<PAGE>
As filed with the Securities and Exchange Commission on March 5, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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U.S. FOODSERVICE
(Exact name of registrant as specified in its charter)
Delaware 52-1634568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
----------------
9755 Patuxent Woods Drive
Columbia, Maryland 21046
(410) 312-7100
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
----------------
David M. Abramson, Esq.
Executive Vice President and General Counsel
U.S. Foodservice
9755 Patuxent Woods Drive
Columbia, Maryland 21046
(410) 312-7100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------
Copies to:
Richard J. Parrino, Esq. Eric S. Haueter, Esq.
Hogan & Hartson L.L.P. Brown & Wood llp
555 Thirteenth Street, N.W. 555 California Street
Washington, D.C. 20004 San Francisco, CA 94104
(202) 637-5600 (415) 772-1200
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2)(3) Fee(3)
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<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share........ 10,010,698 shares $43.94 $439,870,070 $122,284
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</TABLE>
(1) Includes up to 1,305,743 shares that may be purchased to cover over-
allotments.
(2) Estimated pursuant to Rule 457(c) under the Securities Act solely for the
purpose of calculating the registration fee.
(3) In accordance with Rule 457(c), the proposed maximum aggregate offering
price and registration fee are based upon the average of the high and low
closing sale prices for the registrant's common stock on the New York
Stock Exchange on March 4, 1999.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with a United States and Canadian offering (the "U.S.
Prospectus") and one to be used in a concurrent international offering (the
"International Prospectus"). The two prospectuses will be identical in all
respects except for the front and back cover pages and the section entitled
"Underwriting." Pages to be included in the International Prospectus and not
the U.S. Prospectus are marked "Alternate Page."
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated March 5, 1999
PROSPECTUS
8,704,955 Shares
U.S. FOODSERVICE
Common Stock
-----------
Stockholders of U.S. Foodservice named in this prospectus are selling
8,704,955 shares of common stock. The U.S. underwriters are offering 6,963,964
shares in the United States and Canada and the international managers are
offering 1,740,991 shares outside the United States and Canada.
Our common stock trades on the New York Stock Exchange under the symbol
"UFS." On March 4, 1999, the last reported sale price of our common stock on
the New York Stock Exchange was $43 11/16 per share.
Investing in our common stock involves risks which are described in the
"Risk Factors" section beginning on page 9 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price...................................... $ $
Underwriting Discount...................................... $ $
Proceeds to Selling Stockholders........................... $ $
</TABLE>
The U.S. underwriters may also purchase up to an additional 1,044,594
shares from U.S. Foodservice at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. The international managers may similarly purchase up to an
additional 261,149 shares from U.S. Foodservice.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
-----------
Merrill Lynch & Co.
Goldman, Sachs & Co.
Salomon Smith Barney
J.C. Bradford & Co. First Union Capital Markets Corp.
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The date of this prospectus is , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................... 3
Risk Factors............................................................... 9
Cautionary Note Regarding Forward-Looking Statements....................... 13
Use of Proceeds............................................................ 14
Price Range of Common Stock and Dividend Policy............................ 15
Capitalization............................................................. 16
Selected Consolidated Financial Data....................................... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 19
Business................................................................... 33
Management................................................................. 42
Principal and Selling Stockholders......................................... 45
Description of Capital Stock............................................... 48
Shares Eligible for Future Sale............................................ 54
Certain U.S. Tax Consequences to Non-U.S. Holders.......................... 55
Underwriting............................................................... 58
Where You Can Find More Information........................................ 62
Legal Matters.............................................................. 63
Experts.................................................................... 63
Index to Consolidated Financial Statements................................. F-1
</TABLE>
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You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not, and the underwriters are not, making an offer to sell
these securities in any jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus is accurate
only as of the date on the front cover of this prospectus. Our business,
financial condition, results of operations and prospects may have changed since
that date.
Neither U.S. Foodservice nor any of the U.S. underwriters or
international managers has taken or will take action in any jurisdiction to
permit a public offering of the common stock or the possession or distribution
of this prospectus other than in the United States.
2
<PAGE>
SUMMARY
You should read the following summary in conjunction with the more
detailed information and consolidated financial statements and related notes
contained or incorporated by reference in this prospectus, all of which qualify
this summary. Unless we indicate otherwise or the context otherwise requires,
(1) references in this prospectus to "U.S. Foodservice," "we" and "us" are to
U.S. Foodservice and its consolidated subsidiaries from and after February 27,
1998 and to JP Foodservice, Inc. and its consolidated subsidiaries before
February 27, 1998 and (2) all information in this prospectus assumes that the
Underwriters have not exercised their options to purchase additional shares to
cover over-allotments. All references to "$" or "dollars" are to United States
dollars. U.S. Foodservice's fiscal year is a 52-week or 53-week period ending
on the Saturday closest to June 30. The information in this prospectus
concerning the foodservice distribution industry and other foodservice
distribution companies is derived principally from publicly available
information and from industry sources. Although we believe that this publicly
available information and the information provided by these industry sources is
reliable, we have not independently verified the accuracy of any of this
information. The information in this prospectus concerning the foodservice
distribution industry is for the United States.
U.S. Foodservice
U.S. Foodservice, formerly JP Foodservice, Inc., is the nation's second
largest broadline foodservice distributor based on fiscal year 1998 net sales
of $5.5 billion. We sell food and related products to restaurants and other
institutional foodservice establishments through our national distribution
network, which provides geographic access to more than 85% of the U.S.
population. We market and distribute more than 40,000 national and proprietary
brand items to over 130,000 foodservice customers, including restaurants,
hotels, healthcare facilities, cafeterias and schools. This broad product line
allows us to meet substantially all of the food and related supply needs of our
diverse customer base of independent "street" and multi-unit "chain"
businesses, which include Ruby Tuesday, Subway, Buffet's, Inc., Perkins Family
Restaurants and Pizzeria Uno.
We have experienced rapid growth of net sales and operating earnings
through internal expansion and acquisitions. From our 1994 fiscal year through
our 1998 fiscal year, we more than doubled our net sales from $2.6 billion to
$5.5 billion, for a compound annual growth rate of approximately 20%. During
this period, we increased our income from continuing operations before
extraordinary charge, without giving effect to acquisition related costs, from
$0.24 to $1.37 per share, for a compound annual growth rate of approximately
55%. We were able to increase our income from continuing operations over this
period at a more rapid rate than our net sales through:
. cost savings and improved economies of scale from our acquisitions;
. operating efficiencies and improved profit margins from our large-
scale operations and our increasing share of many local markets; and
. a reduction of our interest expense as a percentage of our net sales.
We believe that we have significant opportunities to continue our net
sales growth, both internally and through acquisitions. We expect that the
principal factors contributing to our net sales growth will be:
. continued industry growth reflecting favorable demographic trends;
. gains in market share by foodservice distributors with large-scale
operations;
. use of our operating efficiencies and other competitive advantages to
increase our local and national market share; and
. continued growth through acquisitions.
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We have benefited from favorable demographic trends and continued
industry growth. In recent years, consumers have spent an increasing percentage
of their food dollars on meals eaten away from home. This trend reflects such
demographic factors as the aging of the "baby-boomer" segment of the
population, the growth of single parent and dual-income households and
consumers' increased desire for speed and convenience. These demographic
factors contributed to growth in total net sales for the foodservice
distribution industry from approximately $81 billion in 1985 to approximately
$141 billion in 1997, for a compound annual growth rate of approximately 5%. We
expect that these demographic trends and industry growth will continue into the
foreseeable future.
The growth rate for the largest broadline foodservice distributors
substantially exceeded the growth rate for the industry as a whole during the
period from 1985 to 1997. In 1985, the top ten broadline foodservice
distributors, ranked on the basis of their 1985 net sales, had aggregate net
sales of approximately $8 billion, which represented approximately 10% of the
total 1985 net sales generated by the foodservice distribution industry. By
1997, the top ten broadline foodservice distributors, ranked on the basis of
their 1997 net sales, had aggregate net sales of approximately $33 billion,
which represented approximately 24% of total industry net sales in 1997. The
increase in aggregate net sales of the ten largest broadline distributors from
1985 to 1997 represents a compound annual growth rate of approximately 13%, or
nearly triple the compound annual growth rate for the entire foodservice
distribution industry for that period. We believe that this growth resulted
from factors that include the advantages of large-scale purchasing and
distribution, warehousing efficiencies, industry consolidation, the desire of
foodservice customers to use fewer vendors and heightened food safety concerns.
We believe that we have competitive advantages over most of the companies
in the foodservice distribution industry. There were over 3,000 foodservice
distribution companies in 1998, most of which were small, privately-owned
enterprises supplying a limited number of products within local or regional
markets. Unlike these companies, U.S. Foodservice is a broadline distributor
which offers a comprehensive range of food and related products from a single
source of supply and provides foodservice establishments with the cost savings
associated with large, full-service deliveries. Further, we are one of the few
broadline distributors with a nationwide presence able to meet the needs of
most national chain restaurants, which have captured a larger share of consumer
restaurant spending in recent years. The experience of our management team, our
market position and our capital resources are substantial advantages for
capitalizing on these opportunities. These competitive advantages have
contributed to our strong record of internal growth. From our 1994 fiscal year
through our 1997 fiscal year, we achieved compound annual internal net sales
growth of approximately 9%, calculated without giving effect to the impact of
acquisitions and the restatement of our financial statements for acquisitions
accounted for as poolings of interests.
We supplement our internal growth with an active program of strategic
acquisitions to take advantage of the ongoing consolidation in our industry.
Since we became a public company in 1994, we have acquired 11 foodservice
businesses with combined net sales of over $900 million, as well as Rykoff-
Sexton, Inc., which was the nation's third largest broadline foodservice
distributor based on fiscal 1997 net sales of $3.5 billion. Despite our
substantial growth, our 1998 fiscal year net sales of $5.5 billion represented
less than 4% of the approximately $141 billion of 1998 net sales generated by
the foodservice distribution industry as a whole. Because the foodservice
distribution industry remains highly fragmented and there are factors promoting
consolidation in the industry, we believe we have a significant opportunity to
continue to add to our net sales through acquisitions. We seek to increase
penetration of our current markets through acquisitions of small, privately
owned distributors that we fold into our existing operations and to expand into
new markets through acquisitions of larger-sized distributors. We typically
have been able to improve the profitability of acquired businesses by:
. eliminating redundant overhead expenses;
. reducing distribution and warehouse expenses by eliminating
overlapping delivery routes and duplicate warehouse facilities;
4
<PAGE>
. lowering the cost of financing working capital; and
. improving gross margins by using our purchasing power to reduce the
cost of goods sold.
Growth Strategies
One of our principal strategic objectives is to outpace the growth of the
foodservice industry overall. We employ the following growth strategies to
achieve this objective:
Targeting profitable customer segments with value-added services. We
focus our growth initiatives on segments of our business, such as family
dining, healthcare, business and industry, where we can provide an array of
value-added services. These services include management support and assistance,
service programs for specialized foodservice markets and targeted publications.
In addition, we direct our proprietary brand product development to satisfy an
increasing demand for ethnic foodservice specialties, such as Italian-style and
Mexican-style products.
Improving operating efficiencies by further penetration of existing
accounts. We believe that our profitability depends largely on our local market
share and local economies. Our market share and large-scale operations allow us
to exercise price leadership in a market, spread distribution costs over a
larger customer base and operate warehouses more efficiently. We seek to
increase local market share by gaining a larger share of existing customers'
purchases and by establishing new accounts within our service areas. The
increased net sales we achieve in a local market promote operational
efficiencies in the distribution center serving that market.
Increasing sales of our proprietary brand items. Our proprietary brand
items enable us to offer customers alternatives to comparable national brands
across a wide range of prices. Our strategy is to increase sales of our
proprietary brand items through advertising, promotional activities and
training of our sales force. Proprietary brands help to promote customer
loyalty and generally enhance our profitability and the profitability of our
customers.
Targeting existing and new chain accounts. We support the growth of our
existing chain accounts, many of which are experiencing more rapid sales growth
than other types of foodservice businesses. Because of the proven concepts of
these chains and the operating economies accruing to their large-scale
operations, we believe that the future growth prospects for these chains are
significant. We also target new chain customers that can benefit from our
existing product line and service capabilities, both of which we significantly
augmented by our acquisition of Rykoff-Sexton.
Increasing sales to street accounts. We pursue a long-term strategy of
increasing street account sales as a percentage of net sales by attempting to
expand sales to street customers at a faster rate than sales to chain
customers. We continue to invest in our street account sales force by hiring
and training new salespeople and developing the skills of existing employees.
Pursuing selected acquisition opportunities. A significant portion of our
sales growth in recent years has resulted from acquisitions. We believe we can
enhance the results of operations of acquired businesses by eliminating
redundant overhead expenses, lowering costs of goods sold by increasing
purchasing power, adding our proprietary brands to the product lines of the
acquired businesses, and integrating those businesses into our marketing
programs, centralized purchasing operations and management information systems.
We enhance our ability to compete for acquisition opportunities with other
foodservice businesses through our market leadership, national operations and
financial resources, which include access to the public capital markets.
Continued integration of Rykoff-Sexton. Our December 1997 acquisition of
Rykoff-Sexton has provided us with enhanced profit opportunities. We believe
our operating cost reductions and interest savings
5
<PAGE>
from the integration of Rykoff-Sexton, on a pre-tax basis, exceeded $20 million
in our 1998 fiscal year and $17 million in the first two quarters of our 1999
fiscal year. Based on these results and the status of our integration plan, we
anticipate that our annualized operating cost reductions and interest savings
in our 1999 fiscal year will total approximately $35 million on a pre-tax
basis. Our acquisition of Rykoff-Sexton also has provided us with substantial
revenue opportunities. These opportunities include using nationwide
distribution capabilities to expand regional relationships with chain accounts,
increasing sales to Rykoff-Sexton's specialty item customers by marketing
broadline foodservice products, and bringing Rykoff-Sexton's specialty,
imported, and equipment and supply products to JP Foodservice customers.
Market Leadership
We believe we have a leading position in substantially all of the service
areas that we supply from our 38 full-service distribution centers nationwide.
We attribute our leadership position to the following competitive strengths:
Experienced Management Team Focused on Revenue and Profitability
Growth. Our managers are primarily executives who served as officers of JP
Foodservice before its acquisition of Rykoff-Sexton. From our 1994 fiscal year
through our 1997 fiscal year, we achieved compound annual net sales growth of
approximately 18% and compound annual earnings per share growth of
approximately 29%, excluding extraordinary and nonrecurring items and before
restatement of our historical results for acquisitions accounted for as
poolings of interests and before giving effect to the Rykoff-Sexton
acquisition. Over the same period, we augmented our internal net sales growth
by the successful integration of six acquired businesses and increased our
operating income margin from 2.9% in our 1994 fiscal year to 3.6% in our 1997
fiscal year. Jim Miller, our President and Chief Executive Officer, Mark
Kaiser, our Executive Vice President of Sales, Marketing and Procurement, and
Lew Hay, our Chief Financial Officer, average over 20 years of experience in
the foodservice industry.
Nationwide Distribution Capabilities. The scope of our distribution
network allows us to expand chain account relationships on a national basis and
to offer our growing chain customers a consistent array of products and
services across the United States. In addition, our large-sale operations
provide us with a significant market presence and operating efficiencies. We
use these advantages to provide our street customers with a complete range of
products and services at competitive prices.
Low Cost Structure. Our operating structure enables us to realize
economies of scale by centralizing functions such as purchasing, management
information systems, finance, accounting, advertising and promotion, while
decentralizing sales and distribution operations and profit and loss
responsibility. This structure enhances our operating efficiencies and cost
savings while still allowing branch-level management to respond to customer
needs in each market. We also benefit from the scale and efficiency of our
modern distribution centers, which enable us to realize cost savings in branch
overhead, warehouse operations and transportation services.
Large and Diverse Customer Base. We market and distribute to over 130,000
foodservice customers nationwide. The size of our customer base reduces our
dependence on any individual customer or chain account to sustain growth or
profitability. In our 1998 fiscal year, sales to independent street customers
represented approximately 61% of our net sales. During the same period, sales
to our ten largest customers represented approximately 17% of our net sales,
while no single customer accounted for more than 3% of our net sales.
Extensive High Quality Product Line. Our product line of more than 40,000
national and proprietary brand items is one of the largest in the industry.
