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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 23, 1997
U.S. Foodservice
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(Exact name of registrant as specified in its charter)
Delaware 0-24954 52-1634568
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(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification No.)
9830 Patuxent Woods Drive, Columbia, Maryland 21046
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 312-7100
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ITEM 5. OTHER EVENTS.
Effective December 23, 1997, Rykoff-Sexton, Inc., a Delaware
corporation ("Rykoff-Sexton"), merged (the "Merger") with and into Hudson
Acquisition Corp. ("Merger Sub"), a Delaware corporation and a wholly-owned
subsidiary of U.S. Foodservice, formerly known as JP Foodservice, Inc. ("U.S.
Foodservice"), pursuant to an Agreement and Plan of Merger, dated as of June 30,
1997, as amended as of September 3, 1997 and November 5, 1997, among Rykoff-
Sexton, Merger Sub and U.S. Foodservice (the "Merger Agreement"). Merger Sub
was the surviving corporation in the Merger, was renamed Rykoff-Sexton, Inc. as
of the effective time of the Merger (the "Effective Time") and will continue to
be a wholly-owned subsidiary of U.S. Foodservice.
DESCRIPTION OF RYKOFF-SEXTON COMPANIES
References to Rykoff-Sexton below are to Rykoff-Sexton, Inc. and its
consolidated subsidiaries prior to the Merger and to Merger Sub (which has been
named Rykoff-Sexton, Inc. since the Effective Time) and such consolidated
subsidiaries after the Merger.
GENERAL
Rykoff-Sexton distributes foods and related non-food products and services
for the foodservice industry throughout the United States. Rykoff-Sexton's
products and services are sold wherever food is prepared and consumed away from
home. Rykoff-Sexton distributes its product line of more than 40,000 items to
restaurants, industrial cafeterias, health care facilities, schools and
colleges, supermarket service delicatessen departments, lodging establishments
and other segments of the travel and leisure markets. It also offers equipment
and supplies and design and engineering services for all types of foodservice
operations. Rykoff-Sexton's products consist of a broad range of private label
and national brand food and foodservice equipment and supplies. Rykoff-Sexton's
proprietary private brand products accounted for approximately 33% of its net
sales in the fiscal year ended June 28, 1997.
Rykoff-Sexton also provides restaurant design and engineering services for
all types of foodservice operations through its contract/design offices and
manufactures products primarily under Rykoff-Sexton's proprietary private
brands.
PRODUCTS
In fiscal 1997, Rykoff-Sexton offered to the foodservice industry a single
source of supply for more than 40,000 private label and national brand items
that were distributed to approximately 100,000 foodservice establishments.
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Food Products. Rykoff-Sexton's food products include canned fruits and
vegetables, tomatoes and tomato products, juices, syrups, dressings and salad
oils, baking supplies, spices, condiments, sauces, jellies and preserves,
coffee, tea and fountain goods, prepared convenience entrees, fresh produce,
meats, seafood, poultry, desserts, dietary foods, imported and domestic cheeses
and specialty and gourmet imported items.
Frozen foods include soups, prepared convenience entrees, bakery products,
fruits and vegetables, desserts, meat, poultry, seafood and other frozen
products customarily distributed to the foodservice industry.
Janitorial and Paper Products. Rykoff-Sexton's non-food products include
janitorial supplies such as detergents and cleaning compounds; plastic products
such as refuse container liners, cutlery, straws and sandwich bags; and paper
products such as napkins, cups, hats, placemats and coasters.
Equipment and Supplies. Rykoff-Sexton also distributes smallware
restaurant equipment and supply items, including cookware, glassware, dinnerware
and other commercial kitchen equipment.
MANUFACTURING OPERATIONS
Rykoff-Sexton's products include approximately 1,200 food and 550 non-food
items that are manufactured, processed and packaged at its two plants located
in Los Angeles, California and Indianapolis, Indiana. These products are
primarily manufactured under Rykoff-Sexton's private labels. Rykoff-Sexton
also manufactures products for certain customers such as other manufacturers,
distributors, restaurant chains and other large users under their own brand
labels.
MARKETING AND DISTRIBUTION
Rykoff-Sexton markets its products and contract/design services to
customers in the foodservice industry, including restaurants, industrial
cafeterias, healthcare facilities, schools and colleges, supermarket service
delicatessen departments, lodging establishments and other segments of the
travel and leisure markets.
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The following table sets forth the customer base of Rykoff-Sexton for the
fiscal year ended June 28, 1997.
PERCENTAGE
TYPE OF CUSTOMER OF NET SALES
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Restaurants (including chain and independent,
limited and full menu)................................. 59%
Hospitals, nursing home, long term care and
other healthcare facilities............................ 12%
Schools and colleges...................................... 10%
Lodging establishments.................................... 8%
Business and industry (including in-plant commercial and
industrial food centers)............................... 6%
Other..................................................... 5%
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100%
====
For the fiscal year ended June 28, 1997, no single customer of Rykoff-
Sexton accounted for 3% or more of Rykoff-Sexton's sales and no product
distributed by Rykoff-Sexton accounted for a material part of Rykoff-Sexton's
sales volume.
In fiscal 1997, sales offices were maintained at each of Rykoff-Sexton's 32
distribution centers. Rykoff-Sexton's sales force of over 2,000 employees in
fiscal 1997 included foodservice specialists at each distribution center. The
sales force also included national account executives who handled multi-unit
accounts such as restaurant chains and other large users.
During fiscal 1997, products were distributed to customers nationwide
through Rykoff-Sexton's 32 distribution centers, as well as through independent
distributors. Each center stocks between 5,000 and 14,000 items for sale in its
marketing area. Customer orders are usually processed and shipped within 24
hours of receipt and are delivered directly to the customer. Rykoff-Sexton uses
its warehouse facilities in Los Angeles, Indianapolis and Dorsey, Maryland to
store and consolidate product orders from vendors of specialty and equipment and
supply items, for subsequent shipment to the distribution centers.
SOURCES OF SUPPLY
In fiscal 1997, Rykoff-Sexton purchased from approximately 5,500 suppliers;
no supplier represented more than 3% of Rykoff-Sexton's purchases. Rykoff-
Sexton selects suppliers, which include both large multi-line and smaller
specialty processors and packagers, primarily on the basis of their ability to
meet quality and service standards. Rykoff-Sexton has no significant long-term
purchasing obligations and Rykoff-Sexton believes that it has adequate
alternative sources of supply for almost all of the purchased items and raw
materials used in its manufacturing operations. Rykoff-Sexton's BRB Holdings,
Inc. and WS Holdings, Inc. subsidiaries each have a purchase agreement with Sara
Lee Corporation which requires a minimum level of purchases of Sara Lee products
for every three years. Each of the original agreements was for six years (two
three-year periods) which began in September 1992. Each agreement was extended
for an additional three-year period. Rykoff-Sexton's liability for not meeting
the purchase requirements is capped at $1.9 million under each of the
agreements.
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QUALITY CONTROL AND REGULATION
Rykoff-Sexton maintains quality control laboratories in its Los Angeles
and Indianapolis facilities. These laboratories are staffed by chemists and
food technologists who are trained to control product quality for both self-
manufactured and purchased private label products and to provide research and
development support for Rykoff-Sexton's manufactured products. Quality control
procedures include the sampling and testing of raw materials, purchased private
label products and Company-manufactured items for quality, taste and appearance
and the microbiological testing of Company-manufactured food items. The
distribution centers regularly incur inspections performed by independent
foodservice organizations and the manufacturing facilities receive daily USDA
inspections.
EMPLOYEES
As of June 28, 1997, Rykoff-Sexton employed a total of approximately 8,500
people, of whom approximately 1,700 were covered by collective bargaining
agreements. These agreements expire at various times over the next several
years. Approximately ten collective bargaining agreements that cover
approximately 450 employees expire at various times during fiscal 1998. Rykoff-
Sexton believes its labor relations are good.
PROPERTIES
The following table sets forth Rykoff-Sexton's facilities. As part of the
Company's facility consolidation following the Merger, a number of these
facilities will be closed.
<TABLE>
<CAPTION>
DISTRIBUTION CENTERS
<S> <C> <C>
Atlanta, Georgia** Fresno, California** Philadelphia, Pennsylvania
Austin, Texas** Hurricane, West Virginia** Phoenix, Arizona
Baltimore, Maryland** Knoxville, Tennessee** Pittsburgh, Pennsylvania
Boston, Massachusetts Las Vegas, Nevada** Pittston, Pennsylvania**
Charlotte, North Carolina** Los Angeles, California** Portland, Oregon
Chicago, Illinois** Lubbock, Texas** Reno, Nevada**
Cincinnati, Ohio** Mesquite, Texas** Riviera Beach, Florida**
Columbus, Ohio Minneapolis, Minnesota St. Louis, Missouri**
Dallas, Texas Oklahoma City, Oklahoma** Salem, Virginia**
Detroit, Michigan** Orlando, Florida** San Francisco, California
Englewood, New Jersey** Ormond Beach, Florida**
</TABLE>
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** Indicates facility owned by Rykoff-Sexton; all other facilities
are leased.
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<TABLE>
<CAPTION>
CONTRACT AND DESIGN OFFICES
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<S> <C> <C>
Austin, Texas* Clearwater, Florida Pittston, Pennsylvania*
Berlin, Connecticut Dallas, Texas* Portland, Oregon*
Boston, Massachusetts* Las Vegas, Nevada* Sacramento, California
Brunswick, Maine Los Angeles, California* San Francisco, California*
Charlotte, North Carolina* Minneapolis, St. Paul, Minnesota* Seattle, Washington
Chicago, Illinois* Oklahoma City, Oklahoma* Spokane, Washington
Cincinnati, Ohio* Phoenix, Arizona*
</TABLE>
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* Indicates office within a distribution center; all other offices are leased.
INTRANSIT WAREHOUSES MANUFACTURING FACILITIES
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Dorsey, Maryland
Indianapolis, Indiana Indianapolis, Indiana**
Modesto, California Los Angeles, California**
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** Indicates facility owned by Rykoff-Sexton; all other facilities are leased.
Rykoff-Sexton's manufacturing operations are headquartered at Rykoff-
Sexton's owned property in Los Angeles, California. This facility houses a
large manufacturing plant and warehouse space. Portions of this facility are
currently idle. This facility has been written down to net realizable value.
Equipment and machinery owned by Rykoff-Sexton and used in its operations
consist principally of electronic data processing equipment, food and non-food
processing and packaging equipment and chemical compounding, blending and
product handling equipment. Rykoff-Sexton owns a fleet of approximately 475
vehicles that are used for long hauls and local deliveries. In addition,
Rykoff-Sexton leases approximately 1,200 delivery vehicles under terms which
expire at various dates through 2002.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
On December 23, 1997, in connection with the Merger, U.S. Foodservice
issued 22,657,498 shares of common stock with an approximate value of $782
million, with each outstanding share of common stock of Rykoff-Sexton being
exchanged for .775 of a share of U.S. Foodservice common stock . The transaction
has been accounted for under the pooling of interests method of accounting.
Accordingly, the Company's consolidated financial statements have been restated
to include the results of operations for Rykoff-Sexton for all periods
presented. The following management's discussion refers to the results set forth
in the Company's consolidated financial statements beginning on page F-31 of
this report under Item 7.
As a result of the Merger 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,
merger transaction costs and certain other costs (the "Merger Related Costs") of
approximately $83.4 million (net of related tax benefits) in the quarter ended
December 27, 1997. In addition, the Company expects to recognize an additional
charge of between $15 and $25 million in the third quarter of fiscal 1998
related to the consolidation and realignment of certain operating units and
functions. Further, as a result of the debt refinancing discussed below, the
Company recorded an extraordinary charge in the quarter ended December 27 , 1997
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 U.S. Foodservice senior notes due 2004 in
accordance with the related senior note terms.
GENERAL
Effective February 27, 1998 the Company changed its name to U.S.
Foodservice. References to JP Foodservice below relate to activities of the
Company prior to the Merger.
The following discussion of the Company's results of operations
includes the results of JP Foodservice and Rykoff-Sexton prior to the Merger.
Since each of the companies was seperately managed prior to the Merger, the
discussion that follows discusses operating results on a combined basis, but in
the context of the individual companies. The operations of U.S. Foodservice
prior to the Merger therefore are discussed in terms of the respective
operations of JP Foodservice and Rykoff-Sexton.
JP Foodservice and Rykoff-Sexton had the same fiscal year ends on June
28,1997. Prior to April 29, 1996, Rykoff-Sexton had a fiscal year that ended on
the Saturday closest to April 30. The consolidated financial statements for the
years ended June 28, 1997 ("fiscal 1997"), June 29, 1996 ("fiscal 1996") and
July 1, 1995 ("fiscal 1995"), combine the results of JP Foodservice for such
periods with the results of Rykoff-Sexton for the years ended June 28, 1997,
April 28, 1996 and April 29, 1995, respectively. Each of the periods consisted
of 52 weeks.
Overview. In recent years, JP Foodservice net sales have increased
both as a result of internal expansion through continued growth in street
account and chain account sales as well as from acquisitions. JP Foodservice has
increased its street account sales through growth of its street sales force,
improved sales productivity and the implementation of new street sales promotion
programs. JP Foodservice chain account sales have increased as a result of the
continued growth in sales to existing accounts and the development of
relationships with new accounts. JP Foodservice gross profit margin has improved
in part as a result of an increase in sales of private and signature brand
products as a percentage of JP Foodservice net sales.
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In recent years, Rykoff-Sexton focused on improving profitability
through restructuring and realigning certain operating divisions, rationalizing
the customer base, converting certain divisions which were historical niche
distributors to broadline distributors and pursuing a strategy of decentralized
management of the distribution centers. The sales reductions related to these
initiatives partially offset Rykoff-Sexton's sales gains during these periods.
Acquisitions. Both JP Foodservice and Rykoff-Sexton have pursued
strategic business combinations.
Rykoff-Sexton significantly expanded the geographic coverage of its
distribution network in the Southeastern, Southwestern and Mid-Atlantic regions
through the acquisition of US Foodservice, Inc. ("USF") effective May 17, 1996.
This merger placed Rykoff-Sexton among the top three foodservice distribution
companies regarding market share in the majority of the markets served. This
acquisition also enabled Rykoff-Sexton to enhance its product mix and to
decentralize the management of the distribution centers, a long-standing
objective of Rykoff-Sexton. Due to the merger with USF and the change in fiscal
year, there are no directly comparable financial statements. The operating
results of Rykoff-Sexton for fiscal 1997 have therefore been compared to the
operating results in the 52-week period ended April 27, 1996. In the fourth
quarter of fiscal 1995, Rykoff-Sexton extended the scope of its distribution
network in the Mid-Atlantic region through the acquisition of substantially all
of the assets of Continental Foods, Inc. ("Continental"), a broadline
distributor located in Maryland serving the metropolitan Baltimore and
Washington, D.C. markets. In the first quarter of fiscal 1996, Rykoff-Sexton
increased its penetration of the Midwestern region through the acquisition of
the Specialty Foods Division of Olfisco, Inc., a Minneapolis-based subsidiary of
Noon Hour Food Products. In the third quarter of fiscal 1996, Rykoff-Sexton
enhanced its distribution network throughout the State of Nevada when it
acquired substantially all of the assets of H&O Foods, Inc. ("H&O Foods") a
regional broadline institutional foodservice distributor.
JP Foodservice supplemented its internal expansion in fiscal 1997 with
an active program of strategic acquisitions to take advantage of growth
opportunities from ongoing consolidation in the fragmented foodservice
distribution industry. In the first quarter, JP Foodservice extended the scope
of its distribution network into the Western region of the United States through
its acquisition of Valley Industries, Inc. ("Valley"), a broadline distributor
located in Las Vegas, Nevada. Also in the first quarter of fiscal 1997, pursuant
to JP Foodservice's strategy to increase penetration of its existing service
areas, JP Foodservice acquired Arrow Paper and Supply Co., Inc. ("Arrow"), a
broadline distributor located in Connecticut serving the New England, New York,
New Jersey and Pennsylvania markets. In the second quarter of fiscal 1997, JP
Foodservice filled a gap in its Midwestern distribution network by acquiring
Squeri Food Service, Inc.("Squeri"), a broadline distributor located in Ohio
serving the greater Cincinnati, Dayton, Columbus, Indianapolis, Louisville and
Lexington markets. In the fourth quarter of fiscal 1997, JP Foodservice
strengthened its presence in the Mid-Atlantic region through its acquisition of
Mazo-Lerch Company ("Mazo-Lerch"), a broadline distributor located in Virginia
serving the District of Columbia, Virginia, Maryland, southern New Jersey and
northern North Carolina markets. The Valley and Squeri acquisitions were
accounted for under the pooling of interests method of accounting, and
accordingly, the operating results for all years presented have been restated to
incorporate the results of Valley and Squeri. The Arrow and Mazo-Lerch
acquisitions were accounted for under the purchase method of accounting, and
accordingly, the operating results of Arrow and Mazo-Lerch are included only
from the date of acquisition. The acquisition of Mazo-Lerch was completed in the
fourth quarter of fiscal 1997 and, therefore, did not materially affect fiscal
1997 results.
RESULTS OF OPERATIONS
The principal components of expenses include costs of sales, which
represents the amount paid to manufacturers and growers for products sold, and
operating expenses, which include selling (primarily labor-related) expenses,
warehousing, transportation and other distribution costs, and administrative
expenses. Because distribution and administrative expenses are relatively fixed
in the short term, unexpected changes in net sales, such as those resulting from
adverse weather, can have a significant short-term impact on operating income.
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The Company sells a significant proportion of its products at prices
based on product cost plus a percentage markup. Periods of inflation in food
prices result in higher product costs, which are reflected in higher sales
prices and higher gross profits.
Gross margins generally are lower for chain accounts than for street
accounts. However, because there are typically no commission sales costs related
to chain account sales and because chain accounts usually have larger deliveries
to individual locations, sales and delivery costs generally are lower for chain
accounts than for street accounts. Gross margins are generally higher for
private label products than for national brand products of comparable quality.
However, the Company incurs additional advertising and other marketing costs in
promoting private label products.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales increased 59.6% to $5.2 billion in fiscal 1997
from $3.2 billion in fiscal 1996. Of the increase, $1.7 billion was related to
Rykoff-Sexton and the balance was related to JP Foodservice.
Rykoff-Sexton's net sales increased 94.3% to $3.5 billion in fiscal
1997 from $1.8 billion in fiscal 1996. For comparative purposes, estimated sales
of the same 52-week period of fiscal 1996 would have been approximately $3.6
billion had USF and H&O Foods (which was acquired in fiscal 1996) been part of
Rykoff-Sexton's operations for the entire 1996 fiscal year. Excluding
acquisitions and the closure of nine divisions and four sales offices,
consolidations or other significant changes, "same-division" sales of Rykoff-
Sexton increased 6%. The divisions' sales that were affected by closure,
consolidation or other significant changes (which include customer account
rationalization and territorial realignments) represented approximately 50% of
Rykoff-Sexton's fiscal 1997 sales.
JP Foodservice's net sales increased 16.7% to $1.7 billion in fiscal
1997 from $1.4 billion in fiscal 1996. The Arrow acquisition accounted for net
sales growth of 5.8%. Higher chain account and street sales both contributed to
JP Foodservice's sales growth in fiscal 1997. An increase of 17.2% in chain
account sales reflected the continued growth in sales to JP Foodservice's larger
customers. As a percentage of net sales, chain account sales increased to 42.6%
in fiscal 1997 from 42.4% in fiscal 1996. Street sales increased 16.4% over
fiscal 1996 primarily as a result of the growth of the sales force and continued
improvements in sales force productivity. Fiscal 1996 net sales were adversely
affected by severe winter weather conditions in a majority of JP Foodservice's
markets.
Gross Profit. Gross profit margin decreased to 19.4% in fiscal 1997
from 20.2% in fiscal 1996. The decline in gross profit margin at Rykoff-Sexton
was somewhat offset by improved gross margin at JP Foodservice.
Rykoff-Sexton's gross profit margin in fiscal 1997 was 20.3% compared
to 22.5% in fiscal 1996. The acquisition of USF, as well as inclusion of a full
year's results for H&O Foods, were the primary reasons for the reduction. Both
USF and H&O Foods operate as broadline distributors, which typically have lower
gross margins than the historical Rykoff-Sexton divisions. Rykoff-Sexton has
also continued with the transition of its historical Rykoff-Sexton divisions
from niche distributors to broadline distributors, providing customers with an
expanded selection of product categories, including fresh meats, produce and
seafood, that typically carry lower margins. Rykoff-Sexton, in its operating
focus on broadline distribution, has increased sales to customers under special
program pricing arrangements such as national accounts. The synergies achieved
through the effective integration of the acquisitions and improved pricing of
food and non-food related products from enhanced purchasing programs resulted in
an improvement in gross profit of approximately $6.0 million. Partially
offsetting this improvement was $2.0 million in non-recurring inventory and
promotional related charges incurred in the integration of USF.
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JP Foodservice's gross profit margin increased to 17.5% in fiscal 1997
from 17.3% in fiscal 1996. The increase was primarily attributable to increased
sales of JP Foodservice's private and signature brand products, which increased
to 20.0% of street sales at the end of fiscal 1997 from 16.3% at the end of
fiscal 1996. JP Foodservice also realized purchasing synergies through the
consolidation of purchasing programs with the acquired entities.
Operating Expenses. Operating expenses increased 42.6% to $841.9
million in fiscal 1997 from $590.4 million in fiscal 1996 primarily as a result
of the increase in net sales and Rykoff-Sexton's merger with USF. As a
percentage of sales, operating expenses declined to 16.3% in fiscal 1997 from
18.2% in fiscal 1996.
Rykoff-Sexton's operating expenses increased 57.3% to $609.5 million
in fiscal 1997 from $387.5 million in fiscal 1996 primarily as a result of the
acquisition of USF. As a percentage of net sales, operating expenses decreased
to 17.5% in fiscal 1997 from 21.7% in fiscal 1996. The improvement in operating
expenses as a percentage of net sales from fiscal 1996 to fiscal 1997 was
attributable to the closure, consolidation or other significant changes at
certain divisions, realignment of the management structure, consolidation of
several corporate functions, insurance reductions and other integration efforts.
These efforts resulted in an operating expense improvement of approximately $11
million. Because claims activity in fiscal 1997 was more favorable than
previously estimated, Rykoff-Sexton reversed $3.4 million of insurance reserves
related to prior period programs. This adjustment represented 31% of the $11
million improvement. This improvement was also attributable to the transition to
broadline distribution discussed above, which generally produces lower operating
expense levels. The decrease in operating expenses as a percentage of net sales
was partially offset by approximately $2.0 million in non-recurring charges,
attributable to the integration plan for Rykoff-Sexton and USF. Also included in
operating expenses are net gains of $1.5 million related to sales of certain
assets.
Operating expenses of Rykoff-Sexton for fiscal 1996 were negatively
affected by the relocation of Los Angeles division to a new distribution center.
The Los Angeles division represented 21.0% of Rykoff-Sexton's total sales in
fiscal 1996. Operating expense levels were also negatively affected by higher
than expected bad debt and insurance expense, as well as by the initial impact
of the operational restructuring to facilitate the acquisition of USF.
