
rate of 6.9% (excluding deferred financing costs). Long-term borrowing increased
by $109 million during the nine months ended March 28, 1998 primarily as a
result of increased working capital, capital expenditures and Acquisition
Related Costs.
The Company's working capital balance (excluding current portion of long-term
debt) of $334.3 million at March 28, 1998 increased by $71.3 million from the
balance at June 28, 1997. This increase was primarily attributable to increased
net sales, seasonal increases in inventory and receivables, and the acquisitions
consummated. The $76.2 million of capital expenditures in the nine-month period
ended March 28, 1998 resulted primarily from facility expansion projects,
including new facility projects in Charlotte, North Carolina and Las Vegas,
Nevada, as well as ongoing costs incurred to develop the Company's new
management information systems.
The Acquisition Related Costs are expected to be offset over the next two years
with the proceeds from the disposition of duplicate facilities. The current net
book value of assets held for sale exceeds $55 million.
From time to time, the Company acquires other foodservice businesses. Any such
business may be acquired for cash, common stock of the Company, or a combination
of cash and common stock.
As of March 28, 1998, $592.5 million of borrowings and $33.5 million of letters
of credit were outstanding under the New Credit Facility and an additional
$124.0 million remained available to finance the Company's working capital needs
and to meet the Company's other liquidity requirements. The Company believes
that the combination of the cash flow generated by its operations, additional
leasing activity, sales of duplicate assets and borrowings under the New Credit
Facility will be sufficient to enable it to finance its growth and meet its
currently projected capital expenditures and other liquidity requirements.
Information Systems and the Impact of the Year 2000
Many computer systems and software products currently are coded to accept only
two digit entries in the date code field. These date code fields will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements (the
"Year 2000 issue"). The Company and third parties with which the Company does
business rely on numerous computer programs in their day-to-day operations.
The Company is currently installing new hardware and financial systems software
in each of its operating units. The project is currently anticipated to be
complete in the fall of 1999 and will result in each of its operating units
being on the same hardware and software platforms, all of which are expected to
be Year 2000 compliant. The Company has been in communication with major
suppliers and customers to determine the extent to which the Company may be
vulnerable to such parties' failure to remediate their own systems in response
to the Year 2000 issue. The Company is not aware at this time of any material
adverse impact on the Company that may result from its relationships with such
suppliers and customers. However, the remediation process is ongoing.
Accordingly, management cannot presently reasonably predict, what impact, if
any, the Year 2000 issue will have on the Company.
9
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) On March 20, 1998, U.S. Foodservice issued, in the aggregate,
228,773 shares of its common stock to the six stockholders of
Westlund Provisions, Inc. ("Westlund"), a company U.S.
Foodservice acquired in consideration of its issuance of
shares of common stock. See Note 3 to the financial statements
appearing elsewhere in this report. In connection with such
issuance, U.S. Foodservice relied on the exemption from
registration under the Securities Act of 1933 provided in
Section 4(2) of such Act. U.S. Foodservice did not engage in
any advertising or general solicitation in connection with the
offer and sale of the securities. In addition, U.S.
Foodservice provided or made available information concerning
U.S. Foodservice and the common stock obtained investment
representations from each of the selling stockholders and
placed restrictive legends on the certificates evidencing such
securities.
Item 6. Exhibits and Reports on Form 8-K.
The following Current Reports on Form 8-K were filed by U.S.
Foodservice during the period covered by this Report.
Date of Report Item Reported
January 22, 1998 Item 5 (Resignation of Executive Officer)
February 25, 1998 Item 5 (Post-merger financial results relating
to Rykoff-Sexton, Inc.)
February 27, 1998 Item 5 (Change in name of Registrant)
March 9, 1998 Items 2, 5, 7 (Matters related to acquisition
of Rykoff-Sexton, Inc. amending
Current Report on Form 8-K
dated December 23, 1997)
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.
U.S. FOODSERVICE
(Registrant)
DATE: May 12, 1998 /s/ Lewis Hay, III
------------ ----------------------------------------
Lewis Hay, III, Executive Vice President
and Chief Financial Officer
(Duly Authorized and Principal
Financial Officer)
11
<PAGE>
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