Compared to our principal competitors, we devote a larger portion of our
product line to national brand products, which accounted for approximately 73%
of our net sales in our 1998 fiscal year. We also offer customers a full line
of quality-assured, value-priced private brand products and high quality
signature brand products. Unlike some of our competitors, we use centralized
purchasing, which promotes a consistently high level of quality for our
proprietary brand products throughout our distribution network.
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<PAGE>
Superior Customer Service. Our focus on customer service ensures accurate
fulfillment of customer orders and on-time product delivery. We maintain a high
level of responsiveness to customer needs by employing a decentralized
operating strategy at the branch level and by providing an array of value-added
services designed to assist our customers in managing their foodservice
operations more efficiently and profitably. Our value-added services include
advice and assistance on product selection, menu planning and recipes,
nutritional information, inventory analysis, product costing and marketing
strategies, as well as on-site training of customer personnel.
Recent Acquisitions
In our last full fiscal quarter, we completed the following transactions
as part of our acquisition growth strategy:
On November 16, 1998, U.S. Foodservice acquired Joseph Webb Foods, Inc.,
a broadline foodservice distributor serving the San Diego and other Southern
California markets. Joseph Webb Foods had net sales of $180 million in the
twelve months ended December 26, 1998.
On October 23, 1998, U.S. Foodservice acquired J.H. Haar & Sons, L.L.C.,
a New Jersey-based broadline foodservice distributor serving the metropolitan
New York City market. This distributor had net sales of $57 million in its 1998
fiscal year.
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Our principal executive offices are located at 9755 Patuxent Woods Drive,
Columbia, Maryland 21046, and our telephone number at that address is (410)
312-7100.
The Offerings
<TABLE>
<C> <S>
Common stock offered by the selling stockholders:
U.S. offering...................................................... 6,963,964 shares
International offering............................................. 1,740,991 shares
Total.......................................................... 8,704,955 shares
Shares outstanding before and after the U.S. and international offerings.. 48,261,739 shares(1)
Use of Proceeds........................................................... U.S. Foodservice will
not receive any proceeds
from the sale of shares
of common stock by the
selling stockholders.
NYSE Symbol............................................................... "UFS"
</TABLE>
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(1) Excludes, as of January 31, 1999, 2,442,485 shares subject to outstanding
options at a weighted average exercise price of $29.23 per share and 71,460
shares reserved for issuance upon exercise of an outstanding warrant at an
exercise price of $13.05 per share. This number assumes that the over-
allotment options are not exercised. If the over-allotment options are
exercised in full, we will issue and sell 1,305,743 shares in addition to
the shares to be sold by the selling stockholders. See "Use of Proceeds."
Risk Factors
Prospective purchasers of the shares should consider carefully all of the
information contained and incorporated by reference in this prospectus,
including the information set forth under "Risk Factors," before making an
investment in the shares.
7
<PAGE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
Fiscal Years Ended(1) Six Months Ended(1)
-------------------------------------------------------- ----------------------------
July 2, July 1, June 29, June 28, June 27, December 27, December 26,
1994 1995 1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ---------- ------------ ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Net sales............... $2,623,052 $2,857,334 $3,238,781 $5,169,406 $5,506,949 $2,712,086 $3,011,459
Gross profit............ 551,965 594,515 652,685 1,003,074 1,041,668 512,743 552,059
Operating expenses...... 497,136 526,871 590,446 845,901 876,170 449,166 447,694
Amortization of
intangible assets...... 2,421 2,792 4,244 15,349 15,354 7,419 8,077
Restructuring costs
(reversal)............. -- -- (6,441) (4,000) 53,715 38,037 --
Charge for impairment of
long-lived assets...... -- -- 29,700 -- 35,530 32,135 --
Income from operations.. 52,408 64,852 34,736 145,824 60,899 (14,014) 96,288
Interest expense and
other financing costs,
net.................... 44,201 32,941 32,527 76,063 73,894 39,246 32,672
Nonrecurring charges.... -- -- 1,517 5,400 17,822 17,822 --
Income (loss) from
continuing operations
before extraordinary
charge................. 3,823 18,303 133 38,286 (37,292)(2) (60,831)(2) 37,520
Diluted Per Share Data:
Income (loss) from
continuing operations
before extraordinary
charge(3).............. $ 0.24 $ 0.74 $ 0.00 $ 0.87 $ (0.83) $ (1.35) $ 0.79
Weighted average common
shares................. 15,949 24,567 30,515 44,063 45,320 44,811 47,699
Balance Sheet Data (at
end of period):
Working capital......... $ 248,679 $ 270,942 $ 208,130 $ 234,803 $ 287,816 $ 477,701
Total assets............ 856,744 939,280 1,052,211 1,732,183 1,817,791 2,021,191
Long-term debt,
excluding current
maturities............. 430,379 306,702 303,728 655,246 680,625 765,429
Stockholders' equity.... 145,079 315,060 316,676 579,146 584,720 674,102
</TABLE>
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(1) U.S. Foodservice completed acquisitions of Valley Industries, Inc. in
August 1996, Squeri Food Service, Inc. in September 1996 and Rykoff-Sexton
in December 1997, all of which were accounted for as poolings of interests.
Results for all periods presented prior to these acquisitions have been
restated to include the results of the acquired companies. See "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Introduction," notes 3 and 4
to the audited consolidated financial statements appearing elsewhere in
this prospectus and note 2 to the unaudited consolidated financial
statements appearing elsewhere in this prospectus.
(2) In connection with the acquisition of Rykoff-Sexton, U.S. Foodservice
incurred acquisition related costs, including restructuring costs, charges
for impairment of long-lived assets, transaction costs and other operating
charges resulting from the integration of the two businesses, totaling
approximately $138.0 million for the fiscal year ended June 27, 1998 and
$112.6 million for the six months ended December 27, 1997, which
significantly affected U.S. Foodservice's results for these periods.
Excluding the impact of these acquisition related costs, U.S. Foodservice's
net income before extraordinary charge would have been $62.6 million for
the fiscal year ended June 27, 1998 and $22.6 million for the six months
ended December 27, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Introduction."
(3) Acquisition related costs, restructuring costs and reversals, charges for
impairment of long-lived assets, and nonrecurring charges have affected
diluted earnings per share from continuing operations before extraordinary
charge as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended Six Months Ended
------------------------------------------ -------------------------
July 2, July 1, June 29, June 28, June 27, December 27, December 26,
1994 1995 1996 1997 1998 1997 1998
------- ------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Diluted earnings per
share from continuing
operations before
extraordinary charge.. $0.24 $0.74 $0.00 $0.87 $(0.83) $(1.35) $0.79
Acquisition related
costs, restructuring
costs and reversals,
charge for impairment
of long-lived assets,
and nonrecurring
charges............... -- -- 0.48 0.05 2.20 1.85 --
----- ----- ----- ----- ------ ------ -----
$0.24 $0.74 $0.48 $0.92 $1.37 $0.50 $0.79
===== ===== ===== ===== ====== ====== =====
</TABLE>
8
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RISK FACTORS
In addition to the other information contained and incorporated by
reference in this prospectus, you should carefully consider the following risk
factors relating to U.S. Foodservice and our common stock before purchasing the
shares offered by this prospectus.
Our business has low profit margins and is sensitive to national and
regional economic conditions
Foodservice distribution companies like U.S. Foodservice purchase, store,
market and transport food and related products to establishments that prepare
and serve meals to be eaten away from home. Our industry is characterized by
relatively high inventory turnover with relatively low profit margins. We sell
a significant portion of our products at prices that are based on the cost of
the products plus a percentage markup. As a result, our profit levels may be
reduced during periods of food price deflation, even though our gross profit
percentage may remain relatively constant. Such a reduction could have a
material adverse effect on our business, operating results and financial
condition.
The foodservice distribution industry is sensitive to national and
regional economic conditions. Economic downturns could have an adverse impact
on the demand for our products. These downturns may reduce consumer spending at
restaurants and other foodservice institutions we supply.
Our distribution and administrative expenses are relatively fixed in the
short term. As a result, unexpected decreases in our net sales, such as those
due to severe weather conditions, can have a significant short-term adverse
impact on our operating income. Our operating results also may be adversely
affected by difficulties we may encounter in collecting our accounts receivable
and in maintaining our profit margins in times of unexpected increases in fuel
costs. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
We are subject to risks associated with our acquisitions of other foodservice
businesses
Since we became a public company in November 1994, we have acquired 12
foodservice businesses as part of our growth strategy of supplementing internal
expansion with acquisitions. Our acquisitions may not improve our financial
performance in the short or long term as we expect. Acquisitions will enhance
our earnings only if we can successfully integrate those businesses into our
marketing programs, centralized purchasing operations, distribution network and
information systems. Our ability to integrate acquired businesses may be
adversely affected by factors that include customer resistance to our product
brands and distribution system, our failure to retain management and sales
personnel, difficulties in converting different information systems to our
proprietary systems, the size of the acquired business and the allocation of
limited management resources among various integration efforts. In addition, we
may not eliminate as many redundant costs as we anticipated in selecting our
acquisition candidates. One or more of our acquisition candidates also may have
liabilities or adverse operating issues that we failed to discover prior to the
acquisition. Difficulties in integrating acquired businesses, as well as
liabilities or adverse operating issues relating to acquired businesses, could
have a material adverse effect on our business, operating results and financial
condition.
Even if acquired companies eventually contribute to an increase in our
profitability, the acquisitions may adversely affect our earnings in the short
term. Our earnings may decrease as a result of transaction-related expenses we
record for the quarter in which we complete an acquisition. Our earnings may be
further reduced by the higher operating and administrative expenses we
typically incur in the quarters immediately following an acquisition as we seek
to integrate the acquired business into our own operations. The amortization of
goodwill and depreciation resulting from acquisitions also may contribute to
reduced earnings.
A significant portion of the growth in our revenues in recent years has
resulted from acquisitions. We may not be able to increase our revenues or
earnings through new acquisitions at the same rates we have
9
<PAGE>
achieved through our past acquisitions. For example, we were able to triple our
revenues directly as a result of our acquisition of Rykoff-Sexton, Inc. in our
1998 fiscal year. As the foodservice distribution industry continues to
consolidate, we may find it more difficult to identify suitable acquisition
candidates than we did in the past. We may also find that the acquisition terms
are not as favorable as those in our prior acquisitions.
The way in which we pay for acquired businesses also involves risks. Many
of our past acquisitions have been structured as stock-for-stock transactions.
Continuing volatility in the U.S. securities markets and fluctuations in our
stock price may increase the risk that our stock-for-stock acquisitions could
dilute our earnings per share. We also pay cash for some businesses. In the
past, we have obtained funds for some of our cash acquisitions through
additional bank borrowings or by issuing common stock. If we increase our bank
borrowings or issue debt securities to finance future acquisitions, we will
increase our level of indebtedness and interest expense, while if we issue
additional common stock, we may dilute the ownership of our stockholders. In
addition, we may not be able to obtain the funds we need on acceptable terms.
These risks in the way we finance acquisitions could have a material adverse
effect on our business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our stock price has fluctuated over a wide range, and could fluctuate
significantly in the future, as a result of our operating performance
and conditions in our industry
From time to time, there may be significant volatility in the market
price for our common stock. Since our common stock began to trade publicly in
November 1994, its market price has fluctuated over a wide range. During our
last four complete fiscal quarters, the high last reported sale price of our
common stock on the New York Stock Exchange was $49.13 and the low last
reported sale price of our common stock was $31.50. A number of factors
involving U.S. Foodservice and the foodservice distribution industry could
contribute to future fluctuations in our stock price. These factors include the
following:
. quarterly operating results of U.S. Foodservice or other distributors of
food and related goods, which could affect the attractiveness of our
stock compared to the securities of foodservice companies with better
results or companies in other businesses;
. changes in general conditions in the economy or the foodservice
distribution industry, which could affect the demand for our products
and our operating results;
. our failure to complete and successfully integrate acquisitions of other
foodservice companies, which could adversely affect our operating
results and our ability to grow; and
. severe weather conditions, which could result in unexpected decreases in
our net sales.
See "Price Range of Common Stock and Dividend Policy."
The failure to attain Year 2000 compliance may have an adverse impact on
our business
We and other companies we do business with rely on numerous computer
programs in managing day-to-day operations. We have undertaken a program to
address the Year 2000 issue, which is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000
is approached and reached. Our failure to correct a Year 2000 problem could
result in a material interruption in, or a material failure of, our normal
business activities or operations. Our Year 2000 program is focused on both our
internal computer systems and third-party computer systems, including the
systems of some of our important suppliers and customers. We currently expect
to continue to incur internal staff costs and other expenses of up to $5
million to complete our Year 2000 compliance work with respect to our major
information systems. It is possible that we will have to increase this estimate
as we complete our assessment of the impact of the Year 2000 issue on our
business. In addition, we may have to replace or upgrade systems or equipment
at a substantial cost. We cannot be sure that
10
<PAGE>
we will be able to resolve the Year 2000 issue in 1999. If we fail to resolve
the Year 2000 issue, or if our important suppliers and customers fail to
resolve their Year 2000 issues as they relate to U.S. Foodservice, the Year
2000 problem could have a material adverse effect on our business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Information Systems and the
Impact of the Year 2000 Issue."
A labor dispute or work stoppage involving our employees, many of whom
are union members, could adversely affect our business
As of December 26, 1998, the end of the second quarter in our 1999 fiscal
year, approximately 3,000 of our employees were members of approximately 40
different local unions associated with the International Brotherhood of
Teamsters and other labor organizations. These employees represented
approximately 26% of our full-time employees and approximately 27% of the
employees employed in our warehouse and distribution operations. In the balance
of our 1999 fiscal year, collective bargaining contracts covering approximately
750 of our employees will expire by May 1, 1999. A labor dispute or work
stoppage resulting from our failure to conclude new collective bargaining
agreements or from other factors could have a material adverse effect on our
business, operating results and financial condition.
The foodservice distribution industry is highly competitive
Our industry is extremely fragmented, with over 3,000 companies in
operation in 1998. The number and diverse nature of these companies result in
highly competitive conditions. Our competition includes not only other
broadline distributors, which provide a comprehensive range of food and related
products from a single source of supply, but also specialty distributors and
system distributors. Specialty distributors generally supply one or two product
categories, while system distributors typically supply a narrow range of
products to a limited number of multi-unit businesses operating in a broad
geographical area. We compete in each of our markets with at least one other
large national distribution company, generally SYSCO Corp. or Alliant
Foodservice, Inc., as well as with numerous regional and local distributors. In
seeking acquisitions of other foodservice businesses, we compete against both
other foodservice distribution companies and financial investors. Our failure
to compete successfully could have a material adverse effect on our business,
operating results and financial condition. See "Business--Foodservice
Distribution Industry" and "Business--Competition."
We currently have significant indebtedness and may incur additional
indebtedness in the future
At December 26, 1998, our ratio of total debt to total capitalization was
approximately 53.4%. Our total capitalization is the sum of our total debt and
capital lease obligations plus our stockholders' equity. Our ratio of total
debt to total capitalization as of December 26, 1998 would have been
approximately 60.3% if we included as debt $250 million of accounts receivable
securitization arrangements. In accordance with generally accepted accounting
principles, we do not account for these arrangements as debt on our balance
sheet, but many lenders consider these arrangements in their credit decisions.
We may incur additional indebtedness in the future, subject to limitations
contained in the instruments governing our indebtedness, to finance capital
expenditures or for other general corporate purposes, including acquisitions.
We cannot assure you that our business will continue to generate cash flow at
or above the levels required to service our indebtedness and meet our other
cash needs. If our business fails to generate sufficient operating cash flow in
the future, or if we fail to obtain cash from other sources such as asset sales
or additional financings, we will be restricted in our ability to continue to
make acquisitions for cash and to invest in expansion or replacement of our
distribution facilities, information systems and equipment. Such a failure
could have a material adverse effect on our business, operating results and
financial condition. In addition, because a majority of our indebtedness bears
interest at floating rates, a material increase in interest rates could
adversely affect our ability to meet our liquidity requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
11
<PAGE>
Our success largely depends on our ability to retain our senior
management
We largely depend for our success on the efforts of members of our senior
management. Our key senior managers have many years of experience in broadline
foodservice distribution with U.S. Foodservice and other companies, as well as
in the acquisition and integration of foodservice businesses. They have
developed and coordinated implementation of U.S. Foodservice's business
strategy since our formation in 1989. If we were to lose the services of one or
more of our key senior managers, our business, operating results and financial
condition could be materially adversely affected. See "Management."