JP Foodservice's operating expenses increased 14.5% to $232.4 million
in fiscal 1997 from $203.0 million in fiscal 1996 primarily as a result of the
increase in net sales. As a percentage of net sales, operating expenses
decreased to 13.7% in fiscal 1997 from 14.0% in fiscal 1996. The decrease in
operating expenses, as a percentage of net sales, resulted from distribution
cost savings related to a higher percentage of sales to chain accounts,
increased penetration of street accounts, savings resulting from revised
management compensation agreements relating to certain of the acquired
businesses, and the absence of costs corresponding to those associated with the
severe winter weather conditions experienced in a majority of JP Foodservice's
markets in fiscal 1996.
Amortization of Goodwill and Other Intangible Assets. Goodwill and
other intangible amortization was $15.3 million in fiscal 1997 compared with
$4.2 million in fiscal 1996. The increase was attributable to the goodwill
arising from the USF merger which was accounted for as a purchase business
combination.
Restructuring, Impairment of Long Lived Assets and Other Charges. In
connection with the USF acquisition, Rykoff-Sexton recorded a restructuring
charge of $57.6 million ($35.7 million after tax) in the nine-week period ended
June 29, 1996. Of this charge 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 fiscal 1997, Rykoff-Sexton
charged $27.7 million to the restructuring accrual, consisting of $4.1 million
related to severance and termination benefit costs, $2.7 million for lease
related costs and $20.9 million related to other exit costs.
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During fiscal 1997, $4.0 million of the restructuring liability was
reversed into income, upon the determination that such liability was no longer
required. The remaining balance of the restructuring charge is $25.5 million, of
which $9.0 million is expected to be utilized in fiscal 1998 and is classified
as current within accrued liabilities in the consolidated financial statements.
The remaining balance of $16.5 million is classified as other long-term
liabilities and primarily consists of future payments of leasehold obligations.
During fiscal 1997, the employment of two senior executives was
terminated and the present value of severance compensation and related benefits,
aggregating $4.0 million, was charged to expense.
In the fourth quarter of fiscal 1996, Rykoff-Sexton adopted the
requirements of SFAS 121, "Accounting for the Impairment of Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). The adoption of SFAS 121 resulted in Rykoff-Sexton
recording a non-cash pretax charge of $29.7 million. There are no comparable
charges in fiscal 1997.
Income From Operations. Income from operations increased 319.8% to
$145.8 million in fiscal 1997 from $34.7 million in fiscal 1996 primarily as a
result of the fiscal 1997 increase in net sales, the increase in gross profit
margin, the decrease in operating expenses as a percentage of sales and the
Rykoff-Sexton merger with USF. Operating margin increased to 2.8% in fiscal 1997
from 1.1% in fiscal 1996.
Interest Expense and Other Financing Costs. Interest expense and other
financing costs increased 133.8% to $76.1 million in fiscal 1997 from $32.5
million in fiscal 1996 principally as a result of the increase in average
outstanding debt resulting from Rykoff-Sexton's merger with USF.
Rykoff-Sexton's interest expense and other financing costs increased
243.4% to $59.5 million in fiscal 1997 from $17.3 million in fiscal 1996. The
increase was primarily attributable to the assumption of the outstanding debt
from the USF merger and the subsequent refinancing and the loss on the sale of
accounts receivable sold pursuant to an accounts receivable securitization
facility and related charges. Rykoff-Sexton did not have an accounts receivable
securitization facility in fiscal 1996.
JP Foodservice's interest expense and other financing costs increased
8.8% to $16.5 million in fiscal 1997 from $15.2 million in fiscal 1996. The
increase was primarily attributable to increased borrowings incurred in
connection with the acquisitions consummated in fiscal 1997.
Nonrecurring Charge. In fiscal 1997, JP Foodservice recorded
nonrecurring charges of $5.4 million principally related to transaction fees
required to complete the acquisitions of Valley and Squeri, which were accounted
for as poolings of interests.
Income Taxes. The provision for income taxes for fiscal 1997 increased
$25.5 million over the provision for fiscal 1996.
Rykoff-Sexton's effective income tax rate for fiscal 1997 was 38.2%
compared to an effective income tax benefit of (40.0)% for fiscal 1996. During
the fourth quarter of fiscal 1997, Rykoff-Sexton recorded a reduction in the
valuation allowance of $2.8 million based on an analysis of expected combined
operating results that included USF. Management believes it is more likely than
not that the deferred tax assets as of June 28, 1997, including net operating
loss carryforwards, will be realizable through the combination of future taxable
earnings, the corresponding realization of net operating loss carryforwards,
alternative tax planning strategies and the reversal of existing taxable
temporary differences.
JP Foodservice's provision for income taxes for fiscal 1997 increased
$4.6 million over the provision for fiscal 1996. The increase in the provision
was attributable to JP Foodservice's greater pretax profit level in fiscal 1997.
JP Foodservice's effective tax rate of 42.1% for fiscal 1997 increased from the
effective rate of 40.7% for fiscal 1996 primarily because of the non-deductible
portion of the nonrecurring charges related to the acquisitions consummated in
fiscal 1997.
11
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales increased 13.3% to $3.2 billion in fiscal 1996
from $2.9 billion in fiscal 1995.
Rykoff-Sexton net sales increased 14.1% to $1.8 billion in fiscal 1996
from $1.6 billion in fiscal 1995. Sales of Continental and H&O contributed
significantly to the overall sales growth in fiscal 1996. Excluding
acquisitions, sales on a "same-division" basis for the fiscal year advanced 4%.
Growth of same-branch sales was hampered by the move to the new Los Angeles
distribution center, by a slowdown in sales growth at various locations
throughout the country, and by severe winter weather conditions throughout the
East and Midwest regions.
JP Foodservice net sales increased 12.5% to $1.4 billion in fiscal
1996 from $1.3 billion in fiscal 1995. Higher chain account and street sales
both contributed to JP Foodservice's sales growth in fiscal 1996. Sales
generated by foodservice businesses acquired by JP Foodservice in the last
quarter of fiscal 1995 and the second quarter of fiscal 1996 accounted for 2.0%
of this increase. An increase of 15.9% in chain account sales reflected the
continued growth in sales to JP Foodservice's larger customers and, to a lesser
extent, the development of new chain account relationships, including the new
prime supplier relationship announced with Pizzeria Uno, which commenced in
January 1996. As a percentage of net sales, chain account sales increased to
42.4% in fiscal 1996 from 41.3% in fiscal 1995. Street sales increased 10.1%
over fiscal 1995 primarily as a result of improved sales force productivity and
the implementation of new street sales promotion programs. Fiscal 1996 net sales
were adversely affected by severe winter weather conditions in a majority of JP
Foodservice's markets.
Gross Profit. Gross profit margin decreased to 20.2% in fiscal 1996
from 20.8% in fiscal 1995. A decline in gross margin at Rykoff-Sexton was
partially offset by an increase in gross margin at JP Foodservice.
Rykoff-Sexton's gross profit margin declined to 22.5% in fiscal 1996
from 23.9% in fiscal 1995. This decline was primarily due to the acquisitions
described above, which involved broadline distributors, and Rykoff-Sexton's
continued transition from a niche distributor to a broadline distributor. Gross
margins were also affected by inventory realignments from the continued
transition from a centralized to a decentralized structure.
JP Foodservice gross profit margin increased to 17.3% in fiscal 1996
from 17.0% in fiscal 1995. The increase was primarily attributable to increased
sales of JP Foodservice's private and signature brand products, which increased
to 16.3% of street sales at the end of fiscal 1996 from 12.3% at the end of
fiscal 1995. The increase in sales of private and signature brand products more
than offset the effects of the shift in customer mix to a higher percentage of
sales to chain accounts.
12
<PAGE>
Operating Expenses. Operating expenses increased 12.1% to $590.4
million in fiscal 1996 from $526.9 million in fiscal 1995 primarily as a result
of the increases in net sales. As a percentage of sales, operating expenses
declined to 18.2% in fiscal 1996 from 18.4% in fiscal 1995.
Rykoff-Sexton's operating expenses as a percentage of net sales for
fiscal 1996 were 21.7% compared to 22.2% for fiscal 1995. The decrease in
operating expenses as a percentage of net sales did not decrease as much as
expected due to the impact of the move to Rykoff-Sexton's new Los Angeles
distribution center. The start-up of this facility, which accounted for
approximately 21% of Rykoff-Sexton's total sales volume in fiscal 1996, took
longer, and was more costly, than originally anticipated. Rykoff-Sexton also
experienced higher than expected bad debt and insurance expenses in the fourth
quarter of fiscal 1996.
JP Foodservice's operating expenses increased 14.3% to $203.0 million
in fiscal 1996 from $177.5 million in fiscal 1995 primarily as a result of the
increases in net sales. As a percentage of net sales, operating expenses
increased to 14.0% in fiscal 1996 from 13.8% in fiscal 1995. The increase in
operating expenses, as a percentage of net sales, resulted primarily from
increased costs incurred in connection with the promotion of private and
signature brand products and costs associated with the adverse winter weather
conditions in a majority of JP Foodservice's markets in the third quarter of
fiscal 1996.
Amortization of Goodwill and Other Intangible Assets. Goodwill and
other intangible amortization was $4.2 million in fiscal 1996 compared with $2.8
million in fiscal 1995. The increase was primarily attributable to goodwill
amortization with respect to the acquisitions by Rykoff-Sexton of Continental
and H&O Foods, both of which were accounted for as purchase business
combinations.
Restructuring Impairment of Long Lived Assets and Other Charges.
Rykoff-Sexton recorded a restructuring charge of $31.0 million in fiscal 1993 to
cover costs associated with a planned business reorganization. The
reorganization was completed in fiscal 1996 and the remaining unused portion of
the initial charge of $6.4 million was reversed to operating income.
In the fourth quarter of fiscal 1996, Rykoff-Sexton adopted the
requirements of SFAS 121, which is intended to establish more consistent
accounting standards for measuring the recoverability of long-lived assets. To
comply with this new accounting requirement, Rykoff-Sexton identified all owned
properties where there are assets. The net book values of these identified
assets were compared to estimated current market values and future cash flows
(for long-lived assets in use), to determine whether there may have been
impairment in values. The adoption of SFAS 121 resulted in Rykoff-Sexton
recording a non-cash pretax charge of $29.7 million.
Income From Operations. Income from operations decreased 46.4% to
$34.7 million in fiscal 1996 from $64.9 million in fiscal 1995 primarily as a
result of the decrease in gross profit margin, higher operating expenses and the
asset impairment charge. Operating margin decreased to 1.1% in fiscal 1996 from
2.3% in fiscal 1995.
Interest Expense and Other Financing Costs. Interest expense and other
financing costs decreased 1.3% to $32.5 million in fiscal 1996 from $32.9
million in fiscal 1995.
Rykoff-Sexton interest expense and other financing costs increased
59.6% to $17.3 million in fiscal 1996 from $10.9 million in fiscal 1995. The
increase reflected higher borrowing levels and the reduction of capitalized
interest resulting from placing into service the Los Angeles and Cincinnati
facilities. Higher borrowing levels resulted from capital expenditures for these
facilities, the acquisitions of Continental and H&O Foods and increased
receivables and inventory levels due to sales growth.
JP Foodservice interest expense and other financing costs decreased
31.2% to $15.2 million in fiscal 1996 from $22.1 million in fiscal 1995. The
decrease was primarily attributable to the repayment or refinancing of
substantially all of JP Foodservice's indebtedness in connection with a
recapitalization consummated in the second quarter of fiscal 1995, which
included JP Foodservice's initial public offering of common stock.
13
<PAGE>
Nonrecurring Charge. On February 19, 1996, JP Foodservice terminated
discussions with Sara Lee Corporation regarding a proposed combination of JP
Foodservice and Sara Lee Corporation's wholly-owned subsidiary, PYA Monarch,
Inc. As a result of the termination of these discussions, which began with a
proposal submitted by Sara Lee Corporation in November 1995, JP Foodservice
wrote off the costs incurred related to the proposed transaction (primarily
special committee, legal and advisory fees) of approximately $1.5 million.
Income Taxes. The provision for income tax for fiscal 1996 decreased
$13.0 million from the provision for fiscal 1995. The 1995 taxable income of JP
Foodservice was almost entirely offset by $28.0 million pre-tax loss of Rykoff-
Sexton.
Rykoff-Sexton's effective income tax rate for fiscal 1996 and fiscal
1995 was 40.0%.
JP Foodservice's provision for income tax for fiscal 1996 increased
$4.2 million over the provision for fiscal 1995, primarily as the result of
higher earnings. The increase in the provision was attributable to JP
Foodservice's greater pretax profit level in fiscal 1996. JP Foodservice's
effective tax rate (before extraordinary charge) of 40.7% for fiscal 1996
decreased from the effective rate of 45.2% for fiscal 1995 primarily because of
the effect on fiscal 1995 taxable income of a non-deductible stock compensation
charge of $0.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Rykoff-Sexton and JP Foodservice historically have financed their
operations and growth primarily with cash flow from operations, equity
offerings, borrowings under their bank credit facilities, operating and capital
leases and normal trade credit terms.
Cash Flows from Operating Activities. Net cash flows provided by (used
in) operating activities were $114.6 million, ($4.8) million and $25.5 million
in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. The $119.4 million
improvement in net cash flows from operations was primarily the result of
improved earnings, Rykoff-Sexton's merger with USF and JP Foodservice's
accounting for its accounts receivable securitization arrangement, which
provided $50 million of operating cash flow.
Rykoff-Sexton's net cash flows provided by (used in) operating
activities were $88.8 million, ($15.3) million and $12.0 million in fiscal 1997,
fiscal 1996 and fiscal 1995, respectively. JP Foodservice's net cash flows from
operations were $25.8 million, $10.5 million and $13.5 million in fiscal 1997,
fiscal 1996 and fiscal 1995, respectively.
The Company's working capital requirements generally average between
4% and 6% of annual sales. The Company's working capital balance at June 28,
1997 was $234.8 million.
Cash Flows from Investing Activities. Net cash used in investing
activities was $106.8 million, $74.3 million and $14.6 million in fiscal 1997,
fiscal 1996 and fiscal 1995, respectively.
Rykoff-Sexton used $51.6 million in net cash flows in fiscal 1997 for
investing activities, which included $63.4 million of capital expenditures.
Approximately $31.9 million was spent on the start up of construction of new
distribution centers in Fort Mill, South Carolina and Las Vegas, Nevada, and the
completion of a new distribution center in Reno, Nevada. Other capital
expenditures of $6.0 million in fiscal 1997 were made to expand existing
distribution centers in Boston, Massachusetts and Philadelphia, Pennsylvania.
The balance of capital expenditures in fiscal 1997 consisted of purchases of
warehouse and office equipment, computer hardware and software and upgrades to
Rykoff-Sexton's existing distribution centers. The construction of the Los
Angeles distribution center amounted to approximately $45.0 million over the
course of fiscal 1995 and fiscal 1996. Rykoff-Sexton had commitments for capital
expenditures of approximately $35.0 million at June 28, 1997.
14
<PAGE>
JP Foodservice used $55.1 million in net cash flows in fiscal 1997 for
investing activities, which included $25.1 million of capital expenditures and
$36.0 million of costs primarily related to the acquisition of Arrow. JP
Foodservice's capital expenditures, of which $7.5 million were financed through
capital lease obligations, were primarily for new trucks and trailers,
investment in laptop computers for the sales force and the expansion of the JP
Foodservice's distribution centers in Streator, Illinois; Boston, Massachusetts;
Allentown, Pennsylvania; Fort Wayne, Indiana and Las Vegas, Nevada. JP
Foodservice currently expects to make capital expenditures of approximately $31
million in fiscal 1998, including approximately $9 million to upgrade and expand
its existing facilities.
Cash Flows from Financing Activities. Net cash flows provided by (used
in) financing activities were $32.3 million, $81.4 million and ($12.0) million
in fiscal 1997, fiscal 1996 and fiscal 1995, respectively.
As of June 28, 1997, Rykoff-Sexton's long-term indebtedness, including
current portion, was $505.5 million. Under its bank credit facility, Rykoff-
Sexton had $330.1 million term debt outstanding at June 28, 1997 and a
commitment for a revolving line of credit of up to $150 million, none of which
was outstanding. Letters of credit outstanding as of June 28, 1997, which reduce
availability under the revolving line of credit, were $27.3 million, leaving
$122.7 million in available borrowings.
As of June 28, 1997, JP Foodservice's long-term indebtedness,
including current portion, was $177.9 million, with an overall weighted average
interest rate of 7.3% (excluding deferred financing costs and costs of interest
rate swaps and interest cap arrangements). As of the same date, $63.7 million of
borrowings and $11.7 million of letters of credit were outstanding under JP
Foodservice's bank revolving credit loan agreement and an additional $99.6
million remained available to finance JP Foodservice's working capital
requirements.
On December 23, 1997, in connection with the consummation of the
Merger, the Company entered into a new bank credit facility which provides for a
$550 million five-year revolving credit facility and a $200 million
revolver/term loan facility which is renewable annually (the "New Credit
Facility"). Amounts drawn initially under the New Credit Facility will initially
bear interest at a rate equal to LIBOR plus .45% and LIBOR plus .475%,
respectively, using one, two, three or six month LIBOR loans. Effective with the
third quarter in fiscal 1998, amounts borrowed under the New Credit Facility, at
the option of the Company, will bear interest at an applicable margin for LIBOR-
based borrowings, the lenders' prime rate or the federal funds rate plus .50%.
The applicable margin for LIBOR-based loans will range from .175% to .55%, based
on a formula tied to the Company's leverage from time to time. Annual facility
fees will be based on the same formula and will range between .75% and 2.0% for
the revolving credit facility and .55% and 1.75% for the revolver/term loan
facility. The revolving credit facility includes a $75 million facility for
standby and commercial letters of credit and a $50 million swing-line facility
for same day borrowings. The New Credit Facility includes a number of covenants
which restrict the Company's ability to pay dividends and incur additional
indebtedness as well as require the maintenance of certain financial ratios.
Borrowings under the New Creditor Facility have been used to repay the JP
Foodservice revolving line of credit loans and senior notes payable and Rykoff-
Sexton revolving and term loan facilities.
On January 30, 1998, the Company made an offer to purchase for cash of
$130 million the Rykoff-Sexton outstanding senior subordinated notes due 2003 at
a price of 101% of principal amount, plus accrued and unpaid interest. The offer
is made pursuant to the Indenture governing the notes as a result of the change
of control of Rykoff-Sexton, the issuer of the notes, effected by the Merger.
The Company expects to fund any payments required pursuant to the purchase offer
with borrowings under the New Credit Facility.
The Company believes that the combination of cash flow generated by
its operations, additional capital leasing activity and borrowings under the New
Credit Facility will be sufficient to enable it to finance its growth and meet
its projected capital expenditures and other short-term and long-term liquidity
requirements. Management may determine that it is necessary or desirable to
obtain financing for acquisitions through additional bank borrowings or the
issuance of new debt or equity securities.
15
<PAGE>
QUARTERLY RESULTS AND SEASONALITY
Historically, the Company's operating results have reflected seasonal
variations. The Company experiences lower net sales and income from operations
during its third quarter, which includes the winter months.
INFORMATION SYSTEMS AND THE IMPACT OF THE YEAR 2000
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.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Financial Statements
Report of Independent Public Accountants............................... F-2
Consolidated Balance Sheets as of June 28, 1997 and April 27, 1996..... F-3
Consolidated Statements of Operations for the fiscal years ended
June 28, 1997, April 27, 1996 and April 29, 1995, and the nine-week
transition period ended June 29, 1996................................. F-4
Consolidated Statements of Changes in Shareholders' Equity for the
fiscal years ended June 28, 1997, April 27, 1996 and April 29,
1995, and the nine-week transition period ended June 29, 1996......... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
June 28, 1997, April 27, 1996 and April 29, 1995, and the nine-week
transition period ended June 29, 1996................................. F-6
Notes to Consolidated Financial Statements............................. F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rykoff-Sexton, Inc.:
We have audited the accompanying consolidated balance sheets of Rykoff-
Sexton, Inc. (a Delaware Corporation) and subsidiaries as of June 28, 1997 and
April 27, 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for the fiscal years ended June 28, 1997,
April 27, 1996 and April 29, 1995, and the nine-week transition period ended
June 29, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rykoff-Sexton, Inc. and
subsidiaries as of June 28, 1997 and April 27, 1996 and the results of their
operations and their cash flows for the fiscal years ended June 28, 1997, April
27, 1996 and April 29, 1995, and the nine-week transition period ended June 29,
1996, in conformity with generally accepted accounting principles.
As discussed in Note Three to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" in fiscal 1996.