Product liability claims could have an adverse effect on our business
Like any other seller of food and processor of meats, we face an inherent
risk of exposure to product liability claims if the products we sell cause
injury or illness. We have obtained primary and excess umbrella liability
insurance with respect to product liability claims. We cannot assure you,
however, that this insurance will continue to be available at a reasonable
cost, or, if available, will be adequate to cover liabilities. We generally
seek contractual indemnification from parties supplying our products, but any
such indemnification is limited, as a practical matter, to the creditworthiness
of the indemnifying party. If we do not have adequate insurance or contractual
indemnification available, product liabilities relating to defective products
could have a material adverse effect on our business, operating results and
financial condition.
Future sales of our common stock in the public market could adversely
affect our stock price and our ability to raise funds in new stock
offerings
Future sales of substantial amounts of our common stock in the public
market, or the perception that such sales could occur, could adversely affect
prevailing market prices of our common stock and could impair our ability to
raise capital through future offerings of equity securities. Of the 48.3
million shares of our common stock outstanding at January 31, 1999, other than
the shares offered by this prospectus, approximately 1.4 million shares were
eligible for sale in the public market in accordance with Rule 144 under the
Securities Act of 1933 and approximately 600,000 shares were covered by the
registration statement referred to below. See "Shares Eligible for Future
Sale."
U.S. Foodservice has granted registration rights with respect to the
common stock primarily to holders of common stock U.S. Foodservice issued in
connection with its acquisition of other foodservice businesses. The offering
of the shares by this prospectus is being made following the exercise of these
registration rights. As of January 31, 1999, in addition to the shares offered
hereby, approximately 600,000 shares of common stock were entitled to the
benefits of these registration rights, all of which were shares covered by a
registration statement which was in effect under the Securities Act. The
exercise of registration rights granted by U.S. Foodservice is subject to
notice requirements, timing restrictions and volume limitations which may be
imposed by the underwriters of an offering. U.S. Foodservice is required to
bear the expenses of all these registrations, except for underwriting discounts
and commissions. We expect to grant registration rights to the stockholders of
other foodservice businesses we may acquire in the future.
U.S. Foodservice and the selling stockholders have agreed, subject to
exceptions, not to directly or indirectly offer or sell any shares of common
stock without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated on behalf of the underwriters for 90 days after the date of
this prospectus. With this consent, U.S. Foodservice and the selling
stockholders may sell shares before the expiration of such 90-day period
without prior notice to the other stockholders of U.S. Foodservice or to any
public market in which the common stock trades. See "Underwriting."
We do not anticipate that we will pay dividends on our common stock
We have never paid cash dividends on our common stock and we do not
anticipate that we will pay cash dividends in the foreseeable future. We may
pay cash dividends only if we comply with financial tests and
12
<PAGE>
other restrictions contained in our credit facility agreements and in the
indenture for public notes issued by one of our subsidiaries. See "Price Range
of Common Stock and Dividend Policy."
Provisions in our charter and bylaws and in delaware law could
discourage takeover attempts we oppose even if our stockholders might
benefit from a change in control of U.S. Foodservice
Provisions in our charter and bylaws and in the Delaware general
corporation law may make it difficult and expensive for a third party to pursue
a takeover attempt we oppose even if a change in control of U.S. Foodservice
would be beneficial to the interests of our stockholders. The charter and bylaw
provisions include a requirement that our board of directors be divided into
three classes, with approximately one-third of the directors to be elected each
year. This classification of directors makes it more difficult for an acquiror
or for other stockholders to change the composition of the board of directors.
In addition, the board of directors has the authority to issue up to 5,000,000
shares of preferred stock in one or more series and to fix the powers,
preferences and rights of each series without stockholder approval. The ability
to issue preferred stock could discourage unsolicited acquisition proposals or
make it more difficult for a third party to gain control of U.S. Foodservice,
or otherwise could adversely affect the market price of our common stock.
Further, as a Delaware corporation, we are subject to section 203 of the
Delaware general corporation law. This section generally prohibits us from
engaging in mergers and other business combinations with stockholders that
beneficially own 15% or more of our voting stock, or with their affiliates,
unless our directors or stockholders approve the business combination in the
prescribed manner. See "Description of Capital Stock."
We have adopted a shareholder rights plan which could discourage hostile
acquisitions of control in which our stockholders may wish to
participate
In 1996, our board of directors adopted a "poison pill" shareholder
rights plan, which may discourage a third party from making a proposal to
acquire U.S. Foodservice which we have not solicited or do not approve, even if
the acquisition would be beneficial to our stockholders. As a result, our
stockholders who wish to participate in such a transaction may not have an
opportunity to do so. Under our shareholder rights plan, preferred share
purchase rights, which are attached to our common stock, generally will be
triggered upon the acquisition, or actions that would result in the
acquisition, of 10% or more of the common stock by any person or group.
Investors eligible to report their ownership of our common stock on Schedule
13G under the Securities Exchange Act of 1934 generally may acquire up to 15%
of the common stock without triggering these rights. If triggered, these rights
would entitle our stockholders other than the acquiror to purchase, for the
exercise price, shares of our common stock having a market value of two times
the exercise price. In addition, if a company acquires us in a merger or other
business combination, or if we sell more than 50% of our consolidated assets or
earning power, these rights will entitle our stockholders other than the
acquiror to purchase, for the exercise price, shares of the common stock of the
acquiring company or its parent having a market value of two times the exercise
price. See "Description of Capital Stock--Preferred Share Purchase Rights."
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference in it
include "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act. We intend the
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. All statements regarding our
expected financial position and operating results, our business strategy, our
financing plans, forecasted demographic and economic trends relating to our
industry, our ability to complete acquisitions, to realize anticipated cost
savings and other benefits from acquisitions and to recover acquisition-related
costs, and similar matters are forward-looking statements. These statements can
sometimes be identified by our use of forward-looking words such as "may,"
"will," "anticipate," "estimate," "expect" or "intend." We cannot promise you
that our expectations in such forward-looking statements will turn out to be
correct. Important factors that could cause our actual results to be materially
different from our expectations include those discussed in this prospectus
under the caption "Risk Factors." We undertake no obligation to update or
revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
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<PAGE>
USE OF PROCEEDS
The selling stockholders will sell all of the shares offered by this
prospectus. We will not receive any of the proceeds from the sale of these
shares. We will pay some of the expenses relating to the U.S. and international
offerings, which we estimate will total approximately $0.9 million.
If the over-allotment options are exercised in full, we will issue and
sell 1,305,743 shares in addition to the shares to be sold by the selling
stockholders. We estimate that the net proceeds to us from the sale of these
additional shares will be approximately $54 million, assuming a public offering
price of $43.69 per share and after deducting the underwriting discount and the
estimated expenses of the offerings payable by us. We expect to use these
proceeds to repay borrowings under our five-year revolving credit facility,
which matures on December 23, 2002. We have used these borrowings primarily for
working capital. Amounts borrowed under the credit facility bear interest at
our option at a rate equal to the sum of (a) the London Interbank Offered Rate
("LIBOR"), a specified prime rate, or the federal funds rate plus .5%, and (b)
an applicable margin. The applicable margin varies from .175% to .55%, based on
a formula tied to our level of indebtedness from time to time. As of December
26, 1998, borrowing rates under our credit facility averaged 5.55%.
14
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been listed on the New York Stock Exchange since
December 31, 1996. Our current symbol is "UFS." From November 16, 1994 until
December 31, 1996, our common stock was quoted on the Nasdaq National Market.
The table below shows, for the last two fiscal years and for fiscal 1999
through the date indicated, the high and low last reported sale prices of our
common stock on the Nasdaq National Market prior to December 31, 1996 and,
beginning on December 31, 1996, the high and low last reported sale prices on
the New York Stock Exchange composite tape:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year Ended June 28, 1997
First Quarter.................................................. $24.75 $20.75
Second Quarter................................................. 28.00 21.00
Third Quarter.................................................. 29.13 25.75
Fourth Quarter................................................. 30.13 26.00
Fiscal Year Ended June 27, 1998
First Quarter.................................................. $32.44 $28.69
Second Quarter................................................. 34.81 27.56
Third Quarter.................................................. 37.19 32.31
Fourth Quarter................................................. 37.25 31.50
Fiscal Year Ending July 3, 1999
First Quarter.................................................. $42.50 $32.88
Second Quarter ................................................ 49.13 40.88
Third Quarter (through March 4, 1999).......................... 52.50 43.69
</TABLE>
As of January 31, 1999, there were approximately 830 holders of record of
our common stock. On March 4, 1999, the last reported sale price of our common
stock on the New York Stock Exchange was $43.69 per share.
We have never paid cash dividends on our common stock and we do not
anticipate that we will pay cash dividends in the forseeable future. The
current policy of our board of directors is to retain all earnings to support
our operations and to finance the expansion of our business. We may pay cash
dividends only if we comply with financial tests and other restrictions
contained in our credit facility agreements and in the indenture for public
notes issued by one of our subsidiaries.
15
<PAGE>
CAPITALIZATION
The following table shows the capitalization of U.S. Foodservice on a
consolidated basis as of December 26, 1998. You should read this table in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and
related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 26, 1998
-------------------------
(in thousands, except
share and per share data)
<S> <C>
Current maturities of long-term debt and capital
lease obligations................................... $ 6,275
==========
Long-term debt(1):
Revolving credit facility, excluding current
portion........................................... 655,500
8 7/8% Senior Subordinated Notes, due 2003, net of
discount of $546.................................. 54,239
Other.............................................. 27,362
Capital lease obligations, excluding current
portion............................................. 28,328
----------
Total long-term debt and capital lease
obligations..................................... 765,429
----------
Stockholders' equity:
Preferred Stock, $.01 par value per share;
5,000,000 shares authorized, none issued and
outstanding....................................... --
Common Stock, $.01 par value per share; 150,000,000
shares authorized, 48,195,880 shares issued and
outstanding(2).................................... 482
Additional paid-in capital......................... 634,128
Retained earnings.................................. 39,492
----------
Total stockholders' equity....................... 674,102
----------
Total capitalization........................... $1,439,531
==========
</TABLE>
- --------
(1) Excludes revolving securitization arrangements for accounts receivable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and note 8 to the audited
consolidated financial statements appearing elsewhere in this prospectus.
(2) Excludes 2,479,473 shares subject to outstanding options at a weighted
average exercise price of $27.67 per share and 71,372 shares of common
stock reserved for issuance upon exercise of an outstanding warrant at an
exercise price of $13.06 per share.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of U.S.
Foodservice (1) as of and for each of the fiscal years ended July 2, 1994, July
1, 1995, June 29, 1996, June 28, 1997, and June 27, 1998 and (2) as of and for
the six-month periods ended December 27, 1997 and December 26, 1998. The
selected consolidated financial data as of July 2, 1994 and July 1, 1995 and
for the fiscal year ended July 2, 1994 were derived from unaudited consolidated
financial statements of U.S. Foodservice. The selected consolidated financial
data as of June 29, 1996 and for the fiscal year ended July 1, 1995 were
derived from audited consolidated financial statements of U.S. Foodservice. The
selected consolidated financial data as of June 28, 1997 and June 27, 1998 and
for each of the fiscal years in the three-year period ended June 27, 1998 were
derived from audited consolidated financial statements included elsewhere in
this prospectus. The selected consolidated financial data as of and for the
six-month periods ended December 27, 1997 and December 26, 1998 were derived
from unaudited consolidated financial statements included elsewhere in this
prospectus. Information for interim periods includes all adjustments,
consisting of normal recurring adjustments, considered necessary in the opinion
of management for a fair presentation of financial position and results of
operations of U.S. Foodservice. Results of operations and financial condition
as of and for the six months ended December 26, 1998 are not indicative of
results of operations or financial condition to be expected as of and for the
fiscal year ending July 3, 1999. You should read the selected consolidated
financial data set forth below in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Fiscal Years Ended(1)(2) Six Months Ended(1)
-------------------------------------------------------- ----------------------------
July 2, July 1, June 29, June 28, June 27, December 27, December 26,
1994 1995 1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ---------- ------------ ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Net sales............... $2,623,052 $2,857,334 $3,238,781 $5,169,406 $5,506,949 $2,712,086 $3,011,459
Gross profit............ 551,965 594,515 652,685 1,003,074 1,041,668 512,743 552,059
Operating expenses...... 497,136 526,871 590,446 845,901 876,170 449,166 447,694
Amortization of
intangible assets...... 2,421 2,792 4,244 15,349 15,354 7,419 8,077
Restructuring costs
(reversal)............. -- -- (6,441) (4,000) 53,715 38,037 --
Charge for impairment of
long-lived assets...... -- -- 29,700 -- 35,530 32,135 --
Income (loss) from
operations............. 52,408 64,852 34,736 145,824 60,899 (14,014) 96,288
Interest expense and
other financing costs,
net.................... 44,201 32,941 32,527 76,063 73,894 39,246 32,672
Nonrecurring charges.... -- -- 1,517 5,400 17,822 17,822 --
Income (loss) from
continuing operations
before extraordinary
charge................. 3,823 18,303 133 38,286 (37,292)(3) (60,831)(3) 37,520
Net income (loss)....... 5,620 37,209 133 38,286 (47,004) (70,534) 34,772
Per Share Data:
Income (loss) from
continuing operations
before extraordinary
charge:
Basic.................. $ 0.24 $ 0.75 $ 0.00 $ 0.88 $ (0.83)(3) $ (1.35)(3) $ 0.80
Diluted................ $ 0.24 $ 0.74 $ 0.00 $ 0.87 $ (0.83)(3) $ (1.35)(3) $ 0.79
Weighted average common
shares:
Basic.................. 15,885 24,520 30,388 43,451 45,320 44,811 47,039
Diluted................ 15,949 24,567 30,515 44,063 45,320 44,811 47,699
Balance Sheet Data (at
end of period):
Working capital......... $ 248,679 $ 270,942 $ 208,130 $ 234,803 $ 287,816 $ 477,701
Total assets............ 856,744 939,280 1,052,211 1,732,183 1,817,791 2,021,191
Long-term debt,
excluding current
maturities............. 430,379 306,702 303,728 655,246 680,625 765,429
Stockholders' equity.... 145,079 315,060 316,676 579,146 584,720 674,102
</TABLE>
17
<PAGE>
- --------
(1) U.S. Foodservice completed acquisitions of Valley Industries, Inc. in
August 1996, Squeri Food Service, Inc. in September 1996 and Rykoff-Sexton
in December 1997, all of which were accounted for as poolings of interests.
Results for all periods presented prior to these acquisitions have been
restated to include the results of the acquired companies. See note (2)
below and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Introduction," notes 3 and 4 to the audited
consolidated financial statements appearing elsewhere in this prospectus
and note 2 to the unaudited consolidated financial statements appearing
elsewhere in this prospectus.
(2) U.S. Foodservice's fiscal year ends on the Saturday closest to June 30.
Before April 28, 1996, Rykoff-Sexton had a fiscal year that ended on the
Saturday closest to April 30. The consolidated financial statements for the
fiscal years ended June 28, 1997 and June 29, 1996 appearing elsewhere in
this prospectus combine the results of JP Foodservice for these periods
with the results of Rykoff-Sexton for the years ended June 28, 1997 and
April 27, 1996, respectively. Fiscal 1996, 1997 and 1998 each consist of
52-week periods. See note 3 to the audited consolidated financial
statements appearing elsewhere in this prospectus.
(3) In connection with the acquisition of Rykoff-Sexton, U.S. Foodservice
incurred acquisition related costs, including restructuring costs, charges
for impairment of long-lived assets, transaction costs and other operating
charges resulting from the integration of the two businesses, totaling
approximately $138.0 million for the fiscal year ended June 27, 1998 and
$112.6 million for the six months ended December 27, 1997, which
significantly affected U.S. Foodservice's results for these periods.
Excluding the impact of these acquisition related costs, U.S. Foodservice's
net income before extraordinary charge would have been $62.6 million, or
$1.37 per share on a diluted basis, for the fiscal year ended June 27, 1998
and $22.6 million, or $.50 per share on a diluted basis, for the six months
ended December 27, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Introduction."
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
U.S. Foodservice's business strategy is to increase net sales through
internal growth of chain and street sales, while acquiring other foodservice
distributors to expand its distribution capabilities and increase penetration
of its existing markets. With the acquisition of Rykoff-Sexton on December 23,
1997 (the "Acquisition"), U.S. Foodservice, formerly JP Foodservice, Inc.,
became the second largest broadline foodservice distributor in the United
States based on net sales. The Acquisition expanded U.S. Foodservice's
distribution capabilities nationwide and strengthened its competitive position
in several major markets. A renewed focus on the growth of chain and street
sales at the former Rykoff-Sexton branches, combined with additional sales by
companies acquired in fiscal 1997, which ended June 28, 1997, and fiscal 1998,
which ended June 27, 1998, resulted in net sales growth of 10.5% in the four
fiscal quarters following the Acquisition over the corresponding prior period.
In connection with the Acquisition, U.S. Foodservice incurred
restructuring costs, charges for impairment of long-lived assets, transaction
costs and other operating charges resulting from the integration of the two
businesses (the "Acquisition Related Costs"), which significantly affected U.S.
Foodservice's results for fiscal 1998 and for the six months ended December 26,
1998. The Acquisition Related Costs totaled approximately $138.0 million, of
which $76.6 million consisted of non-cash charges. Of the cash charges, U.S.
Foodservice expended $38.6 million in fiscal 1998 and $3.7 million during the
six months ended December 26, 1998. U.S. Foodservice anticipates that it will
expend $8.4 million of the cash charges in the balance of fiscal 1999 and $5.4
million in fiscal 2000. The remaining cash charges of $5.4 million relate
primarily to losses on lease commitments, the last of which expires in fiscal
2008. U.S. Foodservice is funding these expenditures through, among other
things, realization of cost savings resulting from the integration of the two
businesses, proceeds from the disposition of closed facilities and income tax
benefits. See note 3 to the audited consolidated financial statements appearing
elsewhere in this prospectus. Excluding the impact of the Acquisition Related
Costs, U.S. Foodservice's net income before extraordinary items would have been
$62.6 million or $1.37 per share on a diluted basis for fiscal 1998,
representing a 49% improvement over combined results of U.S. Foodservice for
fiscal 1997 computed on the same basis. U.S. Foodservice does not expect to
incur any additional restructuring costs, asset impairment charges or
transaction costs related to the Acquisition and does not expect any additional
operating costs related to the integration of the two businesses to be
material.
In connection with the integration plan for the combination of the two
businesses, U.S. Foodservice expected to realize operating cost and interest
savings of $19 million in fiscal 1998, $30 million in fiscal 1999 and $40
million in fiscal 2000 and thereafter. U.S. Foodservice believes operating
costs and interest savings exceeded $20 million in fiscal 1998 and $17 million
in the six months ended December 26, 1998. U.S. Foodservice achieved operating
cost savings through the consolidation and re-negotiation of purchasing
programs, consolidation and realignment of distribution facilities and
consolidation of general and administrative functions and realized interest
savings through the refinancing of its senior debt. Based on the results for
fiscal 1998 and the six months ended December 26, 1998 and the status of the
integration plan, U.S. Foodservice believes it will achieve the costs savings
estimated for the subsequent years.
Fiscal 1999 Acquisitions. U.S. Foodservice has pursued an active program
of strategic acquisitions to take advantage of growth opportunities from
ongoing consolidation in the fragmented foodservice distribution industry. In
the second quarter of fiscal 1999, U.S. Foodservice acquired J.H. Haar & Sons,
L.L.C. ("Haar"), a New Jersey-based broadline foodservice distributor serving
the metropolitan New York City market, and Joseph Webb Foods, Inc. ("Webb"), a
broadline foodservice distributor serving the San Diego and other southern
California markets. These two acquisitions significantly expanded U.S.
Foodservice's existing operations in those markets. U.S. Foodservice accounted
for the Haar acquisition under the pooling-of-interests method of accounting.
The operating results of Haar were not material to U.S. Foodservice's reported
results for periods prior to the acquisition and, accordingly, prior operating
results of U.S. Foodservice have not been
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restated to incorporate the results of Haar. U.S. Foodservice accounted for the
acquisition of Webb under the purchase method of accounting, and, accordingly,
Webb's operating results are included only from the date of the acquisition.
The Webb acquisition agreement provides for future stock payments to the former
Webb stockholders if the Webb operations achieve specified sales targets.
Fiscal 1998 Acquisitions Other Than Rykoff-Sexton. In the second quarter
of fiscal 1998, U.S. Foodservice acquired Outwest Meat Company ("Outwest"),
located in Las Vegas, Nevada. In the third quarter of fiscal 1998, the Company
acquired Westlund Provisions, Inc. ("Westlund"), a foodservice distributor
specializing in custom-cut meats located in Minneapolis, Minnesota. These two
acquisitions complemented U.S. Foodservice's existing operations in those
markets, while enabling U.S. Foodservice to enhance significantly its custom-
cut meat offerings. Also in the third quarter of fiscal 1998, U.S. Foodservice
expanded the scope of its distribution network into the northeastern United
States by acquiring Sorrento Food Service, Inc. ("Sorrento"), a broadline
distributor located in Buffalo, New York. U.S. Foodservice accounted for these
acquisitions under the purchase method of accounting, and accordingly, the
operating results of the acquired businesses are included in U.S. Foodservice's
financial statements from the dates of the acquisitions.
Fiscal 1997 Acquisitions. Before the Acquisition, JP Foodservice extended
the scope of its distribution network into the Western region of the United
States through its acquisition in the first quarter of fiscal 1997 of Valley
Industries, Inc. ("Valley"), a broadline distributor located in Las Vegas,
Nevada. Also in the first quarter of fiscal 1997, as part of its 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. JP Foodservice accounted for the Valley and Squeri
acquisitions 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. JP Foodservice accounted for
the Arrow and Mazo-Lerch acquisitions under the purchase method of accounting,
and accordingly, the operating results of Arrow and Mazo-Lerch are included in
U.S. Foodservice's financial statements only from the dates of those
acquisitions.
Fiscal 1996 Acquisitions. In May 1996, Rykoff-Sexton significantly
expanded the geographic coverage of its distribution network in the
Southeastern, Southwestern and Mid-Atlantic regions of the United States
through its acquisition of US Foodservice Inc. ("USF"). USF, formed in 1992,
was the surviving entity of the 1993 combination of two regional broadline
distributors, Unifax, Inc. and WS Holdings Corporation, the parent company of
White Swan, Inc. At the time of its acquisition by Rykoff-Sexton, USF was
unrelated to JP Foodservice, which adopted the U.S. Foodservice name following
its acquisition of Rykoff-Sexton in fiscal 1998. In addition, in November 1995,
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. Both of
these acquisitions were accounted for under the purchase method of accounting,
and accordingly, the operating results of USF and H&O Foods are included in
U.S. Foodservice's financial statements only from the dates of the
acquisitions.
Results of Operations
U.S. Foodservice sells a significant portion 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. Inflation did not have a material impact on
U.S. Foodservice's operating results in any of its three most recent fiscal
years or in the six months ended December 26, 1998.
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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 generally are
higher for proprietary brand products than for national brand products of
comparable quality. U.S. Foodservice, however, incurs additional advertising
and other marketing costs in promoting its proprietary brand products.
The principal components of expenses include cost of sales, which
represents the amount paid to manufacturers and food processors for products
sold, and operating expenses, which include labor-related and other selling
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.
U.S. Foodservice's operating results historically have reflected modest
seasonal variations. See "--Quarterly Results and Seasonality."
Six Months Ended December 26, 1998 Compared to Six Months Ended December 27,
1997
Net Sales. Net sales for the six months ended December 26, 1998 (the
"1999 fiscal six-month period") increased 11.1% to $3.0 billion from $2.7
billion for the six months ended December 27, 1997 (the "1998 fiscal six-month
period"). The acquisitions of Outwest in the second quarter of fiscal 1998,
Sorrento and Westlund in the third quarter of fiscal 1998, and Haar and Webb in
the second quarter of fiscal 1999 accounted for approximately 48% of the sales
growth for the 1999 fiscal six-month period.
Growth in both chain account sales and street sales contributed to the
remaining increase in sales. Chain account sales increased 15.9% for the 1999
fiscal six-month period. A significant portion of this increase was
attributable to the expansion of sales to existing chain customers resulting
from the national distribution capability created through the Acquisition.
Street sales increased 7.9% for the 1999 fiscal six-month period principally as
a result of the growth of the street sales force and improved sales force
productivity. Because chain sales grew at a faster rate than street sales, the
street sales mix, or street sales as a percentage of total net sales, decreased
to 57.7% in the 1999 fiscal six-month period from 61.3% in the 1998 fiscal six-
month period.
Gross Profit. Gross profit margin decreased to 18.3% in the 1999 fiscal
six-month period from a gross profit margin, prior to Acquisition Related
Costs, of 19.1% in the 1998 fiscal six-month period. The decrease was primarily
attributable to a continuing shift in product mix from certain high-margin
items to higher turnover, lower-margin items, consisting primarily of "center-
of-the-plate" entree products in the former Rykoff-Sexton operations, and to an
increase in chain sales as a percentage of net sales in the 1999 fiscal six-
month period.
Operating Expenses. Operating expenses decreased by 0.3%, or $1.5
million, in the 1999 fiscal six-month period over the 1998 fiscal six-month
period. This decrease was principally attributable to $15.6 million of non-cash
charges recorded in the second quarter of fiscal 1998, which consisted
primarily of write-downs of receivables and other assets at operating units
undergoing consolidation or realignment as part of the Acquisition.
Excluding the effects of these Acquisition Related Costs, operating
expenses increased by 3.2%, or $14.1 million, in the 1999 fiscal six-month
period over the 1998 fiscal six-month period and, as a percentage of net sales,
decreased to 14.9% in the 1999 fiscal six-month period from 16.0% in the 1998
fiscal six-month period. This decrease was primarily attributable to operating
efficiencies resulting from the Acquisition restructuring plan, cost reductions
achieved through the consolidation of U.S. Foodservice's general and
administrative functions, and an increase in the average size of customer
deliveries resulting from the shift in sales mix to increased chain account
sales and in product mix towards "center-of-the-plate" entree products.
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Amortization of Goodwill and Other Intangible Assets. Amortization of
goodwill and other intangible assets was $8.1 million in the 1999 fiscal six-
month period compared to $7.4 million in the 1998 fiscal six-month period. This
increase resulted from the goodwill recorded in connection with the Sorrento,
Westlund and Webb acquisitions.
Restructuring Costs and Asset Impairment. The Acquisition Related Costs
in the 1998 fiscal six-month period included a net restructuring charge of
$41.0 million, of which $16 million constituted non-cash charges. These costs
consisted primarily of change in control payments made to former executives of
Rykoff-Sexton and severance, idle facility and facility closure costs related
to U.S. Foodservice's plan to consolidate and realign some operating units and
consolidate various overhead functions. These costs were offset in part by a
reversal of $3.0 million of unutilized reserves from a prior restructuring. The
reversal related to activities for which the actual costs were overestimated or
for which the contemplated restructuring plans were ultimately changed.
The Acquisition Related Costs in the 1998 fiscal six-month period also
included non-cash asset impairment charges of $32.1 million. These charges were
related to write-downs to net realizable value of assets and facilities at
operating units which are being consolidated or realigned and assets related to
management information systems which are being replaced and not currently
utilized.
Income (loss) from Operations. Income from operations was $96.3 million
in the 1999 fiscal six-month period compared to a loss of $14.0 million in the
1998 fiscal six-month period. Excluding the Acquisition Related Costs, income
from operations increased 23.8%, or $18.5 million, in the 1999 fiscal six-month
period from the 1998 fiscal six-month period. The increase was attributable to
the increase in net sales and the reduction of operating expenses as a
percentage of net sales.
Interest Expense and Other Financing Costs, Net. Interest expense and
other financing costs decreased $6.6 million, or 16.8%, for the 1999 fiscal
six-month period from the 1998 fiscal six-month period. The reduced interest
expense was attributable to lower overall interest rates under the credit
facility U.S. Foodservice established in connection with the Acquisition.
Non-Recurring Charges. U.S. Foodservice incurred non-recurring charges of
$17.8 million in the 1998 fiscal six-month period. These charges principally
related to fees for financial advisory, legal and accounting and other
professional services incurred by JP Foodservice and Rykoff-Sexton to
consummate the Acquisition.
Provision for Income Taxes (Benefit). During the 1999 fiscal six-month
period, U.S. Foodservice recognized income tax expense at an effective rate of
41.0% compared to (14.4)% for the 1998 fiscal six-month period. The rate for
the 1998 fiscal six-month period reflects the effect on the income tax
provision of the tax deductibility of certain Acquisition Related Costs and the
amortization of goodwill. U.S. Foodservice's effective tax rate before the
effect of the Acquisition Related Costs was 45.3% for the 1998 fiscal six month
period.
Extraordinary Charge. During the 1999 fiscal six-month period, U.S.
Foodservice incurred an extraordinary charge of $2.7 million, net of a $1.8
million income tax benefit, related to the redemption and retirement of $75.1
million of Rykoff-Sexton's 8 7/8% senior subordinated notes due 2003. In the
1998 fiscal six-month period, U.S. Foodservice recorded an extraordinary charge
of $9.7 million, net of a $6.3 million income tax benefit, related to the
write-off of deferred financing costs with respect to its refinancing of
substantially all of its indebtedness and to additional payments to holders of
U.S. Foodservice's senior notes due 2004 in accordance with the senior note
terms.
Fiscal 1998 Compared to Fiscal 1997
Net Sales. Net sales increased 6.5% to $5.5 billion in fiscal 1998 from
$5.2 billion in fiscal 1997. Higher chain account and street sales contributed
significantly to net sales growth. Acquisitions of foodservice
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distributors other than Rykoff-Sexton in late fiscal 1997 and during fiscal
1998 accounted for net sales growth of 3.3%. An increase of 5.8% in chain
account sales reflected the continued growth in sales to U.S. Foodservice's
larger customers. Street account sales increased 6.8% in fiscal 1998 primarily
as a result of the growth of the sales force and continued improvements in
sales force productivity.
Gross Profit. Gross profit margin decreased to 18.9% in fiscal 1998 from
19.4% in fiscal 1997. The decline in gross profit margin was primarily
attributable to a continuing shift in product mix from certain high-margin
items to higher turnover, lower-margin items, including "center-of-the-plate"
entree products, in the former Rykoff-Sexton operations, as well as decreased
margins at some of the operating units that were closed as part of the
Acquisition restructuring plan. The decline in U.S. Foodservice's margins for
fiscal 1998 also resulted from Acquisition Related Costs of $8.6 million for
writedowns of inventory at operating units undergoing consolidation or
realignment. The effect on gross profit of the shift in product mix was offset
in part by an increase in street sales as a percentage of net sales and the
growth of U.S. Foodservice's proprietary brand product sales in fiscal 1998.
Sales of proprietary brand products increased by 5.7% in fiscal 1998 over
fiscal 1997. In addition, U.S. Foodservice estimates that it achieved
approximately $9.0 million in savings from the consolidation and renegotiation
of its purchasing programs.
Operating Expenses. Operating expenses increased 3.6% to $876.2 million
in fiscal 1998 from $845.9 million in fiscal 1997. The increase was primarily
attributable to $19.4 million of Acquisition Related Costs recognized in fiscal
1998, which consisted principally of writedowns of receivables and other assets
at operating units undergoing consolidation or realignment.
Excluding charges for Acquisition Related Costs in fiscal 1998, operating
expenses increased by 1.8%, or $14.9 million, in fiscal 1998 over fiscal 1997
and, as a percentage of net sales, declined to 15.6% in fiscal 1998 from 16.3%
in fiscal 1997. The decrease was primarily attributable to operating
efficiencies resulting from the Acquisition restructuring plan, an increase in
the average size of customer deliveries, and cost reductions achieved through
the consolidation of U.S. Foodservice's general and administrative functions.
U.S. Foodservice also recognized a $7.4 million curtailment gain upon the
suspension of all participation and benefit accruals under one of Rykoff-
Sexton's defined benefit plans.
Amortization of Goodwill and Other Intangible Assets. Goodwill and other
intangible amortization totaled $15.3 million in fiscal 1997 and $15.4 million
in fiscal 1998.