ARTHUR ANDERSEN LLP
Philadelphia, PA
August 14, 1997
F-2
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 28, 1997 APRIL 27, 1996
------------- --------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................. $ 63,293 $ 10,825
Accounts receivable, less reserves of $13,517 in
1997 and $5,401 in 1996.............................. 122,963 182,312
Inventories........................................... 210,547 152,805
Prepaid expenses and other current assets............. 19,755 19,893
Deferred tax assets................................... 24,797 7,211
---------- ---------
Total Current Assets............................... 441,355 373,046
Property, plant and equipment, at cost:
Land, buildings and improvements....................... 227,132 139,481
Transportation equipment............................... 23,222 30,220
Office, warehouse and manufacturing equipment.......... 196,246 142,347
---------- ---------
446,600 312,048
Less: accumulated depreciation and amortization........ (150,588) (134,130)
---------- ---------
296,012 177,918
Goodwill, net.......................................... 437,361 41,188
Deferred tax assets.................................... 21,337 4,881
Other assets, net...................................... 22,957 14,823
---------- ---------
Total Assets....................................... $1,219,022 $ 611,856
========== =========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Short-term debt ...................................... $ - $ 94,000
Accounts payable...................................... 231,791 120,828
Accrued compensation.................................. 20,815 10,919
Accrued liabilities................................... 85,556 37,284
Current portion of long-term debt..................... 18,771 19,708
---------- ---------
Total Current Liabilities.......................... 356,933 282,739
Long-term debt, less current portion................... 486,731 135,081
Other long-term liabilities............................ 21,185 1,536
---------- ---------
Total Liabilities.................................. 864,849 419,356
Shareholders' equity:
Preferred stock, $.10 par value,....................... - -
Authorized-10,000,000 shares; Outstanding-none
Common stock, $.10 par value,.......................... 2,829 1,513
Authorized-40,000,000 shares;
Outstanding-28,014,305 shares in 1997 and
14,817,247 shares in 1996
Additional paid-in capital............................. 300,757 95,236
Retained earnings...................................... 53,685 99,497
---------- ---------
357,271 196,246
Less: Treasury stock, at cost.......................... (3,098) (3,746)
---------- ---------
354,173 192,500
---------- ---------
Total Liabilities and Shareholders' Equity......... $1,219,022 $ 611,856
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIODS ENDED
--------------------------------------------------
JUNE 28, JUNE 29, APRIL 27, APRIL 29,
1997 1996 1996 1995
(52 WEEKS) (9 WEEKS) (52 WEEKS) (52 WEEKS)
----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net Sales.............................................. $3,477,493 $ 519,903 $1,789,478 $1,569,019
Cost of Sales.......................................... 2,770,109 426,486 1,387,299 1,193,325
---------- ---------- ---------- ----------
Gross Profit........................................... 707,384 93,417 402,179 375,694
Warehouse, Selling, Delivery and General and
Administrative Expenses............................... 609,466 114,187 387,493 348,672
Amortization of Goodwill and Other Intangibles......... 12,431 1,162 1,906 529
Restructuring Charges (Reversals)...................... (4,000) 57,600 (6,441) -
Executive Severance Compensation....................... 4,000 - - -
Impairment of Long-Lived............................... - - 29,700 -
---------- ---------- ---------- ----------
Income (Loss) from Operations.......................... 85,487 (79,532) (10,479) 26,493
Interest Expense, net.................................. 46,423 6,930 17,340 10,867
Other Expenses......................................... 13,118 9,913 - -
---------- ---------- ---------- ----------
Income (Loss) from Continuing Operations
before Provision (Benefit) for Income Taxes.......... 25,946 (96,375) (27,819) 15,626
Provision (Benefit) for Income Taxes................... 9,908 (36,195) (11,039) 6,250
---------- ---------- ---------- ----------
Income (Loss) from Continuing Operations............... 16,038 (60,180) (16,780) 9,376
Discontinued Operations:
Income from Discontinued
Operations, Net of Income Taxes of $95............... - - - 137
Gain on Disposal of Discontinued
Operations, Net of Income Taxes of $15,687........... - - - 23,359
---------- ---------- ---------- ----------
Net Income (Loss)...................................... $ 16,038 $ (60,180) $ (16,780) $ 32,872
========== ========== ========== ==========
Earnings (Loss) per Share:
Income (Loss) from Continuing Operations.............. $ 0.56 $ (2.51) $ (1.12) $ 0.64
Income from Discontinued Operations................... - - - 0.01
Gain on Disposal of Discontinued Operations........... - - - 1.59
---------- ---------- ---------- ----------
Earnings (Loss) per Share............................. $ 0.56 $ (2.51) $ (1.12) $ 2.24
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------ ADDITIONAL
NUMBER OF PAID IN TREASURY RETAINED
SHARES AMOUNT CAPITAL STOCK EARNINGS
---------- ------ ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance, April 30, 1994................................ 11,637,460 $1,194 $ 92,008 $(4,621) $ 84,726
Net income.......................................... - - - - 32,872
Stock split......................................... 2,909,039 298 (305) - -
Cash dividend ($.03 per share)...................... - - - - (437)
Stock options exercised............................. 58,037 6 804 - -
Treasury stock purchased............................ (6,937) - - (5) -
---------- ------- ----------- --------- ----------
Balance, April 29, 1995................................ 14,597,599 1,498 92,507 (4,626) 117,161
Net loss............................................ - - - - (16,780)
Contribution to employees' savings and
profit sharing plan................................ 19,802 - 115 236 -
Cash dividend ($.06 per share)...................... - - - - (884)
Stock options exercised............................. 205,569 15 2,649 649 -
Treasury stock purchased............................ (5,723) - (35) (5) -
---------- ------- ----------- --------- ----------
Balance, April 27, 1996................................ 14,817,247 1,513 95,236 (3,746) 99,497
Net loss............................................ - - - - (60,180)
Purchase of US Foodservice.......................... 12,880,548 1,288 202,384 - -
Stock options exercised............................. 4,802 - - 54 -
Treasury stock purchased............................ (1,152) - - (1) -
---------- ------- ----------- --------- ----------
Balance, June 29, 1996................................. 27,701,445 2,801 297,620 (3,693) 39,317
Net income.......................................... - - - - 16,038
Stock award issuances............................... 37,074 4 527 23 -
Cash dividend ($.06 per share)...................... - - - - (1,670)
Stock options exercised............................. 289,060 24 2,610 584 -
Treasury stock purchased............................ (13,274) - - (12) -
---------- ------- ----------- --------- ----------
Balance, June 27, 1997................................. 28,014,305 $2,829 $300,757 $(3,098) $ 53,685
========== ======= =========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIODS ENDED
----------------------------------------------
JUNE 28, JUNE 29, APRIL 27, APRIL 29,
1997 1996 1996 1995
(52 WEEKS) (9 WEEKS) (52 WEEKS) (52 WEEKS)
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................................ $ 16,038 $ (60,180) $(16,780) $ 32,872
Adjustments to reconcile Net income (loss) to
net cash provided by (used in) operating activities:
Impairment of long-lived assets.......................... - - 29,700 -
Net income from discontinued operations.................. - - - (137)
Depreciation and amortization............................ 42,679 6,542 20,089 16,863
Gain on disposal of discontinued operations.............. - - - (23,359)
(Gain) loss on sale of property, plant and equipment..... (1,585) 281 (1,304) (597)
Deferred income taxes.................................... 11,105 (34,026) (4,477) (2,823)
Restructuring costs...................................... - 57,600 - -
Proceeds from initial sale of receivables................ - 110,000 - -
Other.................................................... (1,439) (97) (561) (475)
Changes in assets and liabilities,
net of working capital acquired:
(Increase) decrease in accounts receivable, net....... (8,606) 23,178 (22,001) (4,717)
(Increase) decrease in inventories.................... 26,101 (2,420) (6,474) (13,245)
(Increase) decrease in prepaid expenses and other..... 10,493 (7,403) (13,289) (1,287)
Increase (decrease) in accounts payable,
accrued and other liabilities........................ (5,989) 13,067 (183) 8,921
--------- -------- -------- --------
Net Cash Provided by (Used in) Operating Activities............. 88,797 106,542 (15,280) 12,016
--------- -------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures..................................... (63,373) (3,945) (43,927) (52,935)
Proceeds from asset sales transactions................... 9,924 159 2,247 2,955
Net cash used in discontinued operations................. - - - (30,002)
Proceeds from sale of assets of discontinued operations.. - - - 96,000
Cost of acquisitions/merger fees......................... - (13,330) (8,726) (24,836)
Cash acquired in US Foodservice acquisition.............. 21,601 - -
(Increase) decrease in other assets...................... 1,816 329 (6,255) (956)
--------- -------- -------- --------
Net Cash (Used in) Provided by Investing Activities............. (51,633) 4,814 (56,661) (9,774)
Cash Flows from Financing Activities:
Net increase (decrease) under revolvers...................... (15,000) 37,000 80,000 (7,000)
Principal payments of long-term debt......................... (8,959) (135,136) (3,433) (226)
Repayment of acquired company debt and preferred stock....... - (328,071) - -
Proceeds from issuance of long-term debt..................... 25,953 335,000 - -
Payment of finance costs..................................... - (8,901) (1,500) (249)
Stock option and award activity.............................. 3,772 53 3,629 804
Dividends paid............................................... (1,670) - (884) (437)
Other........................................................ (12) (81) (5) (5)
--------- -------- -------- --------
Net Cash Provided by (Used in) Financing Activities............. 4,084 (100,136) 77,807 (7,113)
--------- -------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents............ 41,248 11,220 5,866 (4,871)
Cash and Cash Equivalents at Beginning of Period................ 22,045 10,825 4,959 9,830
--------- -------- -------- --------
Cash and Cash Equivalents at End of Period...................... $ 63,293 $ 22,045 $ 10,825 $ 4,959
========= ======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid (refunded) during the period for:
Interest, net............................................ $ 45,381 $ 11,606 $ 18,305 $ 13,220
========= ======== ======== ========
Income taxes, net........................................ $ (1,845) $ - $ 1,583 $ 26,830
========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Line of Business. Rykoff-Sexton, Inc. and subsidiaries ("the Company")
distributes a broad line of food and related non-food products to various
establishments in the foodservice industry. The Company also manufactures
certain food and non-food related products and provides contract and design
services. The Company's market area includes most of the United States, with a
concentration in the Southeast and Mid-Atlantic regions. Although the Company is
not dependent on any single customer, the majority of its customers are
concentrated in the restaurant industry, with less significant concentrations in
the health care and education industries. No single customer accounts for more
than 10% of the Company's trade receivables or sales for any of the periods
presented.
Principles of Consolidation. The consolidated financial statements include
the accounts of Rykoff-Sexton, Inc., its wholly owned distribution subsidiary,
US Foodservice, Inc. ("US Foodservice"), and its other wholly owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Fiscal Year-End. Effective April 28, 1996, the Company changed its fiscal
year-end from the 52 or 53 week period ended the Saturday closest to April 30 to
the 52 or 53 week period ended the Saturday closest to June 30. Included in the
consolidated statements of operations, cash flows and shareholders' equity is
the nine-week transition period beginning April 28, 1996 and ending June 29,
1996 (the "transition period"). In the comparable nine-week period in 1995
(unaudited), net sales were $292.6 million, net income was $1.1 million and net
earnings per share was $0.08. The 1997 fiscal year ended on June 28, 1997
("fiscal 1997"), whereas the previous two fiscal years ended on April 27, 1996
("fiscal 1996") and April 29, 1995 ("fiscal 1995"), respectively.
Earnings Per Share. Earnings per share of common stock have been computed
based on the weighted average number of shares of common stock outstanding and
dilutive common stock equivalents outstanding. The shares used in such
calculations were 28,644,000 for fiscal 1997, 23,972,000 for the transition
period, 14,941,000 for fiscal 1996 and 14,730,000 for fiscal 1995.
Stock Split. In December 1994, the Board of Directors declared a 5-for-4
stock split payable January 24, 1995, to shareholders of record on December 21,
1994. Earnings per share, weighted average shares outstanding and stock option
information included in the accompanying financial statements and related notes
have been adjusted to reflect this stock split.
Inventories. Inventories consist principally of food products and related
non-food products held for sale. Inventories are priced at the lower of cost or
market, and include the cost of purchased merchandise and, for manufactured
goods, the cost of material, labor and factory overhead. The cost of
approximately 7% of the inventories at June 28, 1997 has been determined using
the last-in, first-out (LIFO) method. The remaining inventories are valued using
the first-in, first-out (FIFO) method. Had the FIFO method been used to value
all inventories, at June 28, 1997 inventories would have been higher by
approximately $290,000.
F-7
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE ONE-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories are summarized as follows:
<TABLE>
<CAPTION>
JUNE 28, 1997 APRIL 27,1996
------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Finished goods........... $204,576 $145,899
Raw materials............ 5,971 6,906
-------- --------
$210,547 $152,805
======== ========
</TABLE>
Depreciation, Amortization, Retirement and Maintenance Policies.
Depreciation is provided using the straight-line method, based upon the
following estimated useful lives:
Buildings and improvements........................ 15 to 40 years
Leasehold improvements............................ Life of the lease
Transportation equipment.......................... 3 to 8 years
Office, warehouse and manufacturing equipment..... 3 to 15 years
Costs of normal maintenance and repairs are charged to expense when
incurred. Replacements or betterments of properties are capitalized. When assets
are retired or otherwise disposed of, the cost and related applicable
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is reflected in income.
Construction-in-process at June 28, 1997 was $27.4 million. Such amount was
not significant at April 27, 1996.
The Company has facilities available for sale, largely resulting from the
restructuring discussed in Note Four, with a carrying value of approximately $39
million at June 28, 1997 which management estimates approximates fair value.
Computer Systems Development Costs. The Company has incurred certain costs
in connection with internal computer systems development projects, primarily
external consulting and internal labor costs. Capitalization of these costs
begins once it is determined that the related systems will be completed and
operate as intended. Such costs are included in Office, warehouse and
manufacturing equipment in the accompanying consolidated balance sheets. Costs
of $4.9 million were capitalized during fiscal 1997 and at June 28, 1997 total
capitalized costs were $7.2 million. Capitalized costs are being amortized over
3-5 years as completed portions of the projects are put into service.
Amortization expense for fiscal 1997 was $297,000.
Goodwill. The excess of purchase price over fair value of net assets
acquired (Goodwill) is amortized on a straight-line basis over 40 years. In
accordance with SFAS No. 121 ("SFAS 121") (see Note Three), the Company
evaluates goodwill for impairment at least annually. In completing this
evaluation, the Company compares its best estimate of future cash flows,
excluding interest costs, with the carrying value of goodwill.
Goodwill amortization for fiscal 1997, the transition period, fiscal 1996
and fiscal 1995 was $11,254,000, $1,037,000, $1,393,000 and $114,000,
respectively. Accumulated amortization was $14,077,000 and $1,786,000 at June
28, 1997 and April 27, 1996, respectively.
F-8
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE ONE-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other Assets. Other assets are amortized using the straight-line or
effective interest method over the following periods:
Noncompetition and consulting agreements..... Term of agreement
Deferred finance costs....................... Term of debt
Amortization expense for fiscal 1997, the transition period, fiscal 1996
and fiscal 1995 was $3,597,000, $416,000, $989,000 and $846,000, respectively.
The amortization of deferred finance costs is reflected within interest expense
in the consolidated statements of operations. Accumulated amortization was
$6,231,000 and $7,348,000 as of June 28, 1997 and April 27, 1996, respectively.
Income Taxes. The Company files a consolidated federal income tax return.
Under SFAS No. 109, "Accounting for Income Taxes," ("SFAS 109") a deferred tax
liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and carryforwards. Deferred income taxes
result from temporary differences in the recognition of revenue and expense
items for tax and financial statement purposes. The measurement of deferred
income tax assets is adjusted by a valuation reserve, if necessary, so that the
net tax benefits are recognized only to the extent that they are expected to be
realized.
Statements of Cash Flows. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. The merger with US Foodservice (see Note Two) is presented as a
non-cash investing activity.
Capitalized Interest. The Company capitalizes interest costs as part of
the cost of major asset construction projects. Capitalized interest was
$1,071,000, $55,000, $1,077,000 and $2,667,000 in fiscal 1997, the transition
period, fiscal 1996 and fiscal 1995, respectively.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments. Cash and cash equivalents, accounts
receivable (including the Company's participation in the accounts receivable
securitization facility; see Note Ten), accounts payable and accrued liabilities
are reflected in the financial statements at carrying amounts which approximate
fair value because of the short-term nature of those items. The fair value of
the Company's fixed rate debt is described in Note Five.
Recently Enacted Accounting Pronouncements. In February 1997, SFAS No.
128, "Earnings per Share," was issued which is effective for the Company's
fiscal 1998. This statement specifies the computation, presentation and
disclosure requirements for earnings per share (EPS). In fiscal 1998, the
Company will also be required to adopt SFAS No. 129, "Disclosure of Information
about Capital Structure", which was issued in conjunction with the earnings per
share statement and was intended to centralize capital structure disclosure
requirements. In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was
released and effective in fiscal 1998, the Company will be required to disclose
comprehensive income and its components within the financial statements. SFAS
No. 131, "Disclosures about Segments of an
F-9
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE ONE-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Enterprise and Related Information," was also issued in June of 1997. Beginning
in fiscal 1998, disclosures will be based on the way management organizes
business segments to make decisions about resource allocation and to measure
performance. Based upon management's initial review of the above statements, the
reporting and disclosure requirements are not expected to have a material impact
on the Company's consolidated financial statements.
Reclassifications. The financial statements for prior periods reflect
certain reclassifications to conform with classifications adopted in the current
year.
NOTE TWO-ACQUISITIONS
On May 17, 1996, the Company merged with US Foodservice, a privately held
broadline foodservice distribution company. As part of the merger, US
Foodservice stockholders received 1.457 shares of the Company's 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 were converted into options and warrants to acquire the Company's
common stock on the same basis. The number of shares issued in connection with
the merger was approximately 12.9 million. The shares issued have been recorded
at $15.40 per share, which represents the closing market price as defined in the
merger agreement. The aggregate purchase price was approximately $217 million,
which includes acquisition costs. In addition, all outstanding shares of US
Foodservice $15 cumulative redeemable exchangeable preferred stock were
purchased by the Company for $26.6 million.
The merger was accounted for as a purchase and, accordingly, US
Foodservice's results are included in the consolidated financial statements from
the date of acquisition. The aggregate purchase price was allocated to the
assets and liabilities of US Foodservice based upon the respective fair values,
and the excess of the purchase price over the fair value of net assets acquired
(approximately $409 million) was recorded as goodwill.
In connection with the merger, the Company entered into a new bank credit
facility with a syndicate of financial institutions providing for loans and
other credit facilities equal to $485 million (see Note Five). The Company also
entered into a $110 million standalone revolving receivables securitization
facility, as discussed in Note Ten. 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 the Company, refinance
substantially all of US Foodservice's outstanding debt, repurchase US
Foodservice's preferred stock, provide financing for the Company's ongoing
working capital needs and pay related fees and expenses.
On February 21, 1995, the Company acquired substantially all of the assets
of Continental Foods, Inc., a privately owned Maryland corporation. Continental
is a regional, full line institutional foodservice distributor. The acquisition
was accounted for as a purchase and, accordingly, Continental's results are
included in the consolidated financial statements from the date of acquisition.
The aggregate purchase price was approximately $27.0 million, which includes
costs of acquisition. The purchase price, which was financed through available
cash resources and issuance of a promissory note, has been allocated to the net
assets acquired, based upon the respective fair values. The excess of the
purchase price over the net assets acquired approximated $21.2 million.
On November 1, 1995, the Company acquired substantially all of the assets
of H&O Foods, Inc., a privately owned Nevada corporation. H&O is a regional,
institutional distributor. The acquisition was
F-10
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE TWO-ACQUISITIONS (CONTINUED)
accounted for as a purchase and, accordingly, H&O's results are included in the
consolidated financial statements from the date of acquisition. The aggregate
purchase price was approximately $29.6 million, which includes the costs of
acquisition. The consideration, which included the issuance of unsecured
promissory notes totaling $24.8 million and the Company's assumption of certain
H&O liabilities, has been allocated to the net assets acquired based upon the
respective fair values. The excess of the purchase price over the net assets
acquired approximated $18.4 million.
In connection with the above acquisitions, liabilities were assumed as
follows:
<TABLE>
<CAPTION>
US FOODSERVICE CONTINENTAL H&O
----------------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Fair value of assets acquired.... $ 707,491 $ 39,647 $ 39,948
Unsecured notes issued at
acquisition date................ -- (2,425) (24,831)
Value of shares and options
issued at acquisition date...... (203,672) -- --
Cash paid........................ -- (24,836) (4,737)
Liabilities assumed.............. $503,819(a) $ 12,386 $ 10,380
</TABLE>
- -----------
(a) Includes assumption of $301.5 million of US Foodservice debt and purchase
of $26.6 million of the US Foodservice $15 cumulative redeemable
exchangeable preferred stock.
The following unaudited pro forma consolidated results of operations have
been prepared as if the acquisitions of US Foodservice, Continental and H&O had
occurred as of the beginning of the period of acquisition and the period
preceding such acquisition:
<TABLE>
<CAPTION>
TRANSITION PERIOD FISCAL 1996 FISCAL 1996
----------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales......................... $621,159 $3,553,180 $1,772,425
Income (loss) from continuing
operations....................... (62,364) (14,316) 10,247
Earnings (loss) per share from
continuing operations............ $ (2.23) $ (0.51) $ 0.69
</TABLE>
The pro forma consolidated results do not purport to be indicative of
results that would have occurred had the acquisitions been in effect for the
periods presented, nor do they purport to be indicative of the results that will
be obtained in the future.
NOTE THREE-SFAS 121 ACCOUNTING CHANGE
In the fourth quarter of fiscal 1996, the Company adopted SFAS No. 121-
"Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of." This statement requires that long-lived assets and certain
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. When such events or changes in circumstances indicate an
asset may not be recoverable, a company must estimate the future cash flows
expected to result from the use of the asset and its eventual disposition. If
the sum of such expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss is
required to be recognized in an amount by which the asset's net book value
exceeds its fair market value. For purposes of assessing impairment under this
F-11
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE THREE-SFAS 121 ACCOUNTING CHANGE(CONTINUED)
standard, assets are required to be grouped at the lowest level for which there
are separately identifiable cash flows.
To comply with this standard, the Company identified all long-lived assets
where there had been, or was expected to be, a change in use in the recent past
or foreseeable future which could affect the recoverability of such long-lived
assets. As of the fourth quarter of fiscal 1996 the Company had recently
relocated or closed certain of its distribution centers. If future undiscounted
cash flows estimated to be derived from such assets indicated an impairment
existed, the Company recognized an impairment loss for the amount by which the
estimated net book values of the assets exceeded their estimated fair values.
The fair values estimated by the Company were determined by using the present
value of expected future cash flows and/or market evaluations by qualified real
estate brokers in the related cities. The adoption of this accounting standard
resulted in the Company recording a pre-tax charge of $29.7 million and was
principally reflected as a reduction in the net carrying value of land,
buildings and improvements.
NOTE FOUR-RESTRUCTURING COSTS
In connection with the US Foodservice merger, the Company recorded a
restructuring charge of $57.6 million ($35.7 million after tax) in the
transition period. 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 1997 fiscal year and the
transition period, the Company charged $27.7 million and $0.4 million against
the restructuring liability, respectively, for such costs incurred. These
charges included $4.5 million related to severance and termination benefit
costs, $2.7 million for lease related costs and $20.9 million related to the
closure of duplicate facilities and other related exit costs (including $8.0
million of non-cash asset writeoffs). Related restructuring activities are
substantially complete with respect to the consolidation and closing of
facilities as of June 28, 1997. The remaining liability at June 28, 1997 is
approximately $25.5 million consisting of $2.2 million for severance benefits,
$17.5 million for lease commitments and $5.8 million for other exit costs.
Approximately $9.0 million is expected to be paid in fiscal 1998 with the
remaining cash outlays estimated to be paid in subsequent years (primarily
related to non-cancelable operating lease commitments). During the fourth
quarter of fiscal 1997, $4.0 million of the restructuring liability was reversed
into income, upon the determination that such liability was no longer required.
During fiscal 1993, the Company recorded a restructuring charge of $31.0
million or, on an after tax basis, $19.5 million or $1.34 per share. This charge
was established to provide for a business reorganization which included facility
closures, relocation and consolidation of distribution centers into more
efficient facilities including severance costs, elimination of redundancies
between the Company's two principal operating divisions at the time, workforce
reductions and write down of facilities to their estimated net realizable value.
In fiscal 1995 and fiscal 1996, the Company aggressively continued its plan to
close and consolidate its under-performing distribution centers and sublease
space in those centers with excess capacity. Additionally, severance and
relocation costs were paid in connection with the consolidation, relocation and
downsizing of distribution centers. These payments totaled $3.3 million in 1996.
In October 1995, the Company concluded this restructuring plan and credited the
remaining unutilized restructuring reserve of $6.4 million into income.