Restructuring, Impairment of Long-Lived Assets and Other Charges. The
Acquisition Related Costs in fiscal 1998 included a net restructuring charge of
$53.7 million. These costs consist primarily of change in control payments made
to former executives of Rykoff-Sexton and severance, idle facility and facility
closure costs related to U.S. Foodservice's plan to consolidate and realign
some operating units and consolidate various overhead functions, which were
offset in part by a reversal of $3.0 million of unutilized reserves from a
prior restructuring. The reversal related to activities for which the actual
costs were overestimated or for which the contemplated restructuring plans were
ultimately changed.
The Acquisition Related Costs also included asset impairment charges of
$35.5 million. These charges were related to writedowns to net realizable value
of assets and facilities at operating units that are being consolidated or
realigned and assets related to management information systems which are being
replaced and not currently utilized.
U.S. Foodservice expects that it will recover the cash portion of the
Acquisition Related Costs over the next two years through income tax benefits
and proceeds from the sale of closed facilities.
Income from Operations. Income from operations decreased 58.2% to $60.9
million in fiscal 1998 from $145.8 million in fiscal 1997 primarily as a result
of the Acquisition Related Costs. Operating margin decreased to 1.1% in fiscal
1998 from 2.8% in fiscal 1997.
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Excluding the impact of the Acquisition Related Costs, income from
operations increased 22.1% to $178.1 million in fiscal 1998 from $145.8
million in fiscal 1997. This increase resulted in an operating margin of 3.2%
in fiscal 1998 compared to an operating margin of 2.8% in fiscal 1997 and was
primarily attributable to reduced operating expenses and the cost reductions
achieved in integrating the Rykoff-Sexton operations.
Interest Expense and Other Financing Costs, Net. Interest expense and
other financing costs decreased 2.9% to $73.9 million in fiscal 1998 from
$76.1 million in fiscal 1997. The decrease was primarily attributable to the
refinancing of indebtedness of JP Foodservice and Rykoff-Sexton, as described
below, in connection with the Acquisition. U.S. Foodservice's new credit
facility reduced average borrowing costs by approximately 240 basis points
during the second half of fiscal 1998 from the level in fiscal 1997. The
interest rate reduction was offset in part by higher average borrowings, which
were primarily attributable to the nonrecurring charges associated with the
Acquisition.
Nonrecurring Charges. Acquisition Related Costs included nonrecurring
charges of $17.8 million principally related to fees for financial advisory,
legal, accounting and other professional services incurred by both companies
to consummate the Acquisition.
During fiscal 1997, U.S. Foodservice recorded nonrecurring charges of
$5.4 million with respect to legal and other professional fees required to
complete the acquisitions of Valley and Squeri.
Income Taxes. The provision for income taxes for fiscal 1998 decreased
$19.6 million from the $26.1 million provision for fiscal 1997. U.S.
Foodservice's effective tax rate in fiscal 1997 was 40.5%, which approximates
U.S. Foodservice's normal rate. Non-deductible Acquisition Related Costs had a
significant adverse effect on U.S. Foodservice's income tax rate in fiscal
1998.
Extraordinary Charge. Subsequent to the Acquisition, U.S. Foodservice
applied the proceeds of its new credit facility to refinance substantially all
of its indebtedness, excluding capital leases, $130 million of public notes
and approximately $30 million of other indebtedness, in order to lower
significantly its overall borrowing rates. As a result of this refinancing
during fiscal 1998, U.S. Foodservice recorded an extraordinary charge of $9.7
million, net of a $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 U.S. Foodservice's senior notes due 2004, which were
paid in full in accordance with their terms.
Fiscal 1997 Compared to Fiscal 1996
The following comparison of fiscal 1997 operating results to fiscal 1996
operating results includes a discussion of the results of JP Foodservice and
Rykoff-Sexton prior to the Acquisition. Since each company was separately
managed prior to the Acquisition, some of these operating results are
discussed on a combined basis, but in the context of the individual companies.
References to JP Foodservice below generally relate to activities of U.S.
Foodservice prior to the Acquisition.
The following comparison related to Rykoff-Sexton is materially affected
by the acquisitions of USF and H&O Foods consummated by Rykoff-Sexton in
fiscal 1996. Because of the significance of the USF acquisition and the
related change in Rykoff Sexton's fiscal year end from April (for fiscal years
1996 and before) to June (for subsequent fiscal years), there are no directly
comparable financial statements. The operating results of Rykoff-Sexton for
fiscal 1997 therefore have been compared to the operating results for the 52-
week period ended April 27, 1996. Results for fiscal 1996 do not include
financial data for USF for any periods and include financial data for H&O
Foods only for the six-month period from November 2, 1995 to April 27, 1996.
Net Sales. Net sales increased 59.6% to $5.2 billion in fiscal 1997 from
$3.2 billion in fiscal 1996.
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Rykoff-Sexton's net sales increased 94.3% to $3.5 billion in fiscal 1997
from $1.8 billion in fiscal 1996 primarily as a result of the acquisitions of
USF and H&O Foods.
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 net 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.
Gross Profit. Gross profit margin decreased to 19.4% in fiscal 1997 from
20.2% gross profit margin in fiscal 1996. The decline in gross profit margin at
Rykoff-Sexton was offset in part by improved gross profit 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 the inclusion of a
full year of operating results for H&O Foods, were primarily responsible 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.
The gross profit margin also was affected by the transition of the historical
Rykoff-Sexton divisions from niche distributors to broadline distributors that
provide customers with an expanded selection of product categories, including
fresh meats, produce and seafood, typically carrying lower margins. The cost
reductions 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. This improvement was offset in part by $2.0 million in nonrecurring
inventory and promotion-related charges incurred in the integration of USF.
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 proprietary 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 cost reductions in its purchasing operations
through the consolidation of its purchasing programs with those of the acquired
entities.
Operating Expenses. Operating expenses increased 43.3% to $845.9 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 acquisition of USF and H&O Foods. As
a percentage of net sales, operating expenses declined to 16.4% 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 its
acquisition of USF and H&O Foods. 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 some of the divisions, realignment of the management
structure, consolidation of several corporate functions, insurance reductions
and other integration efforts. The improvement also was 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
nonrecurring charges incurred in connection with the integration plan for
Rykoff-Sexton and USF. Operating expenses for fiscal 1997 included net gains of
$1.5 million related to sales of assets and the reversal of $3.4 million of
insurance reserves. Operating expenses for fiscal 1996 were negatively affected
by the relocation of Rykoff-Sexton's Los Angeles division to a new distribution
center and higher than expected bad debt and insurance expense.
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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 acquisition of USF.
Restructuring, Impairment of Long-Lived Assets and Other Charges. During
fiscal 1997, $4.0 million of the restructuring liability recorded in the nine-
week period ended June 28, 1997 was reversed into income upon the determination
that such liability was no longer required. The reversal related to severance
costs reversed for employees who voluntarily terminated their employment during
fiscal 1997 and, therefore, forfeited their termination rights. In addition,
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.
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 acquisition
of USF. Operating margin increased to 2.8% in fiscal 1997 from 1.1% in fiscal
1996.
Interest Expense and Other Financing Costs, Net. 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 the acquisition of 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 outstanding USF debt
in connection with the acquisition of USF.
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.
Income Taxes. The provision for income taxes for fiscal 1997 increased
$25.5 million over the provision for fiscal 1996. The effective income tax rate
for fiscal 1997 was 40.5%.
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.
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
nondeductible portion of the nonrecurring charges related to the acquisitions
consummated in fiscal 1997.
26
<PAGE>
Quarterly Results and Seasonality
U.S. Foodservice's operating results historically have reflected modest
seasonal variations. U.S. Foodservice generally experiences lower net sales
and income from operations during its third quarter, which includes the winter
months. Winter weather conditions in some regions of the country typically
result in reduced patronage at restaurants and other foodservice
establishments and contribute to higher distribution costs. In the second and
third quarters of fiscal 1998, U.S. Foodservice incurred Acquisition Related
Costs totaling approximately $138.0 million, which significantly affected U.S.
Foodservice's reported results for those quarters. See note 3 to the audited
consolidated financial statements appearing elsewhere in this prospectus.
The following tables present selected statement of operations data for
each of the last ten fiscal quarters:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share
amounts)
Fiscal Year Ended June 28, 1997
-----------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales.................... $1,319,189 $1,304,983 $1,238,937 $1,306,297
Gross profit................. 248,118 254,424 243,269 257,263
Income from operations....... 30,993 36,883 35,553 42,395
Operating margin............. 2.3% 2.8% 2.9% 3.2%
Income before extraordinary
charge...................... $ 4,100 $ 8,631 $ 9,090 $ 16,465
Net income per common share:
Basic:
Before extraordinary
charge.................... $ 0.09 $ 0.20 $ 0.21 $ 0.37
Net income................. $ 0.09 $ 0.20 $ 0.21 $ 0.37
Diluted:
Before extraordinary
charge.................... $ 0.09 $ 0.20 $ 0.20 $ 0.37
Net income................. $ 0.09 $ 0.20 $ 0.20 $ 0.37
<CAPTION>
Fiscal Year Ended June 27, 1998
-----------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter(1) Quarter(2) Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales.................... $1,338,828 $1,373,258 $1,338,138 $1,456,725
Gross profit................. 256,246 256,497 248,126 280,799
Income (loss) from
operations.................. 35,720 (49,735) 12,710 62,204
Operating margin............. 2.7% (3.6)% 0.9% 4.3%
Income (loss) before
extraordinary charge ....... $ 9,791 $ (70,622) $ (3,260) $ 26,799
Net income (loss) per common
share:
Basic:
Before extraordinary
charge.................... $ 0.22 $ (1.56) $ (0.07) $ 0.58
Net income (loss).......... $ 0.22 $ (1.78) $ (0.07) $ 0.58
Diluted:
Before extraordinary
charge.................... $ 0.22 $ (1.56) $ (0.07) $ 0.57
Net income (loss).......... $ 0.22 $ (1.78) $ (0.07) $ 0.57
</TABLE>
- -------
(1) In the second quarter of fiscal 1998, U.S. Foodservice incurred $112.6
million of the total $138.0 million of Acquisition Related Costs.
Excluding these charges, gross profit would have been $262.5 million,
income from operations would have been $42.0 million, the operating margin
would have been 3.1%, net income before extraordinary charge would have
been $12.8 million and diluted earnings per common share, before
extraordinary charge, would have been $.28 per share.
(2) In the third quarter of fiscal 1998, U.S. Foodservice incurred $25.4
million of the total $138.0 million of Acquisition Related Costs.
Excluding these charges, gross profit would have been $250.6 million,
income from operations would have been $38.1 million, the operating margin
would have been 2.8%, net income before extraordinary charge would have
been $13.3 million and diluted earnings per common share, before
extraordinary charge, would have been $.29 per share.
27
<PAGE>
<TABLE>
<CAPTION>
(Dollars in
thousands, except per
share amounts)
Fiscal Year Ending
July 3, 1999
-------------------------------
1st 2nd
Quarter Quarter
---------- ----------
<S> <C> <C> <C> <C>
Net sales................. $1,478,370 $1,533,089
Gross profit.............. 269,977 282,082
Income from operations.... 45,039 51,249
Operating margin.......... 3.1% 3.3%
Income before
extraordinary charge..... $ 16,912 $ 20,608
Net income per common
share:
Basic:
Before extraordinary
charge................. $ 0.36 $ 0.43
Net income.............. $ 0.36 $ 0.37
Diluted:
Before extraordinary
charge................. $ 0.36 $ 0.43
Net income.............. $ 0.36 $ 0.37
</TABLE>
Liquidity and Capital Resources
U.S. Foodservice historically has financed its operations and growth
primarily with cash flow from operations, equity offerings, borrowings under
its credit facilities, and operating and capital leases.
Cash Flows from Operating Activities. Net cash flows provided by (used
in) operating activities were $(45.6) million in the 1999 fiscal six-month
period and $70.7 million, $116.1 million and ($3.1) million in fiscal 1998,
fiscal 1997 and fiscal 1996, respectively. The $45.6 million net cash flows
used in operating activities in the 1999 fiscal six-month period resulted from
seasonal increases in working capital requirements. The $45.4 million decrease
in net cash flows from operations in fiscal 1998 compared to fiscal 1997
primarily reflected U.S. Foodservice's adoption in January 1997, as required,
of Statement of Financial Accounting Standards ("SFAS") No. 125, pursuant to
which U.S. Foodservice accounted for the $50.0 million received from the
securitization of JP Foodservice accounts receivable as a sale of those
receivables. Prior to the adoption of SFAS No. 125, U.S. Foodservice had
accounted for this transaction as a financing. In addition, in fiscal 1998,
U.S. Foodservice experienced a $61.9 million increase in accounts receivable
and inventories as a result of net sales growth in the fourth quarter of fiscal
1998. This increase was offset in part by higher levels of accounts payable and
accrued expenses, including restructuring charges which have not been paid.
U.S. Foodservice's net working capital requirements generally average
between 5.5% and 6.5% of annual sales, net of receivables sold under accounts
receivable securitization arrangements. U.S. Foodservice's working capital
balance, excluding the current portion of long-term debt, of $484.0 million at
December 26, 1998 increased by $188.6 million from the balance at June 27,
1998. The higher working capital balances were primarily attributable to
increased net sales and seasonal increases in inventory and receivables.
In the 1999 fiscal six-month period, U.S. Foodservice realized $7.3
million from the sale of redundant facilities. U.S. Foodservice estimates that
assets held for sale at December 26, 1998 will generate proceeds of $15.0
million.
Cash Flows from Investing Activities. Net cash provided by (used in)
investing activities was $(16.1) million in the 1999 fiscal six-month period
and ($102.3) million, ($106.8) million and ($74.3) million in fiscal 1998,
fiscal 1997 and fiscal 1996, respectively.
U.S. Foodservice used $102.3 million in net cash flows in fiscal 1998 for
investing activities, which included $95.5 million of capital expenditures.
U.S. Foodservice applied the capital expenditures primarily to construction of
new distribution centers in Fort Mill, South Carolina and Las Vegas, Nevada,
expansion of
28
<PAGE>
distribution centers at various locations, and upgrading of management
information systems. U.S. Foodservice currently expects to make capital
expenditures of approximately $68 million in fiscal 1999, including
approximately $41 million to upgrade and expand its existing facilities. The
$16.1 million used in investing activities in the 1999 fiscal six-month period
primarily consisted of capital expenditures of $35.2 million, which were offset
in part by proceeds of $20.1 million received from the sale of manufacturing
division assets acquired in the Acquisition. U.S. Foodservice applied its
capital expenditures in the 1999 fiscal six-month period primarily for facility
expansion projects and continued upgrading of its management information
systems.
Net cash flows used for investing activities in fiscal 1998 also included
$38.7 million of costs related to the acquisitions of Outwest, Sorrento and
Westlund and $32.1 million in proceeds from sales of idle facilities and other
properties.
Cash Flows from Financing Activities. Net cash flows provided by (used
in) financing activities were $68.4 million in the 1999 fiscal six-month period
and $15.0 million, $30.8 million and $79.8 million in fiscal 1998, fiscal 1997
and fiscal 1996, respectively. Net cash flows provided by financing activities
in the 1999 fiscal six-month period included $159.4 million of borrowings under
U.S. Foodservice's five-year revolving credit facility. U.S. Foodservice
applied $66.2 million of these borrowings to redeem or retire a portion of
Rykoff-Sexton's 8 7/8% senior subordinated notes due 2003 and $27.0 million to
retire other indebtedness of acquired companies. Net cash flows provided by
financing activities in fiscal 1998 included $33.2 million from the issuance of
common stock and $12.4 million used to purchase common stock in connection with
a stock repurchase program announced by U.S. Foodservice in the second quarter
of fiscal 1998.
U.S. Foodservice has entered into accounts receivable securitization
arrangements into which it can sell accounts receivables on a revolving basis.
In the third quarter of fiscal 1999, U.S. Foodservice increased the maximum
amount of receivables eligible for sale under these arrangements from $250
million to $353 million, thereby increasing its borrowing capacity by
$103 million.
As of December 26, 1998, U.S. Foodservice's long-term indebtedness,
including current portion, totaled $771.7 million, with an overall weighted
average interest rate of 6.3%, excluding deferred financing costs. Long-term
borrowing increased by $56.7 million in the 1999 fiscal six-month period
primarily as a result of net cash used in operating activities of $45.6
million, capital expenditures of $35.2 million, and net cash of $8.4 million
used in acquisitions. These uses of cash were offset in part by the receipt of
$37.1 million of net cash proceeds from the sale of assets and employee stock
purchases.
On December 23, 1997, in connection with the Acquisition, U.S.
Foodservice entered into a new 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 borrowers under the credit
facility are U.S. Foodservice's two principal operating subsidiaries. The
credit facility is guaranteed by U.S. Foodservice's other subsidiaries and by
U.S. Foodservice. Initial borrowings under the credit facility were used to
repay the former JP Foodservice revolving line of credit loans and senior notes
due 2004 and the former Rykoff-Sexton revolving and term loan facilities. The
total debt repaid was approximately $551.0 million. Amounts borrowed under the
credit facility bear interest at the option of U.S. Foodservice at a rate equal
to the sum of (a) LIBOR, a specified prime rate, or the federal funds rate plus
.5%, and (b) an applicable margin. The applicable margin will vary from .175%
to .55%, based on a formula tied to U.S. Foodservice's level of indebtedness
from time to time. Annual facility fees are based on the same formula and vary
between .055% and .2%. At December 26, 1998, borrowing rates were based on
LIBOR plus an applicable margin of .35% and averaged 5.55%, excluding
amortization of deferred financing costs. The 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. At December 26, 1998, $645.5
million of borrowings and $37.5 million of letters of credit were outstanding
under the credit facility and an additional $67.0 million remained available to
finance U.S. Foodservice's working capital needs and to meet its other
liquidity requirements. The credit facility includes a number of covenants
which require U.S. Foodservice to maintain certain financial ratios and
restrict U.S. Foodservice's ability to incur additional indebtedness and pay
cash dividends.
29
<PAGE>
From time to time, U.S. Foodservice acquires other foodservice
businesses. U.S. Foodservice may acquire any such business for cash, common
stock or a combination of cash and common stock. Accordingly, 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.
U.S. Foodservice believes that the combination of cash flow generated by
its operations, additional capital leasing activity, sales of duplicate assets,
sales of accounts receivable under its securitization arrangements and
borrowings under the credit facility will be sufficient to enable it to finance
its growth and meet its currently projected capital expenditures and other
liquidity requirements for at least the next twelve months.
Information Systems and the Impact of the Year 2000 Issue
The Year 2000 issue results from a programming convention in which
computer programs use two digits rather than four to define the applicable
year. Software and hardware may recognize a date using "00" as the year 1900,
rather than the year 2000. Such an inability of computer programs to recognize
a year that begins with "20" could result in system failures, miscalculations
or errors causing disruptions of operations or other business problems,
including, among others, a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
U.S. Foodservice's Program. U.S. Foodservice has undertaken a program to
address the Year 2000 issue with respect to the following:
. U.S. Foodservice's information technology and operating systems,
including its billing, accounting and financial reporting systems;
. U.S. Foodservice's non-information technology systems, such as
buildings, plant, equipment, telephone systems and other
infrastructure systems that may contain embedded microcontroller
technology;
. selected systems of U.S. Foodservice's major vendors and significant
service providers, insofar as these systems relate to U.S.
Foodservice's business activities with such parties; and
. U.S. Foodservice's significant customers, insofar as the Year 2000
issue relates to U.S. Foodservice's ability to provide services to
these customers.
As described below, U.S. Foodservice's Year 2000 program involves (1) an
assessment of the Year 2000 problems that may affect U.S. Foodservice, (2) the
development and testing of remedies to address the problems discovered in the
assessment phase and (3) the preparation of contingency plans to deal with
worst case scenarios.
Assessment Phase. In order to determine the extent to which its internal
systems are vulnerable to the Year 2000 issue, U.S. Foodservice is currently
evaluating the systems that are date sensitive, including its internal systems
and the systems of its major vendors, and significant service providers and
customers. U.S. Foodservices has completed its evaluation of its internal
systems. U.S. Foodservice's 38 full-service distribution centers, three
specialty products and equipment and supply warehouses, and corporate
headquarters currently use various information systems to process transactions
and meet financial reporting needs. Most of these systems are not fully Year
2000 compliant. As of December 26, 1998, information systems used by 11 of the
distribution centers were Year 2000 compliant. In the third quarter of fiscal
1999, U.S. Foodservice expects to complete the process of sending letters to
its major vendors and significant service providers and customers, requesting
them to provide U.S. Foodservice with detailed, written information concerning
existing or anticipated Year 2000 compliance by their systems insofar as the
systems relate to these parties' business activities with U.S. Foodservice.
U.S. Foodservice is currently evaluating responses on Year 2000 compliance from
the third parties who have responded to U.S. Foodservice's inquiries. U.S.
Foodservice expects that it will complete its assessment of third-party issues
by April 30, 1999.
30
<PAGE>
Remediation and Testing Phase. The activities conducted during the
remediation and testing phase are intended to address potential Year 2000
problems in internally-developed computer software and in U.S. Foodservice's
other information technology and non-information technology systems in an
attempt to demonstrate that this software will be made substantially Year 2000
compliant on a timely basis. In this phase, U.S. Foodservice has evaluated the
program applications and identified Year 2000 problems and is currently
attempting to remediate these problems and individually test the applications
to confirm that the remediating changes are effective and have not adversely
affected the functionality of the applications. U.S. Foodservice is undertaking
similar remediation and testing with respect to the hardware and other
equipment that runs or is run by the software. After the individual
applications and system components have undergone remediation and testing
phases, U.S. Foodservice will conduct integrated testing for the purpose of
demonstrating functional integrated systems operation. Following completion of
its internal, integrated systems testing, U.S. Foodservice intends to conduct
laboratory-simulated integrated systems testing in an attempt to demonstrate
substantial Year 2000 compliance of U.S. Foodservice's systems as they
interface with external systems and equipment of U.S. Foodservice's major
vendors and significant service providers and customers.
During fiscal 1998, among other activities, U.S. Foodservice replaced
information processing systems, consisting of hardware and software, at five
distribution centers, initiated software remediation efforts at 15 distribution
centers, and installed new payroll and human resources information systems at
14 distribution centers and its corporate headquarters. As of the date of this
prospectus, U.S. Foodservice has initiated software and hardware remediation
efforts at the remaining distribution centers and its corporate headquarters.
U.S. Foodservice currently seeks to have most of its software remediated by
March 1999 and to have all of its information systems at its distribution
centers and its corporate headquarters remediated, tested and Year 2000
compliant by July 1999.
Contingency Plans. U.S. Foodservice is developing contingency plans to
handle its most reasonably likely worst case Year 2000 scenarios, which it has
not yet identified fully. U.S. Foodservice intends to complete its
determination of worst case scenarios after it has received and analyzed
responses to substantially all of the inquiries it has made of third parties.
U.S. Foodservice intends to complete the development of its contingency plans
by June 30, 1999.
Costs Related to the Year 2000 Issue. As of December 26, 1998, U.S.
Foodservice had incurred approximately $1.5 million in costs for its Year 2000
program. These costs do not include internal staff costs, consisting
principally of payroll costs, incurred on Year 2000 matters, because U.S.
Foodservice does not separately track these internal staff costs. As of
December 26, 1998, U.S. Foodservice also had made approximately $12.0 million
of capital expenditures on new information processing systems that are already
Year 2000 compliant. U.S. Foodservice currently estimates that it will incur
additional costs, which are not expected to exceed $5.0 million, excluding
internal staff costs, to complete its Year 2000 compliance work with respect to
U.S. Foodservice's major information systems. Of these additional costs,
approximately $3.0 million of costs are expected to be incurred during fiscal
1999 and approximately $2.0 million of costs are expected to be incurred during
fiscal 2000. These costs will be expensed as incurred. Actual costs may vary
from the foregoing estimates based on U.S. Foodservice's evaluation of
responses to its third-party inquiries and on the results of its remediation
and testing activities. U.S. Foodservice expects to fund its Year 2000
remediation costs out of the cash flows generated by its operations. U.S.
Foodservice has not deferred any of its material information technology
projects to date as a result of the Year 2000 issue. U.S. Foodservice currently
believes that the costs to resolve compliance issues with respect to other
information systems and its non-information technology systems will not be
material.
Risks Related to the Year 2000 Issue. Although U.S. Foodservice's Year
2000 efforts are intended to minimize the adverse effects of the Year 2000
issue on its business and operations, the actual effects of the issue and the
success or failure of U.S. Foodservice's efforts described above cannot be
known until the year 2000. Failure by U.S. Foodservice and its major vendors
and significant service providers and customers to address adequately their
respective Year 2000 issues in a timely manner, insofar as these issues relate
to U.S.
31
<PAGE>
Foodservice's business, could have a material adverse effect on U.S.
Foodservice's business, results of operations and financial condition.
Changes in Accounting Standards
During 1997 and 1998, the Financial Accounting Standards Board issued
SFAS No. 130, Reporting Comprehensive Income, SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, and SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activity. SFAS Nos. 130 and 131
generally require additional financial statement disclosure. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value.
In accordance with these pronouncements, U.S. Foodservice adopted SFAS
No. 130 in the first quarter of fiscal 1999 and will adopt SFAS No. 131 in the
second half of fiscal 1999 and SFAS No. 133 in fiscal 2000. U.S. Foodservice is
currently evaluating the impact, if any, that SFAS No. 133 will have on its
consolidated financial statements.
During 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-5, Reporting on the Costs of Start-
Up Activities. SOP No. 98-5 requires that costs incurred during a start-up
activity be expensed as incurred and that the initial application of the SOP,
as of the beginning of the fiscal year in which the SOP is adopted, be reported
as a cumulative effect of a change in accounting principle. U.S. Foodservice
expects to adopt SOP 98-5 in fiscal 2000. U.S. Foodservice does not expect the
cumulative effect of adoption to be material.
Quantitative and Qualitative Disclosures About Market Risk
U.S. Foodservice's major market risk exposure is to changing interest
rates. U.S. Foodservice's policy is to manage interest rates through the use of
a combination of fixed and floating rate debt. U.S. Foodservice uses interest
rate swap, cap and collar contracts to manage its exposure to fluctuations in
interest rates on floating long-term debt. U.S. Foodservice has implemented
management monitoring processes designed to minimize the impact of sudden and
sustained changes in interest rates.
As of December 26, 1998, U.S. Foodservice's long-term indebtedness
consisted of fixed rate and variable rate debt of $55.7 million and $681.4
million, respectively, with an aggregate estimated fair value of approximately
$738 million. Outstanding borrowings under U.S. Foodservice's long-term debt
agreements generally only require periodic interest payments with principal due
at maturity. At December 26, 1998, $655.5 million of U.S. Foodservice's long-
term indebtedness was due in fiscal 2002, with the balance due after 2003.
Substantially all of U.S. Foodservice's floating rate debt is based on LIBOR.
U.S. Foodservice has effectively capped its interest rate exposure at 7.85% on
approximately $400.0 million of its floating rate debt through June 30, 1999.
In addition, U.S. Foodservice has capped its interest exposure on an additional
$129 million of floating rate debt at 8.875% through November 1, 2003.
In addition, U.S. Foodservice sells accounts receivable on a revolving
basis under accounts receivable securitization arrangements. In the third
quarter of fiscal 1999, U.S. Foodservice increased the maximum amount of
receivables eligible for sale under these arrangements from $250 million to
$353 million. The proceeds received from sales of receivables under these
arrangements, which are accounted for under SFAS No. 125, are based to a large
extent on LIBOR. See note 8 to the audited consolidated financial statements
appearing elsewhere in this prospectus. U.S. Foodservice also uses fixed-rate
capital leases to finance certain of its trucks and trailers.
Currently, U.S. Foodservice does not use foreign currency forward
contracts or commodity contracts and does not have any material foreign
currency exposure.
32
<PAGE>
BUSINESS
We are the nation's second largest broadline foodservice distributor
based on our 1998 fiscal year net sales of $5.5 billion. We sell food and
related products to restaurants and other institutional foodservice
establishments through our national distribution network which provides
geographic access to more than 85% of the U.S. population. We market and
distribute more than 40,000 national and proprietary brand items to over
130,000 foodservice customers, including restaurants, hotels, healthcare
facilities, cafeterias and schools. This broad product line allows us to meet
substantially all of the food and related supply needs of our diverse customer
base of independent "street" and multi-unit "chain" businesses, which include
Ruby Tuesday, Subway, Buffet's, Inc., Perkins Family Restaurants and Pizzeria
Uno.
From our 1994 fiscal year through our 1997 fiscal year, we achieved
compound annual net sales growth of approximately 18% and compound annual
earnings per share growth of approximately 29%, excluding extraordinary and
non-recurring items and before restatement of our historical results for
acquisitions accounted for as poolings of interests and before giving effect to
the Rykoff-Sexton acquisition. We supplement our internal growth with an active
program of strategic acquisitions to take advantage of the ongoing
consolidation in our industry. Since we became a public company in 1994, we
have acquired 11 foodservice businesses with combined net sales of over $900
million, as well as Rykoff-Sexton, Inc., which was the nation's third largest
broadline foodservice distributor based on fiscal 1997 net sales of
$3.5 billion. Despite our substantial growth, our 1998 fiscal year net sales of
$5.5 billion represented less than 4% of the approximately $141 billion of 1998
net sales generated by the foodservice distribution industry as a whole.
Because the foodservice distribution industry remains highly fragmented and
there are factors promoting consolidation in the industry, we believe we have a
significant opportunity to continue to add to our net sales through
acquisitions. We seek to increase penetration of our current markets through
acquisitions of small, privately owned distributors that we fold into our
existing operations and to expand into new markets through acquisitions of
larger-sized distributors. We typically have been able to improve the
profitability of acquired businesses by:
. eliminating redundant overhead expenses;
. reducing distribution and warehouse expenses by eliminating
overlapping delivery routes and duplicate warehouse facilities;
. lowering the cost of financing working capital; and
. improving gross margins by using our purchasing power to reduce the
cost of goods sold.
We acquired Rykoff-Sexton because of the substantial benefits which we
expected to realize from the acquisition, including substantial cost savings
and revenue opportunities, nationwide distribution capabilities which would
allow us to extend regional relationships, and increased customer and market
diversity. We have accounted for the acquisition, which we completed on
December 23, 1997, as a pooling of interests. We believe our operating cost
reductions and interest savings from the integration of Rykoff-Sexton, on a
pre-tax basis, exceeded $20 million in our 1998 fiscal year and $17 million in
the first two quarters of our fiscal 1999 year. Based on these results and the
status of our integration plan, we anticipate that our annualized operating
cost reductions and interest savings in our 1999 fiscal year will total
approximately $35 million on a pre-tax basis. On February 27, 1998, we changed
our corporate name from JP Foodservice, Inc. to U.S. Foodservice to reflect our
newly acquired nationwide distribution capabilities.
U.S. Foodservice is a holding company that conducts its operations
through wholly owned subsidiaries. U.S. Foodservice was organized in 1989 under
the laws of the State of Delaware.
Foodservice Distribution Industry
Companies in the foodservice distribution industry purchase, store,
market and transport food products, paper products and other supplies and food-
related items to establishments that prepare and serve meals to be eaten away
from home. Net sales for the foodservice industry were approximately $141
billion in 1997. For the
33
<PAGE>
period from 1985 to 1997, total net sales for the foodservice distribution
industry increased at a compounded annual rate of approximately 5%. Although
the foodservice distribution industry is large and growing, it remains
extremely fragmented, with over 3,000 companies in operation in 1998. Most of
these companies are small, privately owned enterprises supplying a limited
number of products within local or regional markets.
In recent years, the industry has experienced substantial consolidation
as larger distributors have acquired small and regional distributors and have
used their superior competitive position to grow at the expense of smaller
distributors. Consolidation has permitted large foodservice distributors to
benefit from various economies of scale produced by large, low-cost
distribution facilities, increased purchasing power and the elimination of
redundant management and other overhead expenses. The following table
illustrates the impact of these trends on the percentage of total net sales in
the foodservice industry generated by the largest broadline distributors during
the periods indicated.