F-12
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE FIVE-LONG-TERM DEBT AND BORROWING ARRANGEMENTS
Borrowings of the Company as of June 28, 1997 and April 27, 1996 are
summarized as follows:
1997 1996
-------- --------
(IN THOUSANDS)
8-7/8% Senior Subordinated Notes due in 2003,
net of unamortized discount of $713 in 1997
and $843 in 1996.................................... $129,287 $129,157
Bank credit revolver................................. - 94,000
Notes payable........................................ - 24,572
Mortgage notes....................................... - 1,060
Term Loan A.......................................... 146,250 -
Term Loan B.......................................... 124,250 -
Term Loan C.......................................... 59,625 -
La Mirada Bond offering.............................. 25,900 -
H&O Note payable..................................... 3,595 -
Capital lease obligations............................ 14,871 -
Other................................................ 1,724 -
-------- --------
Total debt........................................... 505,502 248,789
Less-current portion................................. 18,771 113,708
-------- --------
Long-term debt, less current portion................. $486,731 $135,081
======== ========
In conjunction with the merger with US Foodservice (see Note Two), the
Company entered into a new credit facility (New Credit Facility). The New Credit
Facility provided $485 million of financing comprised of three term loan
facilities, Tranche A, Tranche B and Tranche C ($335 million in aggregate) and a
$150 million revolving credit facility (the "Revolver"). The initial term loans
had the following principal amounts: $150 million for the Tranche A Term Loan,
$125 million for the Tranche B Term Loan and $60 million for the Tranche C Term
Loan. The amount available under the Revolver includes a letter of credit
sublimit of $45 million. Under the New Credit Facility, substantially all of the
Company's assets have been pledged. The notes bear interest based upon the
bank's reference rate or LIBOR plus 2.5% for Tranche A, LIBOR plus 3.0% for
Tranche B and LIBOR plus 3.25% for Tranche C, at the option of the Company.
There was no outstanding balance under the Revolver at June 28, 1997. Part of
the proceeds were used to pay off the balance outstanding on the Company's
existing bank credit agreement and other outstanding debt.
As part of the above financing the Company agreed to enter into interest
rate protection agreements for a period of three years to insure that the
weighted average interest rate on at least 50 percent of the variable rate debt
will not exceed 9.5%. Three collars and one cap were purchased to fix the rate
on $400 million of variable rate debt at an interest rate no higher than 9.5%.
The cost of these instruments is being amortized over the three year term.
Outstanding borrowings during fiscal 1997 and the transition period were
LIBOR based. LIBOR ranged from 5.5% to 5.9% during fiscal 1997 and during the
transition period. The Tranche A Term Loan, Tranche B Term Loan, Tranche C Term
Loan and the Revolver will mature on October 31, 2001, October 31, 2002, April
30, 2003 and October 31, 2001, respectively.
F-13
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE FIVE-LONG-TERM DEBT AND BORROWING ARRANGEMENTS (CONTINUED)
Covenants and other restrictions contained in the New Credit Facility
require the Company to meet certain financial tests and restrict its ability to
borrow additional funds, make capital expenditures, dispose of assets and pay
cash dividends.
In November 1996 the Company entered into a loan agreement with the La
Mirada Industrial Development Authority ("La Mirada IDA") for $25.9 million
under which La Mirada IDA issued Taxable Variable/Fixed Rate Demand Industrial
Development Revenue Bonds, the proceeds of which were used to finance a portion
of the costs of the La Mirada Distribution Center. The bonds are secured by a
letter of credit issued on behalf of the Company by a commercial bank that holds
a lien against the La Mirada facility. The bonds will mature on December 1, 2026
and from time to time bear and pay interest under Daily, Weekly, Commercial
Paper or Long-Term Interest Rate modes at the election of the Company. Interest
rates on this facility approximated LIBOR plus 210 basis points during fiscal
1997.
In November 1993, the Company issued $130 million principal amount of
8-7/8% Senior Subordinated Notes (the 8-7/8% Notes") due November 1,
2003 with interest payable semiannually commencing May 1, 1994. The 8-7/8%
Notes were sold at a discount for an aggregate price of $128.9 million.
Provisions of the 8-7/8% Notes include, without limitation, restrictions on
liens, indebtedness, asset sales, and dividends and other restricted payments.
The 8-7/8% Notes are redeemable at the option of the Company, in whole or
in part, at 104.44% of their principal amount beginning November 1998, and
thereafter at prices declining annually to 100% on and after November 2001. In
addition, upon the occurrence of an event that constitutes a Change of Control
(as defined in the indenture for such notes), each holder of the 8-7/8%
Notes may require the Company to repurchase all or a portion of such holder's
8-7/8% Notes at a purchase price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of the
repurchase. The 8-7/8% Notes are not subject to any sinking fund
requirements.
In connection with the acquisition of H&O Foods (see Note Two), the Company
has an outstanding note due November 1, 1997. Interest is paid on the note at
the rate of seventy-five (75) basis points per annum above the LIBOR rate.
Scheduled aggregate annual payments of long-term debt, excluding capital
leases (see Note Six) (in thousands), as of June 28, 1997 are $17,898 for 1998,
$24,168 for 1999, $34,145 for 2000, $44,153 for 2001, $37,912 for 2002 and
$332,355 thereafter.
Based on the borrowing rates currently available to the Company for debt
with similar terms and maturities, the fair value of its fixed rate debt is
$129.4 million as of June 28, 1997. The carrying value of the Company's variable
rate debt approximates fair value.
NOTE SIX-LEASE ARRANGEMENTS
The Company leases a substantial portion of its office and warehouse
facilities, as well as transportation vehicles at certain facilities, under
long-term operating leases. Rental expense under operating leases
F-14
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE SIX-LEASE ARRANGEMENTS (CONTINUED)
for fiscal 1997, the transition period, fiscal 1996 and fiscal 1995 was
$42,821,000, $6,222,000, $28,821,000, and $23,714,000, respectively. The
approximate minimum future rentals are payable as follows:
<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL OPERATING
- ----------- ------- ---------
(IN THOUSANDS)
<S> <C> <C>
1998........................................ $ 2,792 $ 30,354
1999........................................ 2,335 26,971
2000........................................ 2,318 24,427
2001........................................ 2,318 21,042
2002........................................ 2,234 18,092
Thereafter.................................. 36,946 37,182
------- --------
Total....................................... 48,943 $158,068
========
Less interest.............................. 34,072
-------
Present value of minimum lease payments.... $14,871
=======
</TABLE>
NOTE SEVEN-INCOME TAXES
The provision (benefit) for income taxes consists of the following (amounts
in thousands):
<TABLE>
<CAPTION>
FISCAL TRANSITION FISCAL FISCAL
1997 PERIOD 1996 1995
-------- ----------- --------- ------
CURRENT TAXES:
<S> <C> <C> <C> <C>
Federal............................ $(2,190) $ (550) $ (5,816) $3,851
State.............................. 993 (1,619) 381 1,395
------- ---------- -------- ------
$(1,197) $ (2,169) $ (5,435) $5,246
DEFERRED TAXES:
Federal............................ $12,295 $(31,645) $ (5,052) $ 821
State.............................. (1,190) (2,381) (552) 183
------- ---------- -------- ------
11,105 (34,026) (5,604) 1,004
------- ---------- -------- ------
Provision (benefit) for
income taxes...................... $ 9,908 $(36,195) $(11,039) $6,250
======= ========== ======== ======
</TABLE>
F-15
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE SEVEN-INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
JUNE 28, APRIL 27,
1997 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Loss carryforwards.................. $ 25,474 $ 569
Restructuring reserves.............. 10,206 -
SFAS 121 write-down................. 12,177 12,177
Allowance for bad debts............. 5,199 1,253
Capital leases...................... 4,331 -
Accrued pension..................... 4,105 2,717
Self insurance reserves............. 1,759 2,533
Accrued vacation.................... 1,061 1,150
Discontinued operations............. - 1,340
Other............................... 8,067 995
Valuation allowance................. (1,398) (1,460)
-------- -------
Total deferred tax assets........... 70,981 21,274
-------- -------
Depreciation........................ (23,304) (6,785)
Other............................... (1,543) (2,397)
-------- -------
Total deferred tax liabilities...... (24,847) (9,182)
-------- -------
Net deferred tax assets............. $ 46,134 $12,092
======== =======
</TABLE>
Reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
FISCAL TRANSITION FISCAL FISCAL
1997 PERIOD 1996 1995
------ ---------- ------ ------
<S> <C> <C> <C> <C>
Statutory federal income tax...... 34.0% (35.0)% (35.0)% 35.0%
State income taxes, net of
federal income taxes............. 1.9 (5.5) (6.9) 4.2
Recording (reversal) of
valuation allowance.............. (10.8) 2.2 3.3 (0.7)
Goodwill amortization............. 12.6 0.8 1.1 1.5
Other............................. 0.5 (0.1) (2.5) -
------ -------- ------ ------
Effective tax rate................ 38.2% (37.6)% (40.0)% 40.0%
====== ======== ====== ======
</TABLE>
During the fourth quarter of fiscal 1997, the Company recorded a reduction
in the valuation allowance of $2.8 million based on an analysis of expected
combined operating results including US Foodservice. Management believes it is
more likely than not that the deferred tax assets as of June 28, 1997, including
net operating loss carryforwards, will be realizable through the combination of
future taxable earnings, the corresponding realization of net operating loss
carryforwards, alternative tax planning strategies and the reversal of existing
taxable temporary differences.
The amount of cumulative federal net operating loss carryforwards as of
June 28, 1997 is $53,270,000 with expiration dates through fiscal 2011. Included
in this total are net operating losses incurred prior to the US Foodservice
merger. The use of pre-merger net operating losses is subject to certain
limitations imposed by the Internal Revenue Code. The Company does not
anticipate these limitations will impact
F-16
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE SEVEN-INCOME TAXES (CONTINUED)
utilization of the carryforwards prior to their expiration date. Various
subsidiaries have state net operating loss carryforwards of $143,229,000 with
expiration dates through fiscal 2011.
NOTE EIGHT-STOCK OPTION AND COMPENSATION PLANS
1995 Rykoff-Sexton Key Employees Stock Option and Compensation Plan (the "1995
Plan")
The 1995 Plan authorizes the issuance of up to 400,000 shares of common
stock through various stock incentives to executive officers of the Company,
including options, stock appreciation rights (SAR's), stock awards, restricted
stock, performance shares and cash awards. Stock options allow for the purchase
of common stock at prices determined by the Stock Option Committee (the
"Committee") except for incentive stock options, which must be purchased at
prices not less than the fair market value at the date of grant. These options
expire 10 years from the date of grant and are exercisable as defined by the
Stock Option Committee.
1993 US Foodservice Stock Option Plan (the "1993 US Foodservice Plan")
This plan was amended subsequent to the US Foodservice acquisition. Under
the terms of the amended plan, 319,700 options have been authorized for grant to
officers and certain employees of US Foodservice. At the time of the merger,
there were 316,793 equivalent Rykoff-Sexton options granted and outstanding
under this plan. There have been no additional awards under this plan in fiscal
1997. The exercisability of the options under this plan is determined at the
time of award by the Committee. As of June 28, 1997, of the remaining 278,846
outstanding options, 229,978 were exercisable. The 48,868 remaining options will
be exercisable on January 1, 1998.
1992 US Foodservice Stock Option Plan (the "1992 US Foodservice Plan")
This plan was also amended in conjunction with the US Foodservice
acquisition. Under the terms of the amended plan, 429,100 options have been
authorized for grant to the management of US Foodservice. At the time of the
merger there were 428,039 equivalent Rykoff-Sexton options granted and
outstanding under this plan. No additional awards have been granted. As of June
28, 1997, all of the remaining 310,411 options are exercisable.
1988 Rykoff-Sexton Stock Option Plan (the "1988 Plan")
The 1988 Plan authorizes the issuance of up to 2,876,470 shares of common
stock through various stock incentives to officers and employees, including
options, stock appreciation rights, stock awards, restricted stock, performance
shares and cash awards. The number of shares authorized was increased in the
current year. Stock options allow for the purchase of common stock at prices
determined by the Committee except for incentive stock options, which must be
purchased at prices not less than the fair market value at the date of grant.
These options expire 10 years from the date of grant and are exercisable as
defined by the Stock Option Committee.
1988 White Swan Stock Option Plan (the "1988 White Swan Plan")
White Swan, Inc. ("White Swan") is a subsidiary of US Foodservice. Under
the 1988 White Swan Plan, options for the Rykoff-Sexton equivalent shares of
332,513 shares of common stock were authorized and granted to the management of
White Swan. The options under this plan became 100% exercisable upon the merger
with US Foodservice.
F-17
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE EIGHT-STOCK OPTION AND COMPENSATION PLANS (CONTINUED)
1980 Rykoff-Sexton Stock Option Plan and 1993 Director Stock Option Plan (the
"1980 Plan" and the "Director Plan")
The 1980 Plan authorized awards of stock options and stock appreciation
rights; options expire 10 years from the date of grant. No further grants may be
made under the 1980 Plan. The Company also maintains the Director Plan which
authorizes the issuance of up to 125,000 shares of common stock. Under the
Director Plan, each director who is not a full-time officer or employee of the
Company will receive annually a non-qualified option to purchase 1,000 shares of
common stock. Options under the 1993 Director Plan expire 10 years from the date
of grant.
The exercise price of each share granted under options for the plans listed
above was not less than 100% of the fair market value per share at the
respective grant date. Accordingly, no compensation expense was recorded with
respect to these option grants.
SAR's and Restricted Stock Grants
SAR's, which may be issued in conjunction with the grant of options under
the 1995 Plan, the 1988 Plan and 1980 Plan, permit the optionee to receive
shares of stock, cash or a combination of shares and cash. Compensation expense
is measured by the difference between the option price and the market value of
the stock on the date of exercise. Upon exercise of a SAR, the option is
canceled. As of June 28, 1997, there were 10,938 SAR's outstanding. Compensation
expense was not significant for any of the periods presented herein.
Restricted stock grants for 2,000 and 49,600 shares were issued under the
1995 Plan in fiscal years 1997 and 1996, respectively and grants for 6,250
shares were issued under the 1988 Plan in fiscal year 1995. These shares vest
either ratably over a four year period or in full, four years from the
respective grant dates. Deferred compensation equivalent to the difference
between the market value at date of grant and the option price was credited to
additional paid-in-capital and is being amortized to compensation expense over
the vesting period. The amounts amortized in fiscal 1997, the transition period,
fiscal 1996 and fiscal 1995 were $500,000, $66,000, $436,000 and $251,000,
respectively.
Other Plans
The Performance Share Plan authorizes awards of cash or stock, at the
election of the Stock Option Committee, to designated key executives based on
the attainment of certain financial performance objectives by the Company. In
fiscal 1996, 300,000 performance shares were granted, 203,000 shares were
granted in the transition period and 50,000 shares were granted in fiscal 1997.
No compensation expense has been recorded under this plan as the defined
performance criteria have not been attained.
The Convertible Award Plan entitles certain employees to elect, at the
start of the fiscal year, to have a certain portion of their annual bonus paid
in the form of Company stock. The price of the stock is based on the Company's
closing stock price on a specified date following the date the Company releases
its earnings for the prior fiscal year. Individuals electing this option receive
a Company match of shares based on the attainment of defined performance levels
which then vest ratably over a three year period. Compensation expense for
awards under this plan was not significant for any of the periods presented
herein.
The vesting of options and awards under the various plans is subject to
acceleration in the event of a change in control (see Note Fourteen).
F-18
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE EIGHT-STOCK OPTION AND COMPENSATION PLANS (CONTINUED)
A summary of stock option activity is presented below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
-------- --------------
1995
<S> <C> <C>
Outstanding, beginning of year.............. 1,281,237 $22.75
Granted..................................... 333,125 $15.86
Exercised (a)............................... (50,537) $14.25
Forfeited, canceled......................... (426,328) $13.20
Outstanding, end of year.................... 1,137,497 $15.90
Exercisable, end of year.................... 649,759 $17.42
Available for grant, end of year............ 347,806
1996
Outstanding, beginning of year.............. 1,137,497 $15.90
Granted..................................... 142,250 $17.98
Exercised (a)............................... (133,000) $15.11
Forfeited, canceled......................... (33,572) $14.96
Outstanding, end of year.................... 1,113,175 $16.26
Exercisable, end of year.................... 704,553 $16.86
Available for grant, end of year............ 214,514
TRANSITION PERIOD
Outstanding, beginning of year.............. 1,113,175 $16.26
Granted (c)................................. 1,495,595 $11.89
Exercised (a)............................... (4,802) $ 3.72
Forfeited, canceled......................... (84,663) $16.40
Outstanding, end of year.................... 2,519,305 $13.69
Exercisable, end of year.................... 1,489,399 $13.77
Available for grant, end of period.......... 1,319,649
1997
Outstanding, beginning of year.............. 2,519,305 $13.69
Granted..................................... 19,400 $16.34
Exercised (a)............................... (289,060) $ 9.47
Forfeited, canceled......................... (56,274) $14.04
Outstanding, end of year (b)................ 2,193,371 $14.25
Exercisable, end of year.................... 1,717,738 $14.09
Available for grant, end of year............ 954,915
</TABLE>
- -----------
(a) Options were exercised at prices ranging from $0.10 to $15.77 during fiscal
1997; from $0.10 to $12.90 during the transition period; from $0.80 to
$19.76 in fiscal 1996; and $0.80 to $19.25 in fiscal 1995.
(b) For outstanding options at June 29, 1997, option prices ranged from $0.10
to $24.00. The expiration date for these options ranged from September 1997
to May 2007.
(c) Includes the issuance of 1,077,345 equivalent options associated with the
US Foodservice merger under the 1993 US Foodservice, 1992 US Foodservice
and the 1988 White Swan Plans.
F-19
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE EIGHT-STOCK OPTION AND COMPENSATION PLANS (CONTINUED)
During fiscal 1997, the Company adopted SFAS 123, the new stock-based
compensation accounting standard. As provided for in the statement, the Company
elected to continue the intrinsic-value method of expense recognition. If
compensation expense for these plans had been determined using the fair value
method prescribed by SFAS 123, the pro forma net income and earnings (loss) per
share in fiscal 1997, the transition period and fiscal 1996 would have been
approximately $15,600,000 and $0.54; $(60,400,000) and $(2.52); and
$(16,800,000) and $(1.12), respectively.
The pro forma effect on results may not be representative of the impact in
future years because the fair-value method was not applied to options granted
before fiscal 1996.
NOTE NINE-PENSION AND PROFIT SHARING PLANS
The Company maintains non-contributory pension plans for its salaried,
commissioned and certain of its hourly employees. Under the plans, the Company
is required to make annual contributions that are determined by the plans'
consulting actuary, using participant data that is supplied by the Company. It
is the Company's policy to fund pension costs currently. Pension benefits are
based on length of service and either a percentage of final average annual
compensation or a dollar amount for each year of service.
The Company also assumed a frozen defined benefit plan related to White
Swan in the US Foodservice merger.
Net pension expense for fiscal 1997, the transition period, fiscal 1996 and
fiscal 1995 are included in the following components:
<TABLE>
<CAPTION>
TRANSITION
1997 PERIOD 1996 1995
-------- ---------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service cost-benefits earned during the period........ $ 4,824 $ 732 $ 3,489 $ 3,339
Interest cost on projected benefit obligation......... 5,692 784 4,133 4,037
Actual return on plan assets.......................... (13,812) (97) (5,055) (4,886)
Net amortization and deferral........................ 7,520 (746) (149) (71)
-------- ----- ------- -------
Net pension expense.................................. $ 4,224 $ 673 $ 2,418 $ 2,419
======== ===== ======= =======
</TABLE>
F-20
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE NINE-PENSION AND PROFIT SHARING PLANS (CONTINUED)
The following table reconciles the pension plans' funded status to accrued
expense as of June 28, 1997 and April 27, 1996.
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Market value of plan assets in equities and bonds.... $ 83,803 $61,886
-------- -------
Actuarial present value of accumulated benefits:
Vested............................................ 64,851 49,307
Non-vested........................................ 4,071 3,235
Additional benefits based on estimated future
salary levels....................................... 7,151 9,809
-------- -------
Projected benefit obligation......................... 76,073 62,351
-------- -------
Plan assets more (less) than projected
benefit obligation.................................. 7,730 (465)
Unrecognized net obligation to be amortized
over 10 years....................................... 2,673 3,497
Unrecognized net (gain).............................. (23,101) (9,659)
-------- -------
Accrued pension liability............................ $(12,698) $(6,627)
======== =======
</TABLE>
The weighted average discount rate was 8.10% and 7.75%, the expected long-
term rate of return on plan assets was 9.6% and 9.5% and the rate of increase in
future compensation levels was 3% and 4% as of June 28, 1997 and April 27, 1996,
respectively.
The Company has supplemental retirement plans for certain executives and
certain other employees, which provide enhanced retirement and disability
benefits for these participants. The expense and liabilities associated with
these plans are reflected in the net pension expense and accrued pension
liability reconciliation shown in the above tables.
For collectively bargained, multi-employer pension plans, contributions are
made in accordance with negotiated labor contracts and generally are based on
the number of hours worked. With the passage of the Multi-Employer Pension Plan
Amendments Act of 1980 (the "Act"), the Company may, under certain
circumstances, become subject to liabilities in excess of contributions made
under collective bargaining agreements. Generally, these liabilities are
contingent upon the termination, withdrawal, or partial withdrawal from these
plans which would result in any material liability. The amount of accumulated
benefits and net assets of such plans is not currently available to the Company.
Total contributions charged to expense under these plans were $5,981,000,
$6,130,000 and $5,786,000 for the fiscal years 1997, 1996 and 1995,
respectively. Related contributions for the transition period were $1,064,000.
The Company provides postretirement health care benefits to certain former
salaried employees of Biggers Brothers, Inc., a wholly owned subsidiary of US
Foodservice, who retired prior to November 1, 1990. Such benefits are not
provided to subsequent retirees or any current employees of the Company. In
accordance with SFAS 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("SFAS 106"), the present value of future benefits to be
paid to eligible retirees amounted to $762,000 at June 28, 1997 and is included
in other noncurrent liabilities in the accompanying consolidated balance sheets.
As the obligation for these benefits is unfunded, the interest component of this
expense will be recognized in future periods. The postretirement benefit expense
was not significant in fiscal 1997.
The Company sponsors two defined contribution plans (including one plan
assumed in connection with the US Foodservice merger) under Section 401(k) of
the Internal Revenue Code for employees
F-21
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE NINE-PENSION AND PROFIT SHARING PLANS (CONTINUED)
meeting certain age and service requirements. The Company matches contributions
of participating employees in these plans on the basis of established
percentages as specified in each of the respective plans. Employer contributions
were $2.1 million in fiscal 1997 and $0.2 million in the transition period.
Contributions in fiscal 1996 and 1995 were not significant.
NOTE TEN-RECEIVABLES SECURITIZATION FACILITY
The Company is party to a $200 million accounts receivable revolving
securitization facility. Through November 1996, this facility consisted of a
stand-alone $110 million Rykoff-Sexton revolving receivables securitization
facility (entered into in conjunction with the US Foodservice merger; see Note
Two) and a $90 million US Foodservice revolving receivables securitization
facility (in existence at the time of the merger). In November 1996, the two
facilities were replaced by the new $200 million revolving facility. The
securitization involves a two step transfer: the sale of the receivables to a
bankruptcy remote wholly owned subsidiary and the subsequent sale of the
receivables to a master trust. The master trust sells certificates of beneficial
ownership to third parties.