<TABLE>
<CAPTION>
Percentage of
Industry Net Sales
Year Ended
December 31,
---------------------
1985 1997
--------- ---------
<S> <C> <C>
Ten largest broadline distributors...................... 10% 24%
Fifty largest broadline distributors.................... 22 28
</TABLE>
U.S. Foodservice anticipates further consolidation in the industry as
smaller specialty distributors confront increasingly difficult competitive
challenges from broadline companies that have access to the significant capital
needed to construct and equip large, efficient distribution centers, maintain a
modern fleet of delivery vehicles and develop the sophisticated information
systems required for cost-efficient operations. We believe that large, well-
capitalized broadline distributors generally have benefited from continuing
industry growth as well as from favorable demographic trends. These trends
include the aging of the "baby-boomer" segment of the population, the growth of
single parent and dual-income households and consumers' increased desire for
speed and convenience. In addition, forecasted expansion of many chain
restaurants is anticipated to generate additional sales volume for broadline
distributors that can satisfy the product and delivery requirements of this
customer segment.
Products
In fiscal 1998, we offered to the foodservice industry a single source of
supply for more than 40,000 national and proprietary brand items.
Food Products. Our 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, dairy and other refrigerated
products, fresh produce, fresh 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.
Many of our product offerings feature "center-of-the-plate" entree
selections.
Janitorial and Paper Products. U.S. Foodservice'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 disposable napkins, cups, hats, placemats and
coasters.
Equipment and Supplies. We distribute light restaurant equipment and
supply items, including cookware, glassware, dinnerware and other commercial
kitchen equipment.
34
<PAGE>
The following table shows the product categories of the items sold by
U.S. Foodservice and the percentage of our net sales generated by product
category and by contract and design services during fiscal 1998:
<TABLE>
<CAPTION>
Percentage
of Net Sales
------------
<S> <C>
Canned and dry products...................................... 30%
Meats........................................................ 16
Other frozen foods........................................... 14
Dairy products............................................... 9
Paper products............................................... 8
Poultry...................................................... 8
Seafood...................................................... 6
Perishable food products..................................... 3
Equipment and supplies....................................... 3
Janitorial supplies.......................................... 2
Contract and design services................................. 1
---
100%
===
</TABLE>
National Brands. We supply more than 32,000 national brand items, which
represented approximately 73% of our net sales in fiscal 1998. We believe that
national brands are attractive to chain accounts and other customers seeking
consistent product quality throughout their operations. Our national brand
strategy has promoted closer relationships with many national suppliers, who
provide important sales and marketing support to U.S. Foodservice.
Proprietary Brands. Our proprietary brands enable us to offer our
customers an exclusive and expanding line of product alternatives to
comparable national brands across a wide range of prices. Proprietary brands
typically carry higher margins than comparable national brand products and at
the same time help to promote customer loyalty. Our two-tier proprietary brand
strategy emphasizes our private brands as a direct alternative to national
brand items and our signature brands as foodservice "concepts" and
specialties, such as ethnic and gourmet product offerings.
. Private Brands. We offer our customers an expanding line of
products under our various private brands. We currently offer over
8,000 private brand products, including frozen and canned goods,
fruits, vegetables and meats, under the following private labels:
Rykoff-Sexton Connoisseur(TM) (highest quality), U.S. Foodservice
Blue(TM), U.S. Foodservice Red(TM), Chef's Variety(R), Harvest
Value(R), U.S. Foodservice Cattleman's Choice(TM), U.S.
Foodservice Cattleman's Selection(TM), Magnifry(R) and
Magnifries(TM). U.S. Foodservice also markets diet-modified
products under the brand name Health.Diet.Life(R) and a sugar
substitute and artificial sweetener under the brand names
Allowance(R) and Allowance II(TM). We market restaurant equipment
and supplies under the Serco Restaurant brand and cleaning
products under the Clean Pride(R) brand. We have developed the
multi-tier quality system to meet the specific requirements of
different market segments.
. Signature Brands. We offer our customers an exclusive and
expanding line of signature products which are comparable in
quality to national brand items and priced competitively with
such items. We market these products under the names Roseli(R)
(Italian-style products), Hilltop Hearth(R) (bread and bakery
products), Cross Valley Farms(TM) (processed fruits and
vegetables), Patuxent Farms(R) (processed meats), el Pasado
Authentic Mexican Cuisine with a Touch of the Past(R) (Mexican-
style products), Rituals(R) (gourmet coffee), Pacific-Jade(R)
(Oriental-style products), and Harbor Banks(R) (seafood
products). We currently offer over 3,000 signature brand items.
35
<PAGE>
We have increased the percentage of our proprietary brand sales from less
than 25% at the beginning of fiscal 1996 to approximately 27% at the end of
fiscal 1998. We historically have sold a significantly lower proportion of
proprietary brand products than our primary competitors, whose proprietary
brand sales have accounted for approximately 30% to over 60% of their sales
volume. We believe there is a significant opportunity for growth of our
proprietary brand sales.
U.S. Foodservice is currently consolidating the proprietary brands
marketed by JP Foodservice and Rykoff-Sexton prior to the Acquisition, a
process which we expect will be substantially completed in fiscal 1999.
Although we intend to continue to emphasize sales of national brand products,
we plan to expand sales of our proprietary brand product lines through national
and local advertising, promotional activities, and training of our sales force
regarding the attributes of these products.
Services
To strengthen our customer relationships and increase account
penetration, we offer the following types of value-added services:
Management Support and Assistance. Our sales force assists customers in
managing their foodservice operations more efficiently and profitably by
providing advice and assistance on product selection, menu planning and
recipes, nutritional information, inventory analysis and product costing and
marketing strategies. We also provide on-site training of customer personnel.
Specialized Market Services. We offer services and programs tailored to
specialized markets. For example, through an integrated service program, we
provide healthcare service providers with special nutritional plans, customized
software packages (directAdvantage(TM)), a variety of marketing services and
on-site training of institutional personnel. To be eligible to participate in
this program, healthcare institutions must maintain a specified minimum volume
of purchases from U.S. Foodservice.
Publications. We promote active customer use of our other products and
services through the distribution of professionally printed publications,
including our quarterly magazines, Quintessential(TM) and Healthnext(TM). Our
publications highlight selected products, including proprietary brand items,
present menu suggestions, provide nutritional information and include recipes
using our products. Customers also may participate, at no cost, in our recipe
program in which we furnish participants every two weeks with recipe cards that
describe new menu concepts.
Customers
U.S. Foodservice's customer base of over 130,000 accounts encompasses a
wide variety of foodservice establishments. The following table shows the
segments of our customer base by type of customer for fiscal 1998:
<TABLE>
<CAPTION>
Percentage
of Net Sales
------------
<S> <C>
Restaurants (limited and full menu).......................... 63%
Hotels and casinos........................................... 9
Healthcare institutions...................................... 9
Schools and colleges......................................... 8
Other........................................................ 11
---
100%
===
</TABLE>
36
<PAGE>
Street Customers. U.S. Foodservice's street customers are independent
restaurants, hotels, schools and other foodservice businesses. Street customers
are serviced directly by our commission sales personnel who personally call on
customers, place orders, coordinate product delivery and provide the services
offered to these customers.
Street accounts represented approximately 61% of our net sales in fiscal
1998. We pursue a long-term strategy of increasing street account sales as a
percentage of net sales by attempting to expand sales to street customers at a
faster rate than sales to chain customers.
Chain Customers. The majority of U.S. Foodservice's chain customers
consist of franchises or corporate-owned units of national or regional family
dining and other restaurant "concepts" and, to a lesser extent, hotels and
other regional institutional operators. We have developed strong working
relationships with many of our chain accounts, which have enabled these
accounts, in conjunction with U.S. Foodservice, to develop distribution
programs tailored to precise delivery and product specifications. These
distribution programs have created operating and cost efficiencies for both the
chain customers and U.S. Foodservice. Chain customers generally are serviced by
salaried sales and service representatives who coordinate the procurement and
delivery of all products throughout the system from a central location. Gross
profit margins generally are lower for chain customers than for street
customers. However, because there are typically no commission sales costs
related to chain account sales and because chain customers usually have larger
deliveries to individual locations, sales and delivery costs generally are
lower for chain accounts than for street accounts.
Chain accounts represented approximately 39% of our net sales in fiscal
1998. Our business strategy emphasizes supporting the growth of our existing
chain accounts. Many of our current chain customers, primarily restaurants, are
experiencing more rapid sales growth than other types of foodservice
businesses. We also target new chain customers which we believe represent
attractive growth opportunities.
No single customer accounted for more than 3% of our net sales in fiscal
1998. Consistent with industry practice, we generally do not enter into
contracts with our customers that may not be canceled by either party at its
option.
Sales and Marketing
U.S. Foodservice's principal marketing activities at June 27, 1998 were
conducted by approximately 2,000 street sales, 250 chain sales and 430 customer
service representatives. Our sales and service representatives are responsible
for soliciting and processing orders, servicing customers by telephone,
reviewing account balances and assisting with new product information. In
addition, our sales representatives advise customers on menu selection, methods
of preparing and serving food and other operating issues. We provide an in-
house training program for our entry-level sales and service representatives,
which includes seminars, on-the-job training and direct one-on-one supervision
by experienced sales personnel.
Our commission program is designed to reward account profitability and
promote sales growth in our street accounts. Our strategy is to measure the
profitability of each street account and product segment and to modify our
incentive program accordingly.
We maintain sales offices at each of our 38 full-service distribution
centers and at 26 additional locations in 13 states. We employ sales and
marketing staff at both the corporate and branch levels to solicit and manage
relationships with multi-unit chain accounts.
We supplement our market presence with advertising campaigns in national
and regional trade publications, which typically focus on our services and our
ability to service targeted industry segments. We support this effort with a
variety of promotional services and programs, including our quarterly magazines
and recipe program.
37
<PAGE>
Distribution
We distribute our products out of our 38 full-service distribution
centers and extend this geographic coverage through remote distribution
facilities. Our Targeted Specialty Services division warehouses and
redistributes, out of three warehouses, to the distribution centers a full line
of restaurant equipment and supplies, imported specialty food products and
proprietary products. This division allows U.S. Foodservice's distribution
centers to offer a more varied product mix while maintaining local inventories
at efficient levels. Our customers generally are located within our principal
geographic service areas, which we define as the areas within a 150-mile radius
of each of our full-service distribution centers. Our distribution network
enables us to serve customers outside of our principal service areas. Services
to both street and chain customers are supported by the same distribution
facilities and equipment.
Our 38 full-service distribution centers have a total of approximately
seven million square feet of warehouse space. Each distribution center operates
from a warehouse complex that contains dry, refrigerated and frozen storage
areas as well as office space for sales, marketing, distribution and
administration personnel.
Products are delivered to U.S. Foodservice's distribution centers by
manufacturers, common carriers and U.S. Foodservice's own fleet of trucks. We
employ management information systems which enable us to lower our inbound
transportation costs by making more efficient use of our own fleet of trucks or
by consolidating deliveries into full truckloads. Orders from multiple
suppliers or multiple distribution centers are consolidated into single
truckloads for efficient use of available vehicle capacity and return-trip
hauls.
Orders typically are entered electronically by the commission sales force
with the appropriate distribution center through a hand-held computer device or
laptop computer. These devices facilitate order entry through the use of pre-
coded price lists which automatically price orders, apply pricing controls and
allow the sales representative to review the gross profit of each order at the
time of sale. Customers also have the option to place orders by telephone with
service representatives at each of our branches. Some of our large customers
place orders through a direct connection to our mainframe computer by means of
a computer terminal, personal computer or touch tone telephone, or through
Tranzmit(TM), our proprietary direct order entry system.
Under all forms of order placement, the salesperson or customer is
notified immediately about product availability, which facilitates instant
product substitution, if necessary. Products are reserved automatically at the
time of order, thereby ensuring complete fulfillment of orders upon delivery.
Customers' orders are assembled in the warehouse, sorted and shrink-wrapped to
ensure order completeness. The products are staged automatically according to
the required delivery sequence.
Products are delivered door-to-door, typically on the day following
placement of the order. We deliver our products through our fleet of over 2,400
tractor-trailer and straight trucks, each of which is equipped with separate
temperature-controlled compartments. In dispatching trucks, U.S. Foodservice
employs a computerized routing system designed to optimize delivery efficiency
and minimize drive time, wait time and excess mileage. The majority of our
fleet utilizes on-board computer systems that monitor vehicle speeds, fuel
efficiency, idle time and other vital statistical information. We collect and
analyze such data in an effort to monitor and improve transportation efficiency
and reduce costs.
In some of our geographic markets, we utilize our remote redistribution
facilities to achieve a higher level of customer service. We transport our
products in large tractor-trailers or double trailers to the redistribution
facility, where the loads are then transferred to smaller equipment for
delivery in the normal fashion.
38
<PAGE>
Suppliers
At June 27, 1998, U.S. Foodservice employed approximately 250 purchasing
agents with expertise in specific product lines to purchase products for U.S.
Foodservice from approximately 7,000 suppliers located throughout the United
States and in other countries. Substantially all types of products distributed
by U.S. Foodservice are available from a variety of suppliers, and we are not
dependent on any single source of supply. We do not purchase any material
portion of our product requirements under long-term supply contracts.
We manage our purchasing operations and negotiate all major vendor
programs from our corporate headquarters in Columbia, Maryland. We seek to
concentrate purchases with selected suppliers to ensure access to high-quality
products on advantageous terms. We cooperate closely with these suppliers to
promote new and existing products. The suppliers assist in training our sales
force and customers regarding new products, new trends in the industry and new
menu ideas, and collaborate with us in advertising and promoting these products
both through printed advertisements and through annual branch-sponsored food
shows and national trade shows.
Prior to the Acquisition, we transacted a majority of our purchasing
activities centrally at our corporate headquarters. At the former Rykoff-Sexton
divisions, purchases were primarily transacted locally. We believe that
centralized purchasing results in lower costs through greater ordering
efficiency. As part of our Acquisition restructuring plan, we are progressively
centralizing at our corporate headquarters the day-to-day purchasing activities
currently being performed at the former Rykoff-Sexton divisions. This
transition, which is dependent upon completion of the centralization of our
management information systems, is currently expected to take two to three
years to complete.
Through our purchasing department, we are able to monitor the quality of
the products offered by various suppliers and ensure consistency of product
quality across our distribution network. U.S. Foodservice maintains a
comprehensive quality control and assurance program that at June 27, 1998
actively involved approximately 225 employees in daily quality control
activities. The program is managed by employees engaged in purchasing
operations, including product group managers who each manage specific segments
of the product line and product line managers who purchase products for the
branches, and is supported at each branch by the merchandising manager, the
branch buyer and an inventory control specialist. The quality control process
includes the selection of suppliers and the policing of quality standards
through product sampling at both U.S. Foodservice's corporate offices and
branch locations and through visits to growing fields, manufacturing facilities
and storage operations.
We generally require our suppliers and manufacturers to maintain
specified levels of product liability insurance and to name U.S. Foodservice as
an additional insured on the applicable insurance policies.
Properties
U.S. Foodservice occupies corporate headquarters in Columbia, Maryland,
which consists of a total of approximately 95,000 square feet of office space,
under a lease which expires in June 2003.
39
<PAGE>
U.S. Foodservice's 38 full-service distribution centers contain a total
of approximately seven million square feet of warehouse space. The distribution
centers range in area from approximately 75,000 square feet to approximately
525,000 square feet. The centers contain dry, refrigerated and frozen storage
areas and office space for the sales and administrative operations of the
branch. As part of our Acquisition restructuring plan, we consolidated some
overlapping distribution centers in fiscal 1998 and plan to close additional
facilities in fiscal 1999. See note 6 to the audited consolidated financial
statements appearing elsewhere in this prospectus. The following table lists
the location of each of our full-service distribution centers:
Arizona Maryland Oklahoma
Phoenix* Baltimore Oklahoma City
Severn
California Oregon
Daly City* Massachusetts Portland
La Mirada Everett
Vista* Pennsylvania
Michigan Allentown
Connecticut Taylor Altoona
South Windsor Pittston
Yantic Minnesota
Plymouth South Carolina
Florida Fort Mill
Ormond Beach Nevada
Las Vegas Tennessee
Georgia Reno* Alcoa
Austell*
College Park New Jersey Texas
Bridgeport Austin*
Illinois Englewood Dallas*
Glendale Heights Kearny* Lubbock
Streator Mesquite
New York
Indiana Buffalo Virginia
Fort Wayne Salem
Ohio
Fairfield West Virginia
Cincinnati Hurricane
- --------
*Indicates facility leased by U.S. Foodservice, except for the Austin, Texas
facility, which is partially leased and partially owned by U.S. Foodservice;
all other facilities are wholly owned by U.S. Foodservice.