All customer accounts receivable of the participating operating divisions
are sold to the trust and the Company acquires a participation interest in the
trust equal to the amount in excess of the $200 million third party interest
($101.3 million at June 28, 1997). This amount is included in accounts
receivable in the accompanying consolidated balance sheets.
The Company is required to maintain a minimum participation interest as
calculated ($37.7 million at June 28, 1997) to serve as collateral for this
facility.
Other expenses of $13.1 million and $9.9 million in fiscal 1997 and the
transition period, respectively, related to charges incurred in connection with
this securitization program.
The transfer of receivables to the master trust qualified as a sale
transaction in accordance with SFAS No. 77, "Reporting by Transferors for
Transfers of Receivables with Recourse" ("SFAS 77") through December 31, 1996.
Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" ("SFAS 125") for receivables sold into the facility after December
31, 1996 and sale accounting treatment continues to be appropriate under this
new pronouncement.
NOTE ELEVEN-COMMITMENTS AND CONTINGENCIES
The Company has change in control agreements with various officers which
provide, among other things, that if, within two years after a change in control
(as defined), the Company terminates the employment of the officer, other than
for death, disability, or cause, or with respect to the Chief Executive Officer,
for any or no reason (other than death) or if the officer elects to terminate
his employment for good reason (as defined), or with respect to the Chief
Executive Officer, for any or no reason, the officer will receive 2.99 times the
sum of the officer's base salary plus the amount that would otherwise be earned
under any executive compensation plan (see Note Eight).
The Company has severance agreements with various officers which provide,
among other things, that if, within the three-year term of the agreements (with
automatic one-year renewal unless either party gives advance notice to the
contrary), the Company involuntarily terminates the officer, other than for
death,
F-22
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE ELEVEN-COMMITMENTS AND CONTINGENCIES (CONTINUED)
disability or cause (as defined), or if the officer elects to terminate
his employment after a reduction in base pay (other than a general reduction) or
notice of the non-renewal of the agreement, the officer will receive certain
termination benefits. Such termination benefits include salary and welfare
benefit continuation for two years, bonus (based on actual performance results
during the applicable performance period and calculated as though the officer
has remained employed throughout such applicable performance period, but
prorated to reflect the period of the officer's actual service), full vesting in
any stock options and in each individual's Supplemental Executive Retirement
Plan and crediting of benefits under the Company's Deferred Compensation Plan at
a preferred rate. Any termination payments made to an officer under a severance
agreement will generally be offset by any payments made under such officer's
employment agreement or change in control agreement.
During the fourth quarter of fiscal 1997, the employment of two senior
executives was terminated and the present value of severance compensation and
related benefits, aggregating $4 million, was expensed.
The Company or its subsidiaries are defendants in a number of cases
currently in litigation or have potential claims encountered in the normal
course of business which are being vigorously defended. In the opinion of
management, the resolution of these matters, individually or in the aggregate,
will not have a material effect on the Company's consolidated financial position
or results of operations.
The Company utilizes standby letters of credit to satisfy worker's
compensation self-insurance security deposit requirements. These letters of
credit are irrevocable and have one-year renewable terms. Outstanding standby
letters of credit as of June 28, 1997 and April 27, 1996 were $27.3 million and
$17.1 million, respectively. Additionally, the Company had outstanding
irrevocable commercial letters of credit of $1.2 million and $4.0 million as of
June 28, 1997 and April 27, 1996, respectively. These letters of credit, which
are payable at sight, collateralize the Company's obligations to third parties
for the purchase of inventory. The contract amounts of these letters of credit
approximate their fair value.
As of June 28, 1997, certain of the Company's subsidiaries have a purchase
agreement with a food vendor requiring a minimum level of purchases over a six
year period through 2001. The Company is required under these agreements to pay
a penalty of up to $3.8 million if the minimum purchase requirements are not
satisfied.
NOTE TWELVE-PREFERRED STOCK PURCHASE RIGHTS
Each outstanding share of common stock is accompanied by 0.64 preferred
share purchase rights to purchase Series A Junior Participating Preferred Stock.
As of June 28, 1997, there were 17,929,155 rights outstanding. Each right
entitles the holder to purchase a unit consisting of one two-hundredth of a
share of Series A Junior Participating Preferred Stock, $.10 par value, at $100
per unit, subject to adjustment. The rights are not exercisable or transferable
apart from the common stock until 10 days after a person or group, with certain
exceptions, has acquired 15 percent or more, or makes a tender offer for 30
percent or more, of the Company's common stock. Each right will entitle the
holder, under certain circumstances (a merger, acquisition of 15 percent or more
of common stock of the Company by an acquiring entity, self-dealing transactions
by an acquiring entity, or sale of 50 percent or more of the Company's assets or
earning power), to acquire at half the value, either common stock of the
Company, a combination of certain assets, or securities of the Company, or
common stock of the acquiring entity. Any such event would also result in any
rights owned beneficially by the acquiring entity or its affiliates to become
null and void. The rights expire May 15, 2006 and are redeemable prior to the
time an acquiring entity acquires
F-23
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE TWELVE-PREFERRED STOCK PURCHASE RIGHTS (CONTINUED)
15 percent or more of the Company's common stock at one cent per right. At June
28, 1997, 125,000 shares of Series A Junior Participating Preferred Stock were
authorized but unissued and were reserved for issuance upon exercise of the
rights.
NOTE THIRTEEN-QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited results of operations by quarter for fiscal 1997 and fiscal
1996 are summarized below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
<S> <C> <C> <C> <C>
Net Sales........................... $904,827 $882,381 $831,272 $859,013
Cost of sales....................... 727,440 701,800 658,981 681,888
Net income.......................... 2,046 3,917 4,009 6,066*
-------- -------- -------- --------
Earnings per share.................. $ 0.07 $ 0.14 $ 0.14 $ 0.21*
======== ======== ======== ========
</TABLE>
- -----------
* Includes adjustment to income tax valuation allowance (see Note Seven).
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
<S> <C> <C> <C> <C>
Net Sales............................ $421,771 $440,545 $452,379 $474,783
Cost of sales........................ 324,540 339,745 351,406 371,608
Net income (loss).................... 2,645 2,877 544 (22,846)**
-------- -------- -------- --------
Earnings (loss) per share............ $ 0.18 $ 0.19 $ 0.04 $ (1.53)**
======== ======== ======== ========
</TABLE>
- -----------
** Includes asset impairment loss (see Note Three).
NOTE FOURTEEN-SUBSEQUENT EVENT
On June 30, 1997, JP Foodservice, Inc. ("JP") of Columbia, Maryland, and
the Company announced the signing of a definitive merger agreement under which
the Company will be merged with a wholly-owned subsidiary of JP. Under the terms
of the agreement, which was unanimously approved by the boards of directors of
both companies, JP and the Company will merge into a wholly owned subsidiary of
JP in an exchange of stock in which the Company's shareholders will receive 0.84
of a share of JP common stock for each share of the Company's common stock held.
The transaction is expected to be accounted for using the pooling-of-interests
method and is intended to qualify as a tax-free reorganization. Completion of
the transaction is subject to shareholder and regulatory approval, and other
customary closing conditions, and is expected to occur before the end of
calendar 1997.
NOTE FIFTEEN-SUPPLEMENTAL FINANCIAL INFORMATION
The following represents summarized combined financial information of the
guarantor subsidiaries of the 8 7/8% Notes (see Note Five).
AS OF
FISCAL 1997 JUNE 28, 1997
----------- -------------
(in thousands) (in thousands)
Net sales $2,669,878 Current assets $208,276
Cost of sales 2,163,408 Noncurrent assets 610,936
Net income 3,218 Current liabilities 274,625
Noncurrent liabilities 495,467
F-24
<PAGE>
RYKOFF-SEXTON, INC. AND SUBSIDIARIES
Financial Statements
Condensed Consolidated Balance Sheets
September 27, 1997 and June 28, 1997................................. F-26
Condensed Consolidated Statements of Operations
Thirteen Weeks ended September 27, 1997 and
September 28, 1996................................................... F-27
Condensed Consolidated Statements of Cash Flows
Thirteen Weeks ended September 27, 1997 and
September 28, 1996................................................... F-28
Notes to Condensed Consolidated Financial
Statements........................................................... F-29
F-25
<PAGE>
RYKOFF-SEXTON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
ASSETS
<TABLE>
<CAPTION>
September 27, June 28,
1997 1997
(Unaudited)
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 47,133 $ 63,293
Accounts receivable, net 161,371 122,963
Inventories 228,668 210,547
Prepaid expenses 23,171 19,755
Deferred income taxes 18,998 24,797
------------ ------------
Total current assets 479,341 441,355
------------ ------------
Property, plant and equipment, net 314,699 296,012
Goodwill, net 434,563 437,361
Deferred income taxes, net 27,805 21,337
Other assets, net 20,998 22,957
------------ ------------
Total assets $ 1,277,406 $ 1,219,022
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 271,728 $ 231,791
Accrued compensation 19,333 20,815
Accrued liabilities 77,165 85,556
Current portion of long-term debt and capitalized leases 21,672 18,771
------------ ------------
Total current liabilities 389,898 356,933
------------ ------------
Long-term debt and capitalized leases, less current portion 498,662 486,731
------------ ------------
Other long-term liabilities 20,655 21,185
------------ ------------
Shareholders' equity:
Preferred Stock -- --
Common stock, at stated value 2,891 2,829
Additional paid-in capital 311,782 300,757
Retained earnings 56,533 53,685
------------ ------------
371,206 357,271
------------ ------------
Less: treasury stock, at cost 3,015 3,098
------------ ------------
Total shareholders' equity 368,191 354,173
------------ ------------
Total liabilities and shareholders' equity $ 1,277,406 $ 1,219,022
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-26
<PAGE>
RYKOFF-SEXTON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
------------------------------
September 27, September 28,
1997 1996
------------- -------------
<S> <C> <C>
Net sales $ 870,938 $ 904,827
Cost of sales 696,839 727,440
------------- -------------
Gross profit 174,099 177,387
Warehouse, selling, delivery and general and
administrative expenses 150,272 155,928
Executive severance compensation 1,100 --
Amortization of goodwill and other intangibles 2,906 2,933
------------- -------------
Income from operations 19,821 18,526
Interest expense, net 11,515 11,272
Other expenses 3,013 3,137
------------- -------------
Income before provision for income taxes 5,293 4,117
Provision for income taxes 2,445 2,071
------------- -------------
Net income $ 2,848 $ 2,046
------------- -------------
------------- -------------
Weighted average number of shares of
common stock and equivalents outstanding 29,217 28,051
------------- -------------
------------- -------------
Net income per share $ 0.10 $ 0.07
------------- -------------
------------- -------------
Cash dividends per share $ -- $ 0.03
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-27
<PAGE>
RYKOFF-SEXTON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------------------
September 27, 1997 September 28, 1996
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities--
Net income $ 2,848 $ 2,046
Adjustments to reconcile net income to net
cash provided by (used in) operating activities --
Depreciation and amortization 11,023 10,939
(Gain) loss on sale of property, plant and equipment 102 (1,196)
Deferred income taxes 2,142 2,154
Changes in assets and liabilities:
(Increase) in receivables (38,408) (32,937)
(Increase) in inventories (18,121) (11,974)
(Increase) decrease in prepaid expenses and
other assets (2,835) 3,184
Increase in accounts payable
and accrued and other liabilities 29,507 44,054
------------------ ------------------
Net cash provided by (used in) operating activities (13,742) 16,230
------------------ ------------------
Cash flows from investing activities --
Capital expenditures (24,906) (7,092)
Proceeds from disposal of property, plant and
equipment 745 3,682
------------------ ------------------
Net cash used in investing activities (24,161) (3,410)
------------------ ------------------
Cash flows from financing activities--
Principal payments of long-term debt and capitalized
lease obligations (1,854) (386)
Increase under revolving credit line 15,000 15,000
Issuance of common stock (stock options) 8,597 619
Dividends paid -- (832)
------------------ ------------------
Net cash provided by financing activities 21,743 14,401
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (16,160) 27,221
Cash and cash equivalents at beginning of period 63,293 22,045
------------------ ------------------
Cash and cash equivalents at end of period $ 47,133 $ 49,266
------------------ ------------------
------------------ ------------------
Supplemental disclosures of cash flow information --
Cash paid (refunds) during the period for:
Interest, net $ 8,511 $ 8,148
Income taxes, net 265 (2,481)
------------------ ------------------
------------------ ------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-28
<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. The foregoing financial information, not audited
by independent public accountants, reflects, in the opinion of the Company,
all adjustments (which included only normal recurring adjustments except as
otherwise noted) necessary to present fairly the information purported to
be shown and is not necessarily indicative of the results of the operations
for the entire fiscal year ending June 27, 1998. 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 Balance Sheets present the assets, liabilities
and shareholders' equity of the Company as of September 27, 1997 and as of
June 28, 1997 (audited). The Condensed Consolidated Statements of
Operations include the results for the thirteen weeks ended September 27,
1997, compared to the thirteen weeks ended September 28, 1996. The Condensed
Statements of Cash Flows present the cash flows for the thirteen weeks ended
September 27, 1997, compared to the thirteen weeks ended September 28, 1996.
2. On June 30, 1997, JP Foodservice Inc. ("JP") of Columbia, Maryland, and the
Company announced the signing of a definitive merger agreement as amended
on September 3, 1997 and November 5, 1997 (the "Agreement") under which the
Company will be merged with a wholly-owned subsidiary of JP. Under the
terms of the Agreement, which was unanimously approved by the boards of
directors of both companies, the Company will merge into a wholly owned
subsidiary of JP in an exchange of stock in which the Company's shareholders
will receive 0.775 (revised from 0.84) of a share of JP common stock for
each share of the Company's common stock held. The transaction is expected
to be accounted for using the pooling-of-interests method and is intended to
qualify as a tax-free reorganization. Completion of the transaction is
subject to shareholder and regulatory approval and is expected to occur
before the end of calendar 1997.
3. Net income per share of common stock has been computed based on the
weighted average number of shares of common stock outstanding and dilutive
common stock equivalents.
In February, 1997 Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share" was issued. This Statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim reporting periods. Earlier application is not permitted.
The change in calculating earnings per share under this Statement is that
basic earnings per share, which replaces primary earnings per share, will no
longer assume potentially dilutive securities. There would not have been
a material change in reported primary earnings per share if this statement
was effective for the current fiscal period.
F-29
<PAGE>
4. Inventories are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
September 27, June 28,
1997 1997
------------- -------------
<S> <C> <C>
Finished Goods $ 222,487 $ 204,576
Raw Materials 6,181 5,971
------------- -------------
$ 228,668 $ 210,547
------------- -------------
------------- -------------
</TABLE>
All inventories are stated at the lower of cost or market, with
approximately 8% at September 27, 1997 determined by the last-in,
first-out ("LIFO") cost method and the remainder by the first-in,
first-out ("FIFO") cost method.
5. In connection with the May 17, 1996 US Foodservice merger, the Company
recorded a restructuring charge of $57.6 million ($35.7 million after tax)
in the transition period ended June 29, 1996, of which 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 current fiscal quarter, the Company charged $1.7
million against the restructuring liability, leaving a remaining balance of
$23.7 million for future costs to be incurred. The $1.7 million utilization
primarily consisted of $624 thousand in severance payments, $631 thousand
in lease related costs and the remaining 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 (primarily related to non-cancelable operating lease
commitments).
6. The following represents summarized combined financial information of
the guarantor subsidiaries of the Company's $130 million principal amount
of 8 7/8% Senior Subordinated Notes.
<TABLE>
<CAPTION>
Thirteen Weeks
As Of Ended
September 27, 1997 September 27, 1997
------------------ ------------------
(in thousands) (in thousands)
<S> <C> <C>
Current assets $ 273,038 Net sales $ 697,908
------------------ ------------------
Noncurrent assets 649,683 Cost of sales 568,639
------------------ ------------------
Current liabilities 278,929 Net income 323
------------------ -------------------
Noncurrent liabilities 599,939
------------------
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
U.S. FOODSERVICE AND SUBSIDIARIES
Index to Financial Statements
PAGE
<S> <C>
Financial Statements:
Reports of Independent Public Accountants.............................. F-32
Consolidated Balance Sheets as of June 29, 1996 and June 28, 1997...... F-37
Consolidated Statements of Operations for the fiscal years ended
July 1, 1995, June 29, 1996 and June 28, 1997........................ F-38
Consolidated Statements of Stockholders' Equity for the fiscal years
ended July 1, 1995, June 29, 1996 and June 28, 1997.................. F-39
Consolidated Statements of Cash Flows for the fiscal years ended
July 1, 1995, June 29, 1996 and June 28, 1997........................ F-40
Notes to Consolidated Financial Statements............................. F-42
Financial Statements Schedules:
Condensed Financial Information of Registrant.......................... S-1
Valuation and Qualifying Accounts...................................... S-4
</TABLE>
F-31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
U.S. Foodservice:
We have audited the accompanying consolidated balance sheet of U.S. Foodservice
(formerly JP Foodservice, Inc.) and subsidiaries as of June 28, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements and the
financial schedules referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We did not audit the consolidated
financial statements of Rykoff-Sexton, Inc. as of and for the year ended
June 28, 1997, which consolidated financial statements reflect total assets
constituting 70 percent, net sales constituting 67 percent and net income
constituting 43 percent of the related consolidated totals. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Rykoff-Sexton, Inc.,
is based solely on the report of other auditors.
The consolidated financial statements of U.S. Foodservice and subsidiaries as of
June 29, 1996, and for each of the years in the two-year period then ended,
prior to their restatement for the pooling-of-interests transaction described in
Note 2 to the consolidated financial statements, were audited by other auditors
whose report, presented herein dated August 2, 1996, expressed an unqualified
opinion on those statements. Separate financial statements of Rykoff-Sexton,
Inc. also included in the restated consolidated financial statements of U.S.
Foodservice as of June 29, 1996, and for each of the years in the two-year
period then ended, were audited by other auditors whose report, presented herein
dated August 14, 1997, expressed an unqualified opinion on those statements.
We conducted our audit 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 also 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 audit and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
1997 consolidated financial statements referred to above present fairly, in all
material respects, the financial position of U.S. Foodservice and subsidiaries
as of June 28, 1997, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
F-32
<PAGE>
We also audited the combination of the accompanying consolidated financial
statements and schedules as of June 29, 1996, and for each of the years in the
two-year period then ended, after restatement for the Rykoff-Sexton Inc.,
pooling-of-interests transaction and in our opinion, such financial statements
and schedules have been properly combined on the basis described in Note 2 of
the notes to the consolidated financial statements.
During the year ended June 28, 1997, the Company adopted Statement of Financial
Accounting Standard No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedules listed in the index to financial
statements are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, based on our audit
and the report of other auditors, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
March 4, 1998
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rykoff-Sexton, Inc.:
We have audited the accompanying consolidated balance sheets of Rykoff-Sexton,
Inc. (a Delaware Corporation) and subsidiaries as of June 28, 1997 and April 27,
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for the fiscal years ended June 28, 1997, April 27, 1996
and April 29, 1995, and the nine-week transition period ended June 29, 1996.
These financial statements (which are not presented separately herein) are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rykoff-Sexton, Inc. and
subsidiaries as of June 28, 1997 and April 27, 1996 and the results of their
operations and their cash flows for the fiscal years ended June 28, 1997, April
27, 1996 and April 29, 1995, and the nine-week transition period ended June 29,
1996, in conformity with generally accepted accounting principles.
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" in fiscal 1996.
ARTHUR ANDERSEN LLP
Philadelphia, PA
August 14, 1997
F-34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of JP Foodservice, Inc.:
In our opinion, based upon our audits and the report of other auditors, the
consolidated balance sheet and the related consolidated statements
of operations, of stockholders' equity and of cash flows as of and for each of
the two fiscal years in the period ended June 29, 1996 (not presented separately
herein) present fairly, in all material respects, the financial position,
results of operations and cash flows of JP Foodservice, Inc. and its
subsidiaries as of and for each of the two fiscal years ended June 29, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Valley Industries,
Inc., which statements reflect total assets of $27,176,000 at January 31, 1996,
and total revenues of $105,406,000 and $121,504,000 for the years ended January
1, 1995 and 1996, respectively. These statements were audited by other auditors
whose report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Valley Industries, Inc., is
based solely on the report of the other auditors. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Linthicum, Maryland
August 2, 1996, except as to Note 16,
which is as of September 10, 1996
and except as to the pooling of interests with
Valley Industries, Inc. and with Squeri Food Service, Inc.
which is as of November 14, 1996
F-35
<PAGE>
REPORT OF INDEPENDENT AUDITORS OF
VALLEY INDUSTRIES AND SUBSIDIARIES AND
Z LEASING (A GENERAL PARTNERSHIP)
The Board of Directors, Stockholders and Partners
Valley Industries, Inc. and Subsidiaries and
Z Leasing Company (A General Partnership):
We have audited the combined balance sheet of Valley Industries, Inc. and
Subsidiaries and Z Leasing Company (A General Partnership collectively, the
Company) as of January 31, 1996, and the related combined statements of
earnings, stockholders' and partners' equity, and cash flows for each of the
years in the two-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
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, 1996, and the combined results of their operations and their
cash flows for each of the years in the two-year period ended January 31, 1996,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Las Vegas, Nevada
June 17, 1996
F-36
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
June 29, June 28,
1996 1997
- ---------------------------------------------------------------------------------------------------------------
(Note 2)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 23,049 $ 74,432
Receivables, net 336,717 261,717
Inventories 231,535 314,897
Other current assets 29,469 29,919
Deferred income taxes 9,556 28,944
- ---------------------------------------------------------------------------------------------------------------
Total current assets 630,326 709,909
Property and equipment 282,176 437,736
Goodwill, net of accumulated amortization of $16,242 and $31,304 112,648 541,519
Other non-current assets 27,061 29,354
Deferred income taxes - 13,665
- ---------------------------------------------------------------------------------------------------------------
Total assets $1,052,211 $1,732,183
- ---------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 123,525 $ 22,492
Current obligations under capital leases 5,072 5,690
Accounts payable 231,058 321,442
Accrued expenses 62,541 125,482
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 422,196 475,106
Noncurrent liabilities:
Long-term debt 286,079 621,788
Obligations under capital leases 17,649 33,458
Deferred income taxes 6,575 -
Other noncurrent liabilities 3,036 22,685
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 735,535 1,153,037
- ---------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued - -
Common stock, $.01 par value, 150,000,000 shares authorized,
44,300,999 and 30,364,328 outstanding 304 443
Additional paid-in-capital 283,524 526,979
Retained earnings 77,791 51,724
Distributions in excess of net book value of continuing
stockholder's interest (44,943) -
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 316,676 579,146
- ---------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (notes 7, 9 and 17)
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,052,211 $1,732,183
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal Years Ended (Note 2)
--------------------------------------------------------
July 1, June 29, June 28,
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 2,857,334 $ 3,238,781 $ 5,169,406
Cost of sales 2,262,819 2,586,096 4,166,332
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 594,515 652,685 1,003,074
Operating expenses 526,871 590,446 841,901
Amortization of intangible assets 2,792 4,244 15,349
Asset impairment - 29,700 -
Executive severance compensation - - 4,000
Reversal of restructuring charges - (6,441) (4,000)
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 64,852 34,736 145,824
Interest expense and other financing costs, net 32,941 32,527 76,063
Nonrecurring charges - 1,517 5,400
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and extraordinary charge 31,911 692 64,361
Provision for income taxes 13,608 559 26,075
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before extraordinary charge 18,303 133 38,286
Income from discontinued operations (net of income taxes of $95) 137 - -
Gain on disposal of discontinued operations
(net of income taxes of $15,687) 23,359 - -
Extraordinary charge on early extinguishment of debt
(net of income taxes of $3,059) (4,590) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 37,209 $ 133 $ 38,286
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share:
Basic:
Before extraordinary charge $ 0.75 $ 0.00 $ 0.88
Discontinued operations 0.01 - -
Gain on disposal of discontinued operations 0.95 - -
Extinguishment of debt (0.19) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income per common share $ 1.52 $ 0.00 $ 0.88
- ---------------------------------------------------------------------------------------------------------------------------
Diluted:
Before extraordinary charge $ 0.74 $ 0.00 $ 0.87
Discontinued operations 0.01 - -
Gain on disposal of discontinued operations 0.95 - -
Extinguishment of debt (0.19) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income per common share $ 1.51 $ 0.00 $ 0.87
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average common shares:
Basic 24,520,000 30,388,000 43,451,000
Diluted 24,567,000 30,515,000 44,063,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Additional
Preferred Common paid-in
stock stock capital
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance July 2, 1994 $ - $151 $146,567
-
Net income - - -
Dividends and distributions to stockholders of acquired companies - - -
Preference dividends on preferred stock 40 - -
Initial public offering (40) 78 81,094
Debt conversion - 47 47,221
Stock issued in connection with business acquisition - 2 2,098
Stock split - 23 (30)
Cash dividends ($.03 per share) - - -
Stock options exercised - - 810
Treasury stock purchased - - (5)
Employee stock purchases - - 302
- ------------------------------------------------------------------------------------------------------------------
Balance July 1, 1995 - 301 278,057
-
Net income - - -
Dividends and distributions to stockholders of acquired companies - - -
Stock options exercised - 2 3,558
Contributions to 401(k) plan - 1 1,611
Cash dividends ($.06 per share) - - -
Treasury stock purchased - - (40)
Employee stock purchases - - 338
- ------------------------------------------------------------------------------------------------------------------
- 304 283,524
Net activity for the period April 28, 1996 to June 29, 1996 (Note 2):
Net loss - - -
Shares issued for US Foodservice, Inc. - 100 203,572
Other net activity - - 53
- ------------------------------------------------------------------------------------------------------------------
Balance June 29, 1996 - 404 487,149
-
Net income - - -
Adjustments with respect to acquisitions - - 2,450
Reclassification in connection with Sara Lee Offering - - (44,943)
Public stock offering - 31 65,944
Stock issued in connection with business acquisitions - 4 9,754
Contributions to 401(k) plan - 1 1,554
Cash dividends ($.06 per share) - - -
Stock options exercised - 3 3,692
Treasury stock purchased - - (12)
Stock award issuances - - 554
Employee stock purchases - - 837
- ------------------------------------------------------------------------------------------------------------------
Balance June 28, 1997 $ - $ 443 $526,979
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Distribution
in excess of
Retained net book
earnings value Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance July 2, 1994 $43,304 $(44,943) $145,079
Net income 37,209 - 37,209
Dividends and distributions to stockholders of acquired companies (779) - (779)
Preference dividends on preferred stock (40) - -
Initial public offering - - 81,132
Debt conversion - - 47,268
Stock issued in connection with business acquisition - - 2,100
Stock split - - (7)
Cash dividends ($.03 per share) (437) - (437)
Stock options exercised - - 810
Treasury stock purchased - - (5)
Employee stock purchases - - 302
- ------------------------------------------------------------------------------------------------------------------
Balance July 1, 1995 79,257 (44,943) 312,672
Net income 133 - 133
Dividends and distributions to stockholders of acquired companies (715) - (715)
Stock options exercised - - 3,560
Contributions to 401(k) plan - - 1,612
Cash dividends ($.06 per share) (884) - (884)
Treasury stock purchased - - (40)
Employee stock purchases - - 338
- ------------------------------------------------------------------------------------------------------------------
77,791 (44,943) 316,676
Net activity for the period April 28, 1996 to June 29, 1996 (Note 2):
Net loss (60,180) - (60,180)
Shares issued for U.S. Foodservice, Inc. - - 203,672
Other net activity - - 53
- ------------------------------------------------------------------------------------------------------------------
Balance June 29, 1996 17,611 (44,943) 460,221
Net income 38,286 - 38,286
Adjustments with respect to acquisitions (2,503) - (53)
Reclassification in connection with Sara Lee Offering - 44,943 -
Public stock offering - - 65,975
Stock issued in connection with business acquisitions - - 9,758
Contributions to 401(k) plan - - 1,555
Cash dividends ($.06 per share) (1,670) - (1,670)
Stock options exercised - - 3,695
Treasury stock purchased - - (12)
Stock award issuances - - 554
Employee stock purchases - - 837
- ------------------------------------------------------------------------------------------------------------------
Balance June 28, 1997 $51,724 $ - $579,146
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Fiscal Years Ended (Note 2)
------------------------------------
July 1, June 29, June 28,
1995 1996 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 37,209 $ 133 $ 38,286
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation of property and equipment 25,574 28,193 41,834
Amortization of intangible assets 3,862 4,981 18,105
Gain on disposal of property and equipment (1,155) (1,489) (1,649)
Gain on disposal of discontinued operations (23,359) - -
Impairment of long-lived assets - 29,700 -
Deferred income taxes (1,128) (4,769) 8,848
Changes in operating assets and liabilities, net of
effects from purchase acquisitions:
(Increase) decrease in receivables (28,638) (36,571) 22,990
(Increase) decrease in inventories (15,738) (13,035) 12,952
(Increase) decrease in other current assets (2,900) (13,636) 10,623
Increase (decrease) in accounts payable
and accrued expenses 27,174 2,284 (33,819)
Other 4,628 (561) (3,579)
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 25,529 (4,770) 114,591
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (57,824) (53,591) (88,436)
Costs of businesses acquired, net of cash acquired (25,270) (11,451) (35,964)
(Issuance) collection of note receivable - (5,500) 5,500
Proceeds from sales of property and equipment 3,525 2,649 10,321
Net costs used in discontinued operations (30,002) - -
Proceeds from sales of assets of discontinued operations 96,000 - -
Other (1,004) (6,363) 1,816
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,575) (74,256) (106,763)
- --------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
F-40
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Fiscal Years Ended (Note 2)
--------------------------------------
July 1, June 29, June 28,
1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from public offerings of common stock $ 79,927 $ - $ 65,975
Long-term debt (repayments) borrowings (82,759) 83,591 (31,961)
Payments of obligations under capital leases (4,989) (4,536) (5,957)
Payment of financing costs (3,371) (1,500) -
Proceeds from other issuances of common stock 1,106 5,475 6,641
Dividends paid (437) (884) (1,670)
Other (1,427) (720) (693)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (11,950) 81,426 32,335
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (996) 2,400 40,163
Cash and cash equivalents:
Beginning of period 21,645 20,649 34,269
- ------------------------------------------------------------------------------------------------------------------------------
End of period $ 20,649 $ 23,049 $ 74,432
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash paid during the period for:
Interest $ 31,234 $ 32,166 $ 59,035
Income taxes $ 28,422 $ 11,781 $ 15,777
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS
U.S. Foodservice, formerly JP Foodservice, Inc. ("JP Foodservice"), and its
consolidated subsidiaries (the "Company") operate as a broadline distributor of
fresh, frozen and packaged foods, paper products, equipment and ancillary
products to foodservice businesses. The Company also manufactures certain food
and non-food related products and provides contract and design services. The
Company's market area includes most of the United States. The Company's
principal customers are restaurants, hotels, healthcare facilities, cafeterias
and schools encompassing both independent and multi-unit businesses. No single
customer accounts for more than 10% of the Company's trade receivables or sales
for any of the periods presented. Effective February 27, 1998, the Company
changed its name to U.S. Foodservice. References to JP Foodservice refer
generally to activities of the Company prior to the merger with Rykoff Sexton,
Inc.
NOTE 2 - BASIS OF PRESENTATION AND ACQUISITION OF RYKOFF-SEXTON, INC.
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"), the third largest
broadline foodservice distributor in the United States, was merged into a wholly
owned subsidiary of JP Foodservice (the "Merger"). In connection with the
Merger, JP Foodservice issued 22,657,498 shares of common stock with an
approximate value of $782 million, with each outstanding share of common stock
of Rykoff-Sexton being exchanged for .775 of a share of JP Foodservice common
stock (the "Exchange Ratio"). The transaction has been accounted for under the
pooling of interests method of accounting. Accordingly, these 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 the Company and Rykoff-Sexton have fiscal years which end on the Saturday
closest to June 30. Prior to April 28, 1996, Rykoff-Sexton had a fiscal year
that ended on the Saturday closest to April 30. The consolidated balance sheet
as of June 28, 1997, combines the consolidated balance sheets of JP Foodservice
and Rykoff-Sexton as of such date. The consolidated balance sheet as of June
29, 1996, combines the consolidated balance sheet of JP Foodservice as of June
29, 1996, with the consolidated balance sheet of Rykoff-Sexton as of April 27,
1996. The consolidated financial statements for the years ended June 28, 1997
("fiscal 1997"), June 29, 1996 ("fiscal 1996), and July 1, 1995 ("fiscal 1995"),
combine the results of JP Foodservice for such periods with the results of
Rykoff-Sexton for the years ended June 28, 1997, April 27, 1996, and April 29,
1995, respectively. Retained earnings activity of Rykoff-Sexton for the period
April 28, 1996 to June 29, 1996 (the "Transition Period"), has been reflected as
adjustments to retained earnings as of June 29, 1996, in the consolidated
statement of stockholders' equity. Net sales, loss from operations and net loss
for the period from April 28, 1996 to June 29, 1996, were $519,903, $(79,532)
and $(60,180), respectively. In addition, the Company has recorded an after-tax
charge of $3,973 to retained earnings as of July 2, 1994 principally related to
the conformance of inventory valuation methods.
(Continued)
F-42
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 2 - CONTINUED
Net sales, income from continuing operations, and net income previously reported
by JP Foodservice and Rykoff-Sexton and the combined amounts presented in the
accompanying consolidated financial statements are summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------
July 1, June 29, June 28,
1995 1996 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales:
JP Foodservice $ 1,288,315 $ 1,449,303 $1,691,913
Rykoff-Sexton 1,569,019 1,789,478 3,477,493
- ---------------------------------------------------------------------------------------------
Combined $ 2,857,334 $ 3,238,781 $5,169,406
- ---------------------------------------------------------------------------------------------
Income (loss) from continuing operations:
JP Foodservice $ 8,927 $ 16,913 $ 22,248
Rykoff-Sexton 9,376 (16,780) 16,038
- ---------------------------------------------------------------------------------------------
Combined $ 18,303 $ 133 $ 38,286
- ---------------------------------------------------------------------------------------------
Net income:
JP Foodservice $ 4,337 $ 16,913 $ 22,248
Rykoff-Sexton 32,872 (16,780) 16,038
- ---------------------------------------------------------------------------------------------
Combined $ 37,209 $ 133 $ 38,286
- ---------------------------------------------------------------------------------------------
</TABLE>
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of U.S. Foodservice
and its wholly owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
B. CASH EQUIVALENTS
For purposes of financial statement disclosure, cash equivalents consist of all
highly liquid instruments with original maturities of three months or less. The
cost of these investments is equivalent to fair market value.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS
Information regarding fair value of long-term debt is set forth in Note 7 to the
consolidated financial statements. Fair values of other financial instruments,
such as receivables and payables, approximate carrying values because of the
short-term nature of these items.
(Continued)
F-43
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 3 - CONTINUED
D. REVENUE AND RECEIVABLES
Revenue is recognized when product is shipped to the customer. Allowances are
provided for estimated uncollectible receivables based on historical experience
and review of specific accounts.
Allowances and credits received from suppliers in connection with the Company's
buying and merchandising activities are recognized as earned.
E. INVENTORIES
Inventories consist principally of fresh, frozen and packaged foods, and related
non-food products. Inventories are valued at the lower of cost or market, and
include the cost of purchased merchandise (net of applicable purchase rebates),
and for manufactured products, the cost of material, labor and factory overhead.
Cost for substantially all inventories is determined using the first-in, first-
out (FIFO) method. Inventories consist primarily of finished goods except for
raw materials of $5,971 and $6,906 as of June 28, 1997 and April 27, 1996,
respectively, used in manufacturing.
F. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation. The
cost of property and equipment transferred during the original capitalization of
the JP Foodservice was based on fair market value at the date of transfer.
Major renewals and betterments are capitalized, and ordinary repairs and
maintenance are charged against operations in the period in which the costs are
incurred. 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 consolidated statement of operations.
Depreciation is computed using the straight-line method over estimated useful
lives from date of acquisition as follows:
Buildings and improvements 15-40 years
Machinery and equipment 3-15 years
Leasehold improvements Life of lease
Delivery vehicles 3-10 years
The Company has facilities available for sale, largely attributable to the
restructuring discussed in Note 15, with a carrying value of approximately $39
million at June 28, 1997.
(Continued)
F-44
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 3 - CONTINUED
G. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are amortized using the straight-line
method over the periods expected to be benefited not to exceed 40 years. The
Company assesses the recoverability of goodwill by determining whether
amortization of the goodwill over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operations. Goodwill
impairment, if any, is measured by determining the amount by which the carrying
value of the goodwill exceeds its fair value based upon discounting future cash
flows.
Legal and bank fees associated with the acquisition of loans are capitalized and
amortized using the effective interest method over the term of the related debt.
Such costs are written off upon refinancing or restructuring of the related
debt.
H. IMPAIRMENT OF LONG-LIVED ASSETS
The recoverability of long-lived assets is assessed whenever events or changes
in circumstances indicate the carrying value of an asset may not be recoverable
through future undiscounted cash flows expected to be generated by the asset.
If such assets are deemed to be impaired, the impairment is measured by
determining the amount by which the carrying value of the asset exceeds its
estimated fair value.
I. INCOME TAXES
Income taxes are accounted for using the asset and liability method. Deferred
tax assets and liabilities are recognized based on the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in 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 rate is recognized in income in the period that included the
enactment date.
J. STATEMENT OF CASH FLOWS - NONCASH ACTIVITIES
During fiscal years 1995, 1996 and 1997, the Company's additions to its
transportation fleet of $4,498, $4,536 and $5,957, respectively, were financed
through capital lease obligations.
(Continued)
F-45
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 3 - CONTINUED
K. Net Income Per Common Share
The Company adopted Statement of Financial Accounting Standard No. 128, Earnings
Per Share, (SFAS No. 128) as of December 27, 1997, and, accordingly, has
restated all prior periods in accordance with the pronouncement. The impact of
adoption was not material. Basic net income per common share is based on the
weighted number of common shares outstanding. Diluted net income per common
share is based on the weighted average number of common shares outstanding and
dilutive securities outstanding. Net income per common share, for the year
ended July 1, 1995, has been adjusted for the preference dividends of $40 for
computational purposes.
L. DERIVATIVE INSTRUMENTS
The Company uses interest rate swap and cap contracts to manage exposure to
fluctuations in interest rates. The interest rate differential on interest rate
swap contracts used to hedge underlying debt obligations is reflected as an
adjustment to interest expense over the life of the swap contract. Upon early
termination of an interest rate swap or cap contract, the gains or losses on
termination are deferred and amortized as an adjustment to the interest expense
on the related debt instrument over the remaining period originally covered by
the contract.
M. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to continue to apply the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25), with pro forma disclosure of net income and
net income per common share as if the fair value based method prescribed by
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), had been applied.
N. ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
O. RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No.
130); and No. 131, Disclosures About Segments of an Enterprise and Related
Information (SFAS No. 131). These pronouncements generally require additional
disclosure and are not expected to have any effect on the Company's
F-46
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 3 - CONTINUED
financial position or results of operations. The Company expects to adopt SFAS
No. 130 and No. 131 during fiscal 1999 and is currently evaluating the impact,
if any, that the new pronouncements will have on their financial statement
disclosures.
P. RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform to the current year's presentation.
NOTE 4 - OTHER ACQUISITIONS
ACQUISITIONS ACCOUNTED FOR AS POOLINGS OF INTERESTS BY JP FOODSERVICE
MERGER WITH VALLEY - On August 30, 1996, JP Foodservice completed a merger with
Valley Industries, Inc. (together with its affiliates, "Valley"), a broadline
distributor located in Las Vegas, Nevada. Under the terms of the merger, JP
Foodservice exchanged 1,936,494 common shares with an approximate value of $40.7
million (net of indebtedness assumed or discharged) for all of Valley's common
shares and ownership interests.
MERGER WITH SQUERI - On September 30, 1996, JP Foodservice completed a merger
with Squeri Food Service, Inc. (together with its affiliates, "Squeri"), a
broadline distributor located in Cincinnati, Ohio. Under the terms of the
merger, JP Foodservice exchanged 1,079,875 common shares with an approximate
value of $24.8 million (net of indebtedness assumed or discharged) for all of
Squeri's common shares and ownership interests.
The mergers with Valley and Squeri, as discussed above, were accounted for as
poolings of interests. JP Foodservice's consolidated financial statements for
the years ended July 1, 1995, June 29, 1996 and June 28, 1997, have been
restated to include the accounts and operations of Valley and Squeri for all
periods prior to each of the respective mergers.
Prior to the mergers with Valley and Squeri, Valley used a fiscal year ending on
January 31 and Squeri used a fiscal year ending December 31. The fiscal 1995 and
1996 restated financial statements of JP Foodservice combine the July 1, 1995
and June 29, 1996 financial statements of JP Foodservice with the January 31,
1995 and 1996, financial statements of Valley, respectively, and the December
31, 1994 and 1995, financial statements of Squeri, respectively. The fiscal
years of Valley and Squeri have been conformed with the JP Foodservice's fiscal
year as of June 30, 1996. Accordingly, retained earnings activity for the period
February 1, 1996 to June 29, 1996, for Valley and the period January 1, 1996 to
June 29, 1996, for Squeri has been reflected as adjustments to retained earnings
as of June 30, 1996. Combined net sales, loss from operations and net loss for
the periods February 1, 1996 to June 29, 1996, for Valley and January 1, 1996 to
June 29, 1996, for Squeri were $99,660, $2,028 and $1,848, respectively.
(Continued)
F-47
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 4 - CONTINUED
Net sales and net income of JP Foodservice, Valley and Squeri (the "Combining
Companies"), for the fiscal years prior to the acquisitions, are summarized
below:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------
July 1, June 29,
1995 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Net sales:
JP Foodservice $1,108,253 $1,242,676
Combining companies 180,062 206,627
- ----------------------------------------------------------------------
JP Foodservice, excluding Rykoff-Sexton $1,288,315 $1,449,303
- ----------------------------------------------------------------------
Net income:
JP Foodservice $ 1,940 $ 14,057
Combining companies 2,397 2,856
- ----------------------------------------------------------------------
JP Foodservice, excluding Rykoff-Sexton $ 4,337 $ 16,913
- ----------------------------------------------------------------------
</TABLE>
For all periods prior to the respective mergers, to the date of the
acquisitions, portions of Valley and Squeri were taxed as S-Corporations and,
therefore, Federal and state income taxes were assessed to the shareholders.
For purposes of the Company's consolidated financial statements, income taxes
have been provided on Valley's and Squeri's earnings at rates which would have
been applicable, had such earnings been taxed at JP Foodservice's income tax
rate. Distributions to S-Corporation shareholders have been adjusted for the
effects of corporate, Federal and state income taxes payable on an annualized
basis.
ACQUISITIONS ACCOUNTED FOR AS PURCHASES BY JP FOODSERVICE
ARROW ACQUISITION - On August 31, 1996, JP Foodservice completed the acquisition
of Arrow Paper and Supply Co., Inc. (together with its affiliate, "Arrow"), a
broadline foodservice distributor located in Norwich, Connecticut. Under the
terms of the acquisition, JP Foodservice purchased certain assets, assumed or
discharged certain liabilities and paid consideration of $28.9 million.
Approximately $1.7 million of the consideration was paid with 73,977 common
shares of JP Foodservice and the remainder was paid in cash. The excess of the
purchase price over the fair value of net tangible assets acquired of
approximately $28.2 million has been allocated to goodwill and is being
amortized using the straight-line method over 40 years. Results of Arrow for
the period September 1, 1996 to June 28, 1997, have been included in JP
Foodservice's 1997 consolidated statement of operations.
(Continued)
F-48
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 4 - CONTINUED
MAZO-LERCH ACQUISITION - On June 19, 1997, JP Foodservice completed the
acquisition of Mazo-Lerch Company ("Mazo-Lerch"), a broadline foodservice
distributor located in Alexandria, Virginia. Under the terms of the acquisition,
JP Foodservice acquired all of the outstanding common stock of Mazo-Lerch in
exchange for 279,268 common shares of JP Foodservice valued at approximately $8
million. The purchase price approximated the fair market value of the net
tangible assets of Mazo-Lerch. Results of Mazo-Lerch for the period June 20,
1997 to June 28, 1997, have been included in JP Foodservice's 1997 consolidated
statement of operations.
PRO FORMA INFORMATION - Unaudited pro forma information for fiscal 1996 and
1997, as if the Arrow and Mazo-Lerch acquisitions had occurred on the first day
of the fiscal year, is shown below.
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------
1996 1997
(in thousands, except per share data)
- ----------------------------------------------------------------------------
<S> <C> <C>
Net sales $3,392,244 $5,260,370
Income from operations $ 36,907 $ 146,340
Net income $ 821 $ 48,252
Net income per common share:
Basic $ 0.03 $ 1.11
Diluted $ 0.03 $ 1.10
- ----------------------------------------------------------------------------
</TABLE>
ACQUISITIONS ACCOUNTED FOR AS PURCHASES BY RYKOFF-SEXTON
US FOODSERVICE ACQUISITION - On May 17, 1996, Rykoff-Sexton merged with US
Foodservice Inc. ("USF"), a privately held broadline foodservice distribution
company. As part of the merger, USF stockholders received 1.457 shares of
Rykoff-Sexton common stock for each outstanding Class A and Class B common stock
of USF. Options and warrants to acquire approximately one million shares of USF
were converted into options and warrants to acquire Rykoff-Sexton common stock
on the same basis. The aggregate purchase price was approximately $217 million,
which includes acquisition costs. Liabilities assumed in the acquisition
approximated $477.2 million. In addition, all outstanding shares of USF
cumulative redeemable exchangeable preferred stock were purchased for $26.6
million. The excess of the purchase price over fair value of net tangible assets
acquired of approximately $409 million has been allocated to goodwill and is
being amortized using the straight-line method over 40 years.
CONTINENTAL FOODS ACQUISITION - On February 21, 1995, Rykoff-Sexton acquired
substantially all of the assets of Continental Foods, Inc., a regional, full-
line institutional foodservice distributor located in Maryland. The acquisition
was accounted for as a purchase and, accordingly, Continental's results are
included in the consolidated financial statements from the date of the
acquisition. The aggregate purchase price was approximately $27.0 million,
which includes costs of acquisition. The excess of the purchase price over the
fair value of the net tangible assets acquired of approximately $21.2 million
has been allocated to goodwill and is being amortized using the straight-line
method over 40 years.
(Continued)
F-49
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 4 - CONTINUED
H&O FOODS ACQUISITION - On November 1, 1995, Rykoff-Sexton acquired
substantially all of the assets of H&O Foods, Inc., a regional, institutional
distributor located in Nevada. The acquisition was accounted for as a purchase
and accordingly, H&O's results are included in the consolidated financial
statements from the date of acquisition. The aggregate purchase price was
approximately $29.6 million, which includes the costs of acquisition. The
excess of the purchase price over the fair value of the net assets acquired of
approximately $18.4 million has been allocated to goodwill and is being
amortized using the straight-line method over 40 years.
NOTE 5 - RECEIVABLES
Receivables are composed of the following:
<TABLE>
<CAPTION>
June 29, June 28,
1996 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Customer accounts and notes $ 297,551 $ 98,000
Residual interest in customer accounts sold - 121,398
Less allowance for doubtful accounts (7,848) (16,792)
- -----------------------------------------------------------------------------
Net customer 289,703 202,606
Other, principally from suppliers 47,014 59,111
- -----------------------------------------------------------------------------
$ 336,717 $ 261,717
- -----------------------------------------------------------------------------
</TABLE>
During the year ended June 28, 1997, JP Foodservice changed its method of
accounting for trade receivables sold under its securitization arrangement to
comply with the new accounting standard described in Note 8. Under the new
standard, sale of the undivided ownership interest in $50 million of trade
accounts receivables has been reflected as a reduction of receivables. At June
29, 1996, JP Foodservice recorded amounts sold under its securitization
arrangement as a secured borrowing.
(Continued)
F-50
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 6 - PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
June 29, June 28,
1996 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Land, buildings and improvements $ 221,551 $ 338,750
Machinery and equipment 212,367 285,675
Vehicles held under capital leases (note 10) 45,495 50,113
- ---------------------------------------------------------------------------
479,413 674,538
Accumulated depreciation (197,237) (236,802)
- ---------------------------------------------------------------------------
$ 282,176 $ 437,736
- ---------------------------------------------------------------------------
</TABLE>
The Company capitalizes interest costs as part of major asset construction
projects. Capitalized interest was $2,667, $1,077 and $1,071 in fiscal 1995,
1996 and 1997, respectively.
NOTE 7 - LONG-TERM DEBT
Long-term debt is composed of the following:
<TABLE>
<CAPTION>
June 29, June 28,
1996 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
JP Foodservice:
Revolving line of credit loans $ 1,000 $ 63,700
Trade accounts receivable securitization
(Note 8) 49,378 -
Senior notes payable 85,000 85,000
Notes payable to PYA/Monarch 4,067 4,331
Other 21,370 618
Rykoff-Sexton:
Revolving line of credit loans 94,000 -
Senior subordinated notes 129,157 129,287
Term Loan A - 146,250
Term Loan B - 124,250
Term Loan C - 59,625
Industrial Development Revenue Bonds - 25,900
Other 25,632 5,319
- --------------------------------------------------------------------------------
Total long-term debt 409,604 644,280
Less current maturities of long-term debt 123,525 22,492
- --------------------------------------------------------------------------------
$286,079 $621,788
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
F-51
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 7 -CONTINUED
JP Foodservice Borrowings
REVOLVING LINE OF CREDIT - Under its unsecured revolving credit loan
arrangement, amended in June 1997, JP Foodservice was entitled to borrow up to
$175 million with interest payable quarterly at the bank's prime rate or, at the
option of JP Foodservice, the London Interbank Offered Rate ("LIBOR"), plus
.275% per annum. JP Foodservice was also required to pay an annual facility fee
of .125%. Borrowings outstanding at June 28, 1997, bear interest at 5.9% to
6.1%.
NOTES PAYABLE - The senior notes are unsecured and are payable in seven annual
installments beginning in October 1998. Interest is paid semi-annually at an
annual rate of 8.55%.
In 1989, JP Foodservice loaned to PYA/Monarch $110 million in exchange for a
promissory note. The note is due in installments through December 31, 1998, and
bears interest at rates between 10.35% and 10.8% per annum. JP Foodservice
assumed a promissory note payable to PYA/Monarch of $112 million which is due in
installments through May 31, 1998, and bears interest at 11.0% per annum. Under
a Note Offset Agreement between the parties, maturities of principal and
interest payable under the two notes are to be settled by offsetting amounts
due, with the net difference being carried until settlement as an obligation or
receivable.
INTEREST RATE SWAP AGREEMENT - In May 1997, JP Foodservice entered into a three-
year interest rate swap contract whereby JP Foodservice pays, quarterly,
interest at a fixed rate of 5.97% on a notional principal amount of $70 million
and receives LIBOR, as defined, on the same notional amount provided LIBOR does
not exceed 7% on the quarterly reset dates. If LIBOR is equal to or greater
than 7%, no payment is made by either party during the calculation period. At
June 28, 1997, JP Foodservice estimated it would have paid $213 to terminate the
swap contract.
RYKOFF-SEXTON BORROWINGS
REVOLVING CREDIT AND TERM LOANS - In conjunction with the merger with USF (see
Note 4), Rykoff-Sexton obtained a credit facility consisting of three term
loans, A, B and C, and a $150 million revolving credit facility. The amount
available under the revolver included a letter of credit sublimit of $45
million. The notes bear interest based upon the bank's reference rate or LIBOR
plus 2.5% for Term Loan A, LIBOR plus 3.0% for Term Loan B and LIBOR plus 3.25%
for Term Loan C, at the option of Rykoff-Sexton. There was no outstanding
balance under the Revolver at June 28, 1997. Outstanding borrowings during
fiscal 1997 were LIBOR based. LIBOR ranged from 5.5% to 5.9% during fiscal 1997.
Part of the proceeds were used to pay off the balance outstanding on Rykoff-
Sexton's existing bank credit agreement and other outstanding debt.
As part of the above financing, Rykoff-Sexton agreed to enter into interest rate
protection agreements for a period of three years to insure that the weighted
average interest rate on at least 50 percent of the variable rate debt will not
exceed 9.5%. Three collars and one cap were purchased to fix the rate on $400
million of variable rate debt at an interest rate no higher than 9.5%. The cost
of these instruments is being amortized over the three year term.
(Continued)
F-52
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 7 -CONTINUED
INDUSTRIAL DEVELOPMENT REVENUE BONDS - Rykoff-Sexton entered into a loan
agreement with the La Mirada Industrial Development Authority ("La Mirada IDA")
for $25.9 million under which La Mirada IDA issued Taxable Variable/Fixed Rate
Demand Industrial Development Revenue Bonds, the proceeds of which were used to
finance a portion of the costs of a west coast Distribution Center. The bonds
are secured by a letter of credit issued on behalf of Rykoff-Sexton by a lien
against the facility. The bonds will mature on December 1, 2026, and from time
to time bear and pay interest under Daily, Weekly, Commercial Paper or Long-Term
Interest Rate modes at the election of Rykoff-Sexton. Interest rates on this
facility approximated LIBOR plus 2.1% during fiscal 1997.
SENIOR SUBORDINATED NOTES - Rykoff-Sexton has issued $130 million principal
amount of 8 7/8% Senior Subordinated Notes due November 1, 2003 (the "8 7/8%
Notes"), with interest payable semi-annually commencing May 1, 1994. The 8 7/8%
Notes were sold at a discount for an aggregate price of $128.9 million.
Provisions of the 8 7/8% Notes include, without limitation, restrictions on
liens, indebtedness, asset sales, and dividends and other restricted payments.
The 8 7/8% Notes are redeemable at the option of Rykoff-Sexton in whole or in
part, at 104.44% of their principal amount beginning November 1998, and
thereafter at prices declining annually to 100% on and after November 2001. As a
result of the Merger, each holder of the 8 7/8% Notes may require Rykoff-Sexton
to repurchase all or a portion of such holder's 8 7/8% Notes at a purchase price
equal to 101% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of the repurchase. To the extent that holders
require Rykoff-Sexton to repurchase the 8 7/8% Notes, the Company will finance
the payments with borrowings under the New Credit Facility described below.
Interest expense and other financing costs were $32,941, $32,527 and $76,063 in
fiscal 1995, 1996 and 1997, respectively. Interest expense included
amortization of deferred financing cost of $1,070, $735 and $2,680,
respectively. Other financing costs of $235 and $15,978 in 1996 and 1997,
respectively, represents costs associated with the Company's trade accounts
receivable securitization arrangements.
The Company's aggregate annual principal payments applicable to long-term debt
are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
- ---------------------------------------------------------------------
<S> <C>
1998 $ 22,492
1999 36,474
2000 46,347
2001 56,355
2002 113,816
Thereafter 368,796
- ---------------------------------------------------------------------
$ 644,280
- ---------------------------------------------------------------------
</TABLE>
Based on the borrowing rates currently available to the Company for indebtedness
with similar terms and average maturities, the fair value of the Company's long-
term debt is estimated to be $647,903.
(Continued)
F-53
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 7 - CONTINUED
THE COMPANY'S NEW CREDIT FACILITY
On December 23, 1997, in connection with the consummation of the Merger, the
Company entered into a new bank credit facility which provides for a $550
million five-year revolving credit facility and a $200 million revolver/term
loan facility which is renewable annually (the "New Credit Facility"). Amounts
drawn initially under the New Credit Facility will initially bear interest at a
rate equal to LIBOR plus .45% and LIBOR plus .475%, respectively, using one,
two, three or six month LIBOR loans. Effective with the quarter ended March
1998, amounts borrowed under the New Credit Facility, at the option of the
Company, will bear interest at an applicable margin for LIBOR based borrowings,
the lenders' prime rate or the federal funds rate plus .50%. The applicable
margin for LIBOR based loans will range from .175% to .55%, based on a formula
tied to the Company's leverage from time to time. Annual facility fees will be
based on the same formula and will range between .75% and 2.0% for the revolving
credit facility and .55% and 1.75% for the revolver/term loan facility. The
revolving credit facility includes a $75 million facility for standby and
commercial letters of credit and a $50 million swing-line facility for same day
borrowings.
The New Credit Facility included a number of covenants which restrict the
Company's ability to pay dividends and incur additional indebtedness as well as
require the maintenance of certain financial ratios.
Borrowings under the New Credit Facility have been used to repay the JP
Foodservice revolving line of credit loans and senior notes payable and Rykoff-
Sexton revolving and term loan facilities.
NOTE 8 - TRADE ACCOUNTS RECEIVABLE SECURITIZATION
ARRANGEMENTS
In May 1996, JP Foodservice entered into a three-year agreement pursuant to
which JP Foodservice sells, on an ongoing basis and without recourse, an
undivided percentage ownership interest in a designated pool of trade accounts
receivable to an independent issuer of receivable-backed paper for proceeds of
up to $50 million. In order to maintain the designated balance in the pool of
accounts receivables sold, JP Foodservice is obligated to sell undivided
percentage interests in new receivables as existing receivables are collected.
JP Foodservice has retained substantially the same credit risk as if the
receivables had not been sold. JP Foodservice retains collection and
administrative responsibilities on the participating interest sold as agent for
the purchaser.
Prior to January 1, 1997, the net proceeds from the sale of the undivided
ownership interest in the pool of receivables was accounted for as a secured
borrowing. Effective January 1, 1997, JP Foodservice adopted, as required,
Statement of Financial Accounting Standards No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No.
125). SFAS No. 125 is required to be applied to transfers of assets occurring
after December 31, 1996. Under the new standard, the sale of the undivided
ownership interest has been
(Continued)
F-54
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 8 - CONTINUED
reflected as a reduction of trade accounts receivable, and JP Foodservice no
longer reports the $50 million proceeds as a secured borrowing. In the 1997
consolidated statement of cash flows, the sale has been reflected as a change in
working capital and a decrease in long-term debt. JP Foodservice's residual
interest, in the undivided ownership interest of the designated pool of trade
accounts receivable sold, is included in trade accounts receivable on the
balance sheet. There was no material effect on net income as a result of
adoption of the new standard. Discounts on the sale of the undivided ownership
interest in the pool of receivables, since January 1, 1997, amounted to $1,372
and are included in interest expense and other financing costs on the
consolidated statement of operations.
Rykoff-Sexton is party to a $200 million accounts receivable revolving
securitization facility. Through November 1996, this facility consisted of a
stand-alone $110 million Rykoff-Sexton revolving receivables securitization
facility (entered into in conjunction with the USF merger; see Note 4) and a $90
million USF revolving receivables securitization facility (in existence at the
time of the merger). In November 1996, the two facilities were replaced by the
new $200 million revolving facility. The securitization involves a two step
transfer: the sale of the receivables to a bankruptcy remote wholly owned
subsidiary and the subsequent sale of the receivables to a master trust. The
master trust sells certificates of beneficial ownership to third parties.
All customer accounts receivable of the participating operating divisions are
sold to the trust and Rykoff-Sexton acquires a participation interest in the
trust equal to the amount in excess of the $200 million third party interest.
This amount is included in accounts receivable on the balance sheet. Rykoff-
Sexton is required to maintain a minimum participation interest as calculated
($37.7 million at June 28, 1997) to serve as collateral for this facility.
The transfer of receivables to the master trust qualified as a sale transaction
in accordance with SFAS No. 77, Reporting by Transferors for Transfers of
Receivables with Recourse ("SFAS 77") through December 31, 1996. Effective
January 1, 1997, Rykoff-Sexton adopted SFAS No. 125 for receivables sold into
the facility after December 31, 1996, and sale accounting treatment continues
to be appropriate under this new pronouncement.
(Continued)
F-55
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 9 - LEASES
The Company leases its corporate office facilities and certain distribution
facilities and equipment under operating leases. The Company leases the
majority of its delivery fleet under capital leases. Charges to operations for
all operating leases were $30,088, $35,282 and $50,656 in fiscal 1995, 1996 and
1997, respectively.
Set forth below are the future minimum lease payments under operating leases and
capital leases with noncancelable terms beyond one year.
<TABLE>
<CAPTION>
Operating Capital
Fiscal Year Ended leases leases
- ----------------------------------------------------
<S> <C> <C>
1998 $ 35,471 $ 8,864
1999 30,282 7,905
2000 27,111 7,513
2001 23,665 7,050
2002 19,661 4,408
2003 and thereafter 38,737 41,397
- ----------------------------------------------------
77,137
Less interest portion 37,989
- ----------------------------------------------------
39,148
Less current obligations 5,690
- ----------------------------------------------------
$ 33,458
- ----------------------------------------------------
</TABLE>
NOTE 10 - INCOME TAXES
The components of income tax expense (before discontinued operations and
extraordinary charge) are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------
July 1, June 29, June 28,
1995 1996 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 7,808 $ 4,426 $ 14,224
State and local 2,455 1,589 3,003
- ---------------------------------------------------------------------------------
Total current 10,263 6,015 17,227
- ---------------------------------------------------------------------------------
Deferred tax expense (benefit):
Federal 3,092 (4,896) 10,354
State and local 253 (560) (1,506)
- ---------------------------------------------------------------------------------
Total deferred 3,345 (5,456) 8,848
- ---------------------------------------------------------------------------------
$ 13,608 $ 559 $ 26,075
- ---------------------------------------------------------------------------------
</TABLE>
(Continued)
F-56
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 10 - CONTINUED
Temporary differences and the resulting deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
June 29, June 28,
1996 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loss carryforwards $ 569 $ 25,474
Restructuring reserves and asset impairment 12,177 22,383
Allowance for doubtful accounts 2,264 6,565
Capital leases - 4,331
Accrued expenses 7,286 8,244
Other, net 2,203 10,289
Discontinued operations 1,340 -
Valuation allowance (1,460) (1,398)
- ------------------------------------------------------------------------------
Deferred tax assets 24,379 75,888
- ------------------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment (16,374) (30,218)
Intangible assets (4,020) (1,916)
Other, net (1,004) (1,145)
- ------------------------------------------------------------------------------
Deferred tax liability (21,398) (33,279)
- ------------------------------------------------------------------------------
Net deferred tax asset $ 2,981 $ 42,609
- ------------------------------------------------------------------------------
</TABLE>
Deferred tax benefits of $879 related to the periods from February 1, 1996 to
June 29, 1996, and January 1, 1996 to June 29, 1996, for the Valley and Squeri
acquisitions, respectively, are not included above, but have been included in
retained earnings activity in the consolidated statement of stockholders' equity
as discussed in Note 4.
Included in temporary differences is $2,450 related to an increase in the tax
basis of certain assets resulting from the acquisition of Valley. The
establishment of the deferred tax asset has been recorded as a credit to
additional paid-in-capital.
(Continued)
F-57
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 10 - CONTINUED
A reconciliation of the statutory Federal income tax rate to the income tax rate
on consolidated income, before income taxes, discontinued operations and
extraordinary charge, is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------
July 1, 1995 June 29, 1996 June 28, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed statutory expense $11,169 35.0% $ 242 35.0% $22,519 35.0%
State and local income tax,
net of federal tax benefit 1,760 5.5% (1,140) (164.7%) 973 1.5%
Permanent differences 1,406 4.4% 3,084 445.7% 4,853 7.5%
Record (reversal
of) valuation allowance (113) (0.4%) 916 132.4% (2,800) (4.4%)
Gas tax credit and other (614) (1.9%) (2,543) (367.5%) 530 0.8%
- ---------------------------------------------------------------------------------------------------
$13,608 42.6% $ 559 80.8% $26,075 40.5%
- ---------------------------------------------------------------------------------------------------
</TABLE>
Federal net operating loss carryforwards as of June 28, 1997 approximate $53,270
and expire in various amounts through 2011. Included in such amount are net
operating losses incurred prior to the USF merger. The use of these net
operating losses is subject to certain limitations imposed by the Internal
Revenue Code. The Company does not anticipate these limitations will impact
utilization of the carryforwards prior to their expiration date. All tax years
of the Company, since fiscal 1994, are open for examination. The Internal
Revenue Service and certain state authorities have examinations in progress.
Management believes it is more likely than not that the deferred tax assets as
of June 28, 1997, including net operating loss carryforwards, will be realizable
through the combination of future taxable earnings, the corresponding
realization of net operating loss carryforwards, alternative tax planning
strategies and the reversal of existing taxable temporary differences.
NOTE 11 - STOCKHOLDERS' EQUITY
AUTHORIZED COMMON STOCK - At the annual meeting of stockholders on December 23,
1997, stockholders of the Company approved the increase in the authorized
number of common shares from 75,000,000 to 150,000,000. The increase became
effective on January 9, 1998.
ISSUANCE OF COMMON STOCK - In August and September 1996, the Company sold
3,075,000 shares of common stock in a public offering for $65.9 million, net.
The net proceeds of the offering were used to fund the cash portion of the Arrow
purchase price and to repay indebtedness assumed or discharged by the Company in
connection with its acquisitions of Valley and Arrow, as discussed in Note 4.
RELATED PARTY TRANSACTIONS - In December 1996, Sara Lee Corporation ("Sara Lee")
sold its ownership interest of approximately 27% of the Company's outstanding
common shares in a public offering. As a result, the Company has reclassified
$44,943 of distributions in excess of net book value of continuing stockholder's
interest as a reduction to additional paid-in-capital.
(Continued)
F-58
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 11 - CONTINUED
Employee Stock Purchase Plan - The Company sponsors an employee stock purchase
plan, pursuant to which all full-time employees of the Company and its
subsidiaries who have been employed by the Company for 90 days or more are
eligible to purchase shares of common stock from the Company. An aggregate of
1,500,000 shares of common stock may be issued and purchased under the plan.
Eligible employees may purchase shares of common stock at a price equal to 85%
of the market price per share on each quarterly investment date. Purchases
under this plan totaled 28,080 shares, 33,940 shares and 38,902 shares during
fiscal 1995, 1996 and 1997, respectively.
The Company applies APB No. 25 and related interpretations in accounting for the
employee stock purchase plan. Accordingly, no compensation cost has been
recognized for this plan. Had compensation cost been determined under SFAS No.
123, the Company would have recognized as compensation expense the 15% discount
from the market price or $127 and $157 for fiscal 1996 and 1997, respectively.
Shareholder Rights Plan - In 1996, the Board of Directors of the Company adopted
a shareholder rights plan. Issuance of rights under the rights plan, subject to
specified exceptions, would be triggered by the acquisition (or certain actions
that would result in the acquisition) of 10% or more of the Company's common
stock by any person or group (or 15% or more by any person eligible to report
its ownership of the Company's common stock on Schedule 13G under the Securities
Exchange Act of 1934).
Pursuant to this plan, the Board of Directors of the Company declared a dividend
of one preferred share purchase right (a "Right") for each outstanding share of
common stock of the Company. Each share of common stock has attached one Right
which entitles the registered holder of common stock to purchase from the
Company, upon the occurrence of the specified triggering events, one-hundredth
of a share of a newly authorized issue of junior participating preferred stock
at a price of $95, subject to adjustment. The Company may redeem the Rights at
a price of $.01 per Right prior to a triggering event. The Rights expire on
February 19, 2006.
NOTE 12 - STOCK OPTION PLANS
JP Foodservice Stock Option Plans - JP Foodservice sponsors employee and outside
director stock option plans. The employee stock option plan authorizes the
grants, at the discretion of JP Foodservice's Board of Directors, of incentive
stock options, non-qualified stock options, restricted stock awards, stock
appreciation rights, or any combination thereof, at the fair market value on the
date of grant. Options granted under the employee stock option plan generally
have a life of ten years and vest over a three-year period. The outside director
stock option plan provides for an initial award of 5,000 options and an annual
award of 2,000 options, at fair market value, for a ten-year period with one-
fourth vesting upon grant and the balance vesting equally over three years. The
aggregate number of shares reserved for the issuance of common stock under stock
option plans was 1,472,404 at June 28, 1997. Upon a change of control of JP
Foodservice, as defined, all outstanding and previously unvested options will
become immediately exercisable.
(Continued)
F-59
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 12 - CONTINUED
At the annual meeting of stockholders on December 23, 1997, stockholders of the
Company approved an increase in the number of shares of common stock authorized
for issuance pursuant to the JP Foodservice, Inc. 1994 Stock Incentive Plan
to 2,600,000 shares and an increase in the number of shares of common stock
authorized for issuance pursuant to the JP Foodservice Stock Option Plan for
Outside Directors to 200,000 shares.
A summary of changes in outstanding stock options related to plans sponsored by
JP Foodservice follows:
<TABLE>
<CAPTION>
Weighted average
Incentive exercise price
stock options per share
- ------------------------------------------------------------------------
<S> <C> <C>
Options granted in fiscal 1995 400,877 $ 11.06
Options cancelled (32,245) 11.00
- ------------------------------------------------------------------------
Balance July 1, 1995 368,632 11.06
Options granted 158,868 14.46
Options cancelled (57,142) 11.77
Options exercised (16,881) 11.44
- ------------------------------------------------------------------------
Balance June 29, 1996 453,477 12.13
Options granted 666,510 21.81
Options cancelled (30,083) 13.17
Options exercised (25,826) 18.37
- ------------------------------------------------------------------------
Balance June 28, 1997 1,064,078 $ 17.87
- ------------------------------------------------------------------------
</TABLE>
(Continued)
RYKOFF-SEXTON STOCK OPTIONS PLANS AND OUTSTANDING WARRANTS - Rykoff-Sexton
sponsored several stock option plans for employees and directors. In connection
with the Merger, options and warrants to purchase shares of Rykoff-Sexton were
exchanged for options to purchase the Company's common stock on the same terms
and conditions after adjusting the option amounts and exercise prices for the
Exchange Ratio. Virtually all of the options are immediately exercisable as the
result of the change of control provisions contained in each of the option
agreements.
F-60
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 12 - CONTINUED
A summary of changes in outstanding stock options related to plans sponsored by
Rykoff-Sexton follows. The number of shares and exercise prices for Rykoff-
Sexton options have been adjusted for the Exchange Ratio (see Note 2).
<TABLE>
<CAPTION>
Weighted average
Incentive exercise price
stock options per share
- --------------------------------------------------------------------------------------
<S> <C> <C>
Balance, April 30, 1994 992,959 $ 29.35
Options granted 258,172 20.46
Options cancelled (330,404) 17.03
Options exercised (39,166) 18.39
- --------------------------------------------------------------------------------------
Balance, April 29, 1995 881,561 20.52
Options granted 110,244 23.20
Options cancelled (26,018) 19.30
Options exercised (103,075) 19.50
- --------------------------------------------------------------------------------------
Balance, April 27, 1996 862,712 20.98
Options granted (a) 1,159,086 15.34
Options cancelled (65,614) 21.16
Options exercised (3,722) 4.80
- --------------------------------------------------------------------------------------
Balance, end of Transition Period (Note 2) 1,952,462 17.66
Options granted 15,035 21.08
Options cancelled (43,612) 18.12
Options exercised (224,022) 12.22
- --------------------------------------------------------------------------------------
Balance, June 28, 1997 1,699,863 $ 18.39
- --------------------------------------------------------------------------------------
</TABLE>
(a) Includes the issuance of $834,942 equivalent options associated with the
merger with USF (see Note 4).
The Compensation Committee has the authority to determine the terms and
conditions of any restricted stock awards under the stock option plan. No such
awards were made through June 28, 1997.
(Continued)
F-61
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 12 - CONTINUED
The following table summarizes information about stock options outstanding at
June 28, 1997:
<TABLE>
<CAPTION>
Number Weighted Weighted Number Weighted
outstanding average average exercisable average
Range of June 28, remaining exercise June 28, exercise
exercise prices 1997 contractual life price 1997 price
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.03-$0.03 19,153 5.19 $0.13 19,153 $0.13
$4.48-$4.48 4,717 7.74 $4.48 3,113 $4.48
$11.00-$15.75 918,770 6.18 $12.79 716,578 $12.82
$16.65-$24.98 1,675,729 7.85 $20.39 742,177 $19.79
$25.50-$30.97 145,572 4.66 $29.88 140,956 $29.90
----------------------------------------------------------------------------
2,763,941 7.11 $18.19 1,621,977 $17.33
============================================================================
</TABLE>
The Company applies APB No. 25 and related interpretations when accounting for
stock-based employee compensation grants as permitted under SFAS No. 123.
Accordingly, no compensation cost has been recognized for its stock option
plans. Had compensation cost been determined under the fair value method of
SFAS No. 123, the Company's net income and net income per common share would
have been reduced to the pro forma amounts indicated below (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------
June 29, 1996 June 28, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $ 133 $38,286
Pro forma (145) 36,479
- --------------------------------------------------------------------------------
Basic earnings per share:
As reported $0.00 $ 0.88
Pro forma 0.00 0.83
- --------------------------------------------------------------------------------
Diluted earnings per share:
As reported $0.00 $ 0.87
Pro forma 0.00 0.83
- --------------------------------------------------------------------------------
</TABLE>
The fair value of each option is estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted average assumptions
used for grants in fiscal 1996 and 1997: dividend yield of 0%; expected
volatility of 41.45% and 45.44% for fiscal 1996 and 1997, respectively; risk-
free interest rate of 6.18% and 6.36% for fiscal 1996 and 1997, respectively;
and expected lives of 5 years. The weighted average fair value of options
granted during fiscal 1996 and 1997 was $6.48 and $11.21, respectively.
Pro forma net income reflects only options granted in fiscal 1996 and 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 for fiscal 1996 and 1997 is not reflected in the pro forma
net income amounts presented above, because compensation cost is reflected over
the options' vested period of three years and compensation cost for options
granted prior to July 2, 1995, is not considered.
(Continued)
F-62
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 13 - EMPLOYEE RETIREMENT PLAN
The majority of the Company's union employees are covered by union-administered
pension plans. Since these plans are part of multi-employer pension
arrangements, it is not practicable to determine the amount of accumulated
plan benefits or plan net assets applicable solely to the Company's employees.
With the passage of the Multi-Employer Pension Plan Amendments Act of 1980
(the "Act"), the Company may, under certain circumstances, become subject to
liabilities in excess of contributions made under collective bargaining
agreements. Generally, these liabilities are contingent upon the termination,
withdrawal, or partial withdrawal from these plans. Charges to operations for
all employer defined benefit pension contributions required by union agreements
aggregated $7,634, $8,459 and $8,546 in fiscal 1995, 1996 and 1997,
respectively.
JP Foodservice and certain of its subsidiaries sponsor defined contribution
profit sharing plans for which all full-time non-union employees are generally
eligible. Terms of the plans provide for employee and JP Foodservice
contributions. JP Foodservice's Savings and Retirement 401(k) plan allows JP
Foodservice contributions to be made in common stock of JP Foodservice, and
provides for vesting by employees in JP Foodservice contributions on the fifth
anniversary of participation in the plan. Charges to operations for employer
contributions to the plans were $1,514, $1,775 and $1,811 in fiscal 1995, 1996
and 1997, respectively.
JP Foodservice has no defined benefit pension plan for non-union employees. JP
Foodservice does not grant any post-retirement benefits other than those
described above.
Rykoff-Sexton maintains non-contributory pension plans for its salaried,
commissioned and certain of its hourly employees. Under the plans, Rykoff-
Sexton is required to make annual contributions that are determined by the
plans' consulting actuary, using participant data that is supplied by Rykoff-
Sexton. It is Rykoff-Sexton's policy to fund pension costs currently. Pension
benefits are based on length of service and either a percentage of final average
annual compensation or a dollar amount for each year of service.
Net pension expense for the Rykoff-Sexton defined benefit pension plans for
fiscal 1995, 1996 and 1997 are included in the following components:
<TABLE>
<CAPTION>
Fiscal Years
Ended
------------------------------------------------
April 29, April 27, June 28,
1995 1996 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned $ 3,339 $ 3,489 $ 4,824
during the period
Interest cost on projected 4,037 4,133 5,692
benefit obligation
Actual return on plan assets (4,886) (5,055) (13,812)
Net amortization and deferral (71) (149) 7,520
- ---------------------------------------------------------------------------------
Net pension expense $ 2,419 $ 2,418 $ 4,224
- ---------------------------------------------------------------------------------
</TABLE>
(Continued)
F-63
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 13 - CONTINUED
The following table reconciles the pension plans' funded status to accrued
expense as of June 28, 1997, and April 27, 1996.
<TABLE>
<CAPTION>
April 27, June 28,
1996 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Market value of plan assets in equities and bonds $ 61,886 $ 83,803
- -----------------------------------------------------------------------------------------------------
Actuarial present value of accumulated benefits:
Vested $ 49,307 $ 64,851
Non-vested 3,235 4,071
Additional benefits based on estimated future salary levels 9,809 7,151
- -----------------------------------------------------------------------------------------------------
Projected benefit obligation 62,351 76,073
Plan assets more (less) than projected benefit obligation (465) 7,730
Unrecognized net obligation to be amortized over 10 years 3,497 2,673
Unrecognized net (gain) (9,659) (23,101)
- -----------------------------------------------------------------------------------------------------
Accrued pension liability $ (6,627) $(12,698)
- -----------------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate was 7.75% and 8.10%, the expected long-term
rate of return on plan assets was 9.5% and 9.6% and the rate of increase in
future compensation levels was 4% and 3% as of April 27, 1996 and June 28, 1997,
respectively.
Rykoff-Sexton has supplemental retirement plans for certain executives and
certain other employees, which provide enhanced retirement and disability
benefits for these participants. The expense and liabilities associated with
these plans are reflected in the net pension expense and accrued pension
liability reconciliation shown in the above tables.
Rykoff-Sexton provides postretirement health care benefits to certain former
salaried employees of a wholly owned subsidiary of USF, who retired prior to
November 1, 1990. Such benefits are not provided to subsequent retirees or any
current employees of Rykoff-Sexton. The present value of future benefits to be
paid to eligible retirees amounted to $762 at June 28, 1997, and is included in
other noncurrent liabilities in the accompanying consolidated balance sheets.
Rykoff-Sexton sponsors two defined contribution plans under Section 401(k) of
the Internal Revenue Code for employees meeting certain age and service
requirements. Rykoff-Sexton matches contributions of participating employees in
these plans on the basis of established percentages as specified in each of the
respective plans. Employer contributions were $2.1 million in fiscal 1997.
Contributions in fiscal 1995 and 1996 were not significant.
(Continued)
F-64
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 14 - IMPAIRMENT OF LONG-LIVED ASSETS
In fiscal 1996, Rykoff-Sexton identified all long-lived assets where there had
been, or was expected to be, a change in use which could affect the
recoverability of such long-lived assets. If future undiscounted cash flows
estimated to be derived from such assets indicated an impairment existed,
Rykoff-Sexton recognized an impairment loss for the amount by which the
estimated net book values of the assets exceeded their estimated fair values.
The fair values estimated by Rykoff-Sexton were determined by using the present
value of expected future cash flows and/or market evaluations by qualified real
estate brokers in the related cities. As a result of this process, Rykoff-
Sexton recorded a pre-tax charge of $29.7 million and was principally reflected
as a reduction in the net carrying value of land, buildings and improvements.
NOTE 15 - RESTRUCTURING COSTS
In connection with the USF merger described in Note 4, Rykoff-Sexton recorded a
restructuring charge of $57.6 million ($35.7 million after tax) in the nine week
fiscal period ended June 29, 1996 (see Note 2). The restructuring charge
consisted of severance and employee benefit costs of $10,700, lease related
costs of $20,200 and other closure and integration costs of $26,700.
During the Transition Period and fiscal 1997, Rykoff-Sexton charged costs of
$28.1 million (severance and employee benefit costs of $4,500, lease related
costs of $2,700 and other closure and integration costs of $20,900) against the
restructuring reserve and reversed $4 million into income, as management
determined that such liability was no longer required.
The reserve at June 28, 1997 was $25.5 million, consisting of $2.2 million for
severance benefits, $17.5 million for lease commitments and $5.8 million for
other exit costs. Approximately $9 million will be paid during fiscal 1998 with
the remaining cash outlays estimated to be paid in subsequent years (primarily
related to non-cancelable operating lease commitments).
In fiscal 1995 and fiscal 1996, Rykoff-Sexton aggressively continued its plan to
close and consolidate its under-performing distribution centers and sublease
space in those centers with excess capacity. Additionally, severance and
relocation costs were paid in connection with the consolidation, relocation and
downsizing of distribution centers. These payments totaled $3.3 million in 1996.
In October 1995, Rykoff-Sexton concluded this restructuring plan and credited
the unutilized restructuring reserve of $6.4 million into income which was
accrued during fiscal 1993.
(Continued)
F-65
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 16 - NONRECURRING CHARGES
In connection with the mergers of Valley and Squeri described in Note 4, the
Company recorded a nonrecurring charge of approximately $5.4 million of merger
costs and expenses (consisting primarily of legal and other professional fees)
required to complete the transactions.
On February 19, 1996, the Company terminated discussions with Sara Lee
Corporation regarding the proposed combination of Sara Lee Corporation's
subsidiary, PYA/Monarch, Inc. ("PYA/Monarch"), with the Company. As a result of
the termination of these discussions, the Company wrote off the costs incurred
related to the transaction (consisting primarily of legal and other professional
fees) of approximately $1.5 million.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is involved, from time to time, 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.
RYKOFF-SEXTON CHANGE IN CONTROL AND COMPENSATION AGREEMENTS
Rykoff-Sexton has change in control agreements with various officers which
provide, among other things, that if, within two years after a change in control
(as defined), the Company terminates the employment of the officer, other than
for death, disability, or cause, or with respect to the Chief Executive Officer,
for any or no reason (other than death) or if the officer elects to terminate
his employment for good reason (as defined), or with respect to the Chief
Executive Officer, for any or no reason, the officer will receive 2.99 times the
sum of the officer's base salary plus the amount that would otherwise be earned
under any executive compensation plan. Liabilities with respect to these and
other similar agreements were incurred upon the merger with JP Foodservice.
Such amounts have been charged to earnings in the second quarter of fiscal 1998
(see Note 18).
In addition, during the fourth quarter of fiscal 1997, the employment of two
senior executives was terminated and the present value of severance compensation
and related benefits, aggregating $4 million, was expensed.
(Continued)
F-66
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except where noted)
- --------------------------------------------------------------------------------
NOTE 17 - CONTINUED
Letters of Credit
The Company utilizes standby letters of credit to satisfy medical worker's
compensation self-insurance security deposit requirements. These letters of
credit are irrevocable and have one-year renewable terms. Outstanding standby
letters of credit as of June 28, 1997, and June 29, 1996, were approximately $39
million. Additionally, Rykoff-Sexton had outstanding irrevocable commercial
letters of credit of $1.2 million as of June 28, 1997 to collateralize the
purchase of inventory. The contract amounts of these letters of credit
approximate their fair value.
PURCHASE AGREEMENT
As of June 28, 1997, Rykoff-Sexton had a purchase agreement with a food vendor
requiring a minimum level of purchases over a six-year period through 2001. The
Company is required under these arrangements to pay a penalty of up to $3.8
million if the minimum purchase requirements are not satisfied.
NOTE 18 - SUBSEQUENT EVENTS (UNAUDITED)
As a result of the Merger 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,
merger transaction costs and certain other costs (the "Merger Related Costs") of
approximately $83.4 million (net of related tax benefits) in the quarter ended
December 27, 1997. In addition, the Company expects to recognize an additional
charge of between $15 and $25 million in the third quarter of fiscal 1998
related to the consolidation and realignment of certain operating units and
functions.
In addition, as a result of the debt refinancing discussed in Note 7, the
Company recorded an extraordinary charge in the quarter ended December 27, 1997,
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 in
accordance with the related senior note terms.
- --------------------------------------------------------------------------------
F-67
<PAGE>
U.S. FOODSERVICE SCHEDULE 1
- ---------------- ----------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT Page 1 of 3
(Dollars in thousands)
The following are the condensed balance sheets, statements of operations and
cash flows for U.S. Foodservice with its subsidiaries accounted for on the
equity method:
- -------------------------------------------------------------------------------
June 29, June 28,
1996 1997
- -------------------------------------------------------------------------------
(see Note 2 to consolidated
financial statements)
Condensed Balance Sheets
- ------------------------
Assets
- ------
Cash and cash equivalents $ 134 $ 126
Other current assets 131 125
Intra-company receivable 3,850 82,384
Investments in subsidiaries 312,561 496,511
----------------------------
$ 316,676 $ 579,146
============================
Liabilities and Stockholders' Equity
- ------------------------------------
Stockholders' equity
Common stock $ 304 $ 443
Paid-in capital 283,524 526,979
Retained earnings (accumulated deficit) 77,791 51,724
Distribution in excess of net book value of
continuing stockholders' interest (44,943)
----------------------------
Total stockholders' equity 316,676 579,146
----------------------------
$ 316,676 $ 579,146
============================
S-1
<PAGE>
U.S. FOODSERVICE SCHEDULE 1
- ---------------- ----------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT Page 2 of 3
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
July 1, June 29, June 28,
1995 1996 1997
- --------------------------------------------------------------------------------
(see Note 2 to consolidated financial statements)
Condensed Statements of Operations
- ----------------------------------
Operating expenses $ (6) $ (29)
Interest expense $ (2,926)
Income tax benefit 1,024
------------------------------------
Loss before equity in undistributed
net income of subsidiary (1,902) (6) (29)
Equity in net income of
unconsolidated subsidiary 39,111 139 38,315
------------------------------------
Net loss applicable to common stock $ 37,209 $ 133 $ 38,286
====================================
S-2
<PAGE>
U.S. FOODSERVICE SCHEDULE 1
- ---------------- ----------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT Page 3 of 3
- --------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
July 1, June 29, June 28,
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------
(see Note 2 to consolidated financial statements)
<S> <C> <C> <C>
Condensed Statements of Cash Flows
- ----------------------------------
Cash flows from operating activities:
Net income $ 37,209 $ 133 $ 38,286
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed income of subsidiary (39,111) (139) (38,315)
(Increase) decrease in other current assets 129 (6)
Preferred stock liquidation 182
PIK note interest payable in additional notes 394
Increase (decrease) in other assets 1,981 (1,869) (68,817)
Increase (decrease) in other liabilities 12,506
----------------------------------------------
Net cash provided by (used in) operating activities 13,161 (1,746) (68,852)
----------------------------------------------
Cash flows from investing activities:
Payment of recapitalization costs (1,432)
Investment in unconsolidated subsidiary (64,257)
----------------------------------------------
Net cash used in investing activities (65,689)
----------------------------------------------
Cash flows from financing activities:
Redemption of preferred stock (643)
Long-term debt repayment (27,026)
Net proceeds from public offerings of common stock 79,927 65,975
Proceeds from other issuances of common stock 302 1,846 2,869
----------------------------------------------
Net cash provided by financing activities 52,560 1,846 68,844
----------------------------------------------
Net increase (decrease) in cash and cash equivalents 32 100 (8)
Cash and cash equivalents, at beginning of year 2 34 134
----------------------------------------------
Cash and cash equivalents, at end of year $ 34 $ 134 $ 126
==============================================
</TABLE>
S-3
<PAGE>
U.S. FOODSERVICE SCHEDULE II
- ---------------- -----------
VALUATION AND QUALIFYING ACCOUNTS /(1)/
(Dollars in thousands)
YEAR ENDED JULY 1, 1995
<TABLE>
<CAPTION>
Additions
-----------------------------------
Balance at Charged Amounts
beginning to costs Charged to charged off Balance at
Description of period and expenses other accounts /(2)/ less recoveries end of period
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $6,738 $3,250 $479 $3,611 $6,856
</TABLE>
YEAR ENDED JUNE 29, 1996
<TABLE>
<CAPTION>
Additions
-----------------------------------
Balance at Charged Amounts
beginning to costs Charged to charged off Balance at
Description of period and expenses other accounts /(2)/ less recoveries end of period /(4)/
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $6,856 $5,600 $108 $4,616 $7,948
</TABLE>
YEAR ENDED JUNE 28, 1997
<TABLE>
<CAPTION>
Additions
-----------------------------------
Balance at Charged Amounts
beginning to costs Charged to charged off Balance at
Description of period and expenses other accounts /(3)/ less recoveries end of period /(4)/
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $7,948 $7,854 $10,608 $9,363 $17,047
</TABLE>
(1) See Note 2 to consolidated financial statements for basis of presentation.
(2) Other charges consist of reserves acquired through purchase acquisitions.
(3) Other charges consist of $7,439 in reserves acquired through purchase
acquisitions during the year, net increase in reserves of $8,562 during the
transition period from pooled acquisitions, less amounts written off by
Rykoff-Sexton during the period April 27, 1996 to June 29, 1996 of $5,393.
(4) Includes $100 and $255 with respect to supplier receivables at June 29, 1996
and June 28, 1997, respectively.
S-4
<PAGE>
(c) EXHIBITS (LISTED ACCORDING TO THE NUMBER ASSIGNED IN ITEM 601 OF
REGULATION S-K UNDER THE SECURITIES ACT OF 1933):
Exhibit No. Description
- ----------- -----------
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2 Consent of KPMG Peat Marwick LLP, Independent Accountants.
23.3 Consent of KPMG Peat Marwick LLP, Independent Accountants.
23.4 Consent of Arthur Andersen LLP, Independent Accountants.
<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 hereunto duly authorized.
JP FOODSERVICE, INC.
By: /s/ Lewis Hay, III
-----------------------------
Lewis Hay, III
Executive Vice President and
Chief Financial Officer
Date: March 9, 1998
<PAGE>
EXHIBIT INDEX
-------------
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2 Consent of KPMG Peat Marwick LLP, Independent Accountants.
23.3 Consent of KPMG Peat Marwick LLP, Independent Accountants.
23.4 Consent of Arthur Andersen LLP, Independent Accountants.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-88140, 33-88142, 33-88144, 33-81011 and 333-
43185) of our report dated August 2, 1996, except as to Note 16, which is as of
September 10, 1996 and except as to the pooling of interests with Valley
Industries, Inc. and with Squeri Foods, Inc. which is as of November 14, 1996,
which appears on page F-35 of U.S. Foodservice's Form 8-K/A-1 dated March 9,
1998.
PRICE WATERHOUSE LLP
Linthicum, Maryland
March 6, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
U.S. Foodservice:
We consent to the incorporation by reference in the registration statements on
Form S-8 (Nos. 33-88140, 33-88142, 33-88144, 33-81011 and 333-43185) of U.S.
Foodservice (formerly JP Foodservice, Inc.) of our report, dated March 4, 1998,
with respect to the consolidated balance sheet of U.S. Foodservice and
Subsidiaries as of June 28, 1997 and the related consolidated statements of
operations, stockholders' equity, cash flows and financial schedules for the
year then ended, which report appears in the Form 8-K/A dated March 9, 1998.
KPMG Peat Marwick LLP
Baltimore, Maryland
March 6, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Valley Industries, Inc. and
Z Leasing Company:
We hereby 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/A of U.S. Foodservice (formerly JP Boodservice, Inc.). We also consent
to the incorporation by reference of such report in the Registration Statements
on Form S-8 (Nos. 33-88140, 33-88142, 33-88144, 33-81011 and 333-43185) of U.S.
Foodservice.
KPMG Peat Marwick LLP
Baltimore, Maryland
March 6, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated August 14, 1997, originally included in Rykoff-Sexton, Inc.'s Form
10-K, as amended by Form 10-K/A, for the fiscal year ended June 28, 1997, and
subsequently included in this Form 8-K/A-1 dated March 9, 1998, into U.S.
Foodservice's (formerly JP Foodservice, Inc.) previously filed Registration
Statements on Form 8 (File Nos. 33-88140, 33-88142, 33-88144, 33-81011 and
333-43185).
Arthur Andersen LLP
Philadelphia, PA
March 9, 1998