U.S. Foodservice also leases in-transit warehouses in Indiana and
Maryland and manages an in-transit warehouse out of a third-party facility in
California.
Equipment and Machinery
Equipment and machinery owned by U.S. Foodservice and used in our
operations consist principally of electronic data processing equipment and
product handling equipment. We also operate a fleet of over 2,400 vehicles,
consisting of tractors, trailers and straight trucks, which are used for long
hauls and local deliveries. At June 27, 1998, U.S. Foodservice owned
approximately 29% of these vehicles and leased the remainder.
We outsource our data center operations for approximately one third of
our divisions. As our business needs warrant, we can either increase or
decrease the amount of computer capacity we purchase upon short notice to the
vendor. We believe that this arrangement provides us with more reliable and
flexible service at a lower cost than we could achieve by operating our own
data center for this segment of our business.
40
<PAGE>
We regularly evaluate the capacity of our various facilities and
equipment and make capital investments to expand capacity where necessary. In
fiscal 1998, we spent $95.5 million on capital expenditures, primarily for
construction of new distribution centers in Fort Mill, South Carolina and Las
Vegas, Nevada, expansion of existing distribution centers at various locations
and upgrading of our management information systems. In the six months ended
December 26, 1998, we spent $35.2 million on capital expenditures, primarily
for facility expansion projects and continued upgrading of our management
information systems. We will continue to undertake expansion or replacement of
our facilities as and when needed to accommodate our growth.
Employees
At the end of fiscal 1998, U.S. Foodservice had approximately 11,000
full-time employees, of whom approximately 240 were employed in corporate
management and administration and approximately 4,200 of whom were hourly
employees. Approximately 3,000 of our employees were covered by collective
bargaining contracts with approximately 40 different local unions associated
with the International Brotherhood of Teamsters and other labor organizations.
Collective bargaining contracts covering approximately 750 of our employees
will expire by May 1, 1999.
We believe that our relations with our employees are satisfactory.
Competition
The foodservice distribution industry is extremely fragmented, with over
3,000 companies in operation in 1998. In recent years, the foodservice
distribution industry has been characterized by significant consolidation and
the emergence of larger competitors. We compete in each of our markets with at
least one other large national distribution company, generally SYSCO Corp. or
Alliant Foodservice, Inc., as well as with numerous regional and local
distributors.
U.S. Foodservice believes that, although price is an important
consideration, distributors in the foodservice industry compete principally on
the basis of service, product quality and customer relations. We attribute our
ability to compete effectively against smaller regional and local distributors
in part to our wider product selection, the cost advantages resulting from our
size and centralized purchasing operations and our ability to offer broad and
consistent market coverage. We compete against other broadline distributors
primarily by providing our customers with accurate and timely fulfillment of
orders and an array of value-added services. U.S. Foodservice typically
competes against other foodservice distribution companies and, to a lesser
extent, financial investors for potential acquisitions. We believe that our
financial resources and our ability to offer owners of acquisition targets an
interest in the combined business through ownership of our common stock
provides us with an advantage over many of our competitors.
Legal Proceedings
From time to time, U.S. Foodservice is involved in litigation and
proceedings arising out of the ordinary course of our business. There are no
pending material legal proceedings or environmental investigations to which
U.S. Foodservice is a party or to which the property of U.S. Foodservice is
subject.
41
<PAGE>
MANAGEMENT
The following table presents information regarding our executive officers
and directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
James L. Miller............. 50 Chairman of the Board of Directors, President
and Chief Executive Officer
Lewis Hay, III.............. 43 Director, Executive Vice President and Chief
Financial Officer
Mark P. Kaiser.............. 41 Director, Executive Vice President-Sales,
Marketing and Procurement
David M. Abramson........... 45 Director, Executive Vice President and General
Counsel
George T. Megas............. 46 Vice President and Chief Accounting Officer
Matthias B. Bowman.......... 50 Director
Michael J. Drabb............ 65 Director
Albert J. Fitzgibbons III... 53 Director
Eric E. Glass............... 58 Director
Paul I. Latta, Jr........... 55 Director
James P. Miscoll............ 64 Director
Jeffrey D. Serkes........... 39 Director
Dean R. Silverman........... 47 Director
Bernard Sweet............... 74 Director
</TABLE>
James L. Miller has served as Chairman of the Board of Directors and
Chief Executive Officer of U.S. Foodservice since July 1989 and as President of
U.S. Foodservice from July 1989 to December 1997 and January 1998 to the
present. From 1986 to 1989, Mr. Miller served as Executive Vice President and
Chief Operating Officer of the Northern Division of PYA/Monarch, Inc., a
broadline foodservice distributor ("PYA/Monarch"). From 1983 to 1985, Mr.
Miller served as Vice President and General Manager of PYA/Monarch's Northeast
Division. Before joining PYA/Monarch, Mr. Miller was employed by SYSCO Corp., a
broadline foodservice distributor, from 1972 to 1983, where he held the
positions of Vice President of Operations, Vice President of Sales, and Vice
President and General Manager.
Lewis Hay, III has served as a director of U.S. Foodservice since 1991.
He joined U.S. Foodservice in 1991 as Senior Vice President and Chief Financial
Officer and was appointed Executive Vice President in September 1997. Before
joining U.S. Foodservice, Mr. Hay was a Vice President and partner of Mercer
Management Consulting, formerly Strategic Planning Associates, Inc. ("Mercer"),
a management consulting firm, where he led the strategy consulting practice in
the firm's Washington, D.C. office. Mr. Hay joined Mercer in 1982 and,
beginning in 1986, participated in a number of consulting projects for
PYA/Monarch, including the management-led leveraged acquisition of certain
operations of PYA/Monarch in connection with the formation of JP Foodservice.
Mr. Hay serves as a member of the Council on Finance for the Graduate School of
Industrial Administration of Carnegie Mellon University and as a director of
Utilities, Inc., a holding company that owns and operates water and waste water
utilities.
Mark P. Kaiser has served as a director of U.S. Foodservice since 1996
and was appointed Executive Vice President-Sales, Marketing and Procurement of
U.S. Foodservice in January 1998. Previously, since 1993, he served as U.S.
Foodservice's Senior Vice President-Sales, Marketing and Procurement. Mr.
Kaiser served as
42
<PAGE>
U.S. Foodservice's Vice President-Sales and Marketing from 1989 to 1991 and as
operating executive vice president for sales, marketing and procurement from
1991 to 1993. Mr. Kaiser previously held a number of positions at PYA/Monarch,
including Vice President-Sales, from 1979 to 1989.
David M. Abramson has served as a director of U.S. Foodservice since
1994. He joined U.S. Foodservice as Senior Vice President and General Counsel
in July 1996 and was appointed Executive Vice President in January 1998. He has
served as Secretary of U.S. Foodservice since September 1996. Mr. Abramson was
the President and Managing Principal of the law firm of Levan, Schimel, Belman
& Abramson, P.A. from 1992 to 1996. Previously, Mr. Abramson was a Vice
President and Principal of that firm.
George T. Megas joined U.S. Foodservice in 1991 as Vice President-
Finance, with responsibility for the accounting, treasury and finance
functions, and was appointed Vice President and Chief Accounting Officer in
December 1997. Mr. Megas, a Certified Public Accountant, previously served as
the Corporate Controller for Strategic Planning Associates, Inc., a management
consulting firm, from 1979 to 1990, when it was acquired by Mercer, and served
as a Controller for certain regions of Mercer until 1991.
Matthias B. Bowman has served as a director of U.S. Foodservice since
December 1997. He has served as Vice Chairman of Investment Banking at Merrill
Lynch & Co., Inc. since 1993 and as a director of Merrill Lynch Capital
Partners, Inc. ("MLCP"), a private investment firm associated with Merrill
Lynch & Co., Inc., since 1994. Mr. Bowman has been employed by Merrill Lynch &
Co., Inc. in various capacities since 1972 and currently serves as an officer
or director of several affiliates of Merrill Lynch & Co., Inc. Mr. Bowman
serves as a director of Supermarkets General Holdings Corporation, SMG-II
Holdings Corporation and Pathmark Stores, Inc.
Michael J. Drabb has served as a director of U.S. Foodservice since 1994.
He has served as Executive Vice President of O'Brien Asset Management, Inc., an
institutional asset management firm, since August 1993. From April 1992 to July
1993, Mr. Drabb was retired. Mr. Drabb served as an Executive Vice President
and a member of the cabinet of The Mutual Life Insurance Company of New York
("MONY") from 1989 to 1992 and was employed by MONY from 1961 until his
retirement in 1992. Mr. Drabb serves as a director of the New York Life
Mainstay VP Fund, Inc. and the MONY Series Fund, Inc.
Albert J. Fitzgibbons III has served as a director of U.S. Foodservice
since December 1997. He is a partner and director of Stonington Partners, Inc.,
a private investment firm, a position he has held since 1993, and a partner and
director of Stonington Partners, Inc. II. He also has been a director of MLCP
since 1988 and a consultant to MLCP since 1994. Mr. Fitzgibbons was a partner
of MLCP from 1993 to 1994 and Executive Vice President of MLCP from 1988 to
1993. Mr. Fitzgibbons also was a Managing Director of the Investment Banking
Division of Merrill Lynch & Co., Inc. from 1978 to July 1994. Mr. Fitzgibbons
serves as a director of Borg-Warner Security Corporation, Dictaphone
Corporation, Merisel, Inc. and United Artists Theatre Circuit, Inc.
Eric E. Glass has served as a director of U.S. Foodservice since 1996. He
has served as Chairman of the Board of The Taney Corporation, a manufacturer of
wooden stairway components and stairways, since 1995. Previously, from 1962 to
1995, Mr. Glass served as President of The Taney Corporation. Mr. Glass serves
as a director of the Gettysburg Hospital in Gettysburg, Pennsylvania, and as a
director of F&M Bancorp, which is the parent corporation of Farmers & Mechanics
Bank.
Paul I. Latta, Jr. has served as a director of U.S. Foodservice since
1996. He has served since 1993 as Senior Vice President of The Rouse Company, a
real estate development and management company, where he is responsible for all
retail properties. Mr. Latta previously held a number of other positions with
The Rouse Company, where he has been employed since 1968.
James P. Miscoll has served as a director of U.S. Foodservice since
December 1997. He has been retired since 1992. Mr. Miscoll was previously Vice
Chairman of BankAmerica Corporation. He serves as a
43
<PAGE>
director of American International Group, Inc., MK Gold Company, U.S. Rentals,
Inc. and 20th Century Industries.
Jeffrey D. Serkes has served as a director of U.S. Foodservice since
1996. He has been Vice President and Treasurer of International Business
Machines Corporation ("IBM") since January 1995 and served as Assistant
Treasurer of IBM from August 1994 to December 1994. From 1987 to August 1994,
Mr. Serkes held a number of positions with RJR Nabisco, Inc., a manufacturer
and marketer of consumer packaged goods, including Vice President and Deputy
Treasurer and Vice President and Assistant Treasurer, Corporate Finance. Mr.
Serkes serves as a director of IBM Credit Corporation.
Dean R. Silverman has served as a director of U.S. Foodservice since
1996. He has served since 1993 as President of Dean & Company Strategy
Consultants, Inc., a strategic management consulting company located in Vienna,
Virginia. Prior to 1993, Mr. Silverman was a director of Mercer and headed
Mercer's strategy consulting practice.
Bernard Sweet has served as a director of U.S. Foodservice since December
1997. He has been retired since 1985. Mr. Sweet previously was President and
Chief Executive Officer of Republic Airlines, Inc. He serves as a director of
G&K Services, Inc.
The selling stockholders affiliated with Merrill Lynch & Co., Inc.
appointed Matthias B. Bowman and Albert J. Fitzgibbons III to the U.S.
Foodservice board of directors upon consummation of the Acquisition as provided
for in the merger agreement relating to the Acquisition. See "Principal and
Selling Stockholders." Upon consummation of the offerings, the Merrill Lynch
selling stockholders intend to request that Messrs. Bowman and Fitzgibbons
resign from their positions on the board of directors.
44
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table presents information, as of January 31, 1999,
regarding the beneficial ownership of our common stock by (1) each person known
to us to be the beneficial owner of more than 5% of our common stock, (2) each
director of U.S. Foodservice, (3) each executive officer of U.S. Foodservice,
(4) all directors and executive officers of U.S. Foodservice as a group and (5)
the selling stockholders both before and after giving effect to their sale of
the shares offered by this prospectus. Under SEC rules, beneficial ownership of
our common stock includes any shares as to which a person, directly or
indirectly, has or shares voting power or investment power and also any shares
as to which a person has the right to acquire such voting or investment power
within 60 days through the exercise of any stock option or other right.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Shares Beneficially
Owned Before Being Owned After
Offerings(1) Offered Offerings(1)
-------------------- --------- -------------
Name and Address of Beneficial Number Number Number
Owner of Shares % of Shares of Shares %
------------------------------ --------- ---- --------- --------- ---
<S> <C> <C> <C> <C> <C>
Merrill Lynch Entities(2)......... 7,808,898 16.2 7,808,898 0 0
c/o Merrill Lynch Capital
Partners, Inc.
225 Liberty Street
New York, New York 10080
T. Rowe Price Associates, 3,833,157 7.9 0 3,833,157 7.9
Inc.(3)..........................
100 E. Pratt Street
Baltimore, Maryland 21202
J. Christopher Reyes.............. 358,423 * 358,423 0 0
M. Jude Reyes..................... 358,423 * 358,423 0 0
David K. Reyes.................... 179,211 * 179,211 0 0
David M. Abramson(4).............. 29,481 * 0 29,481 *
Matthias B. Bowman................ 7,847,648(5) 16.3 0 38,750 *
Michael J. Drabb(6)............... 10,000 * 0 10,000 *
Albert J. Fitzgibbons III......... 6,422,430(7) 13.3 0 7,750 *
Eric E. Glass(8).................. 7,900 * 0 7,900 *
Lewis Hay, III(9)................. 86,962 * 0 86,962 *
Mark P. Kaiser(10)................ 74,689 * 0 74,689 *
Paul I. Latta, Jr.(11)............ 6,250 * 0 6,250 *
George T. Megas(12)............... 32,962 * 0 32,962 *
James L. Miller(13)............... 335,041 * 0 335,041 *
James P. Miscoll(14).............. 11,157 * 0 11,157 *
Jeffrey D. Serkes(15)............. 5,250 * 0 5,250 *
Dean R. Silverman(16)............. 5,250 * 0 5,250 *
Bernard Sweet(17)................. 17,219 * 0 17,219 *
All directors and executive
officers as a group
(14 persons)(18)................. 8,477,559(5)(7) 17.4 0 668,661 1.4
</TABLE>
- --------
(*) Represents holdings of less than 1%.
(1) Percentage of beneficial ownership as to any person as of a particular
date is calculated by dividing the number of shares beneficially owned by
that person by the sum of the number of shares outstanding as of such date
and the number of shares as to which that person has the right to acquire
voting or investment power within 60 days. Except as noted, all persons
listed above have sole voting and investment power with respect to their
shares. Information with respect to beneficial owners of more than 5% of
the common stock is based upon the most recent Schedule 13D or Schedule
13G on file with the SEC.
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<PAGE>
(2) The reporting persons (the "Merrill Lynch Entities") include the Merrill
Lynch selling stockholders and the following additional persons: Merrill
Lynch & Co., Inc., Merrill Lynch Group, Inc., Merrill Lynch MBP Inc.,
Merrill Lynch Capital Partners, Inc., ML Employees LBO Managers, Inc.,
Merrill Lynch LBO Partners No. IV, L.P., Merrill Lynch LBO Partners No. B-
IV, L.P. and KECALP Inc. Merrill Lynch & Co., Inc. and Merrill Lynch
Group, Inc. report that they each have shared voting and dispositive power
with respect to all of the shares shown and sole voting and dispositive
power with respect to none of the shares shown. The other Merrill Lynch
Entities report that they have shared voting and dispositive power with
respect to 7,808,898 of the shares shown and sole voting and dispositive
power with respect to none of the shares shown. Each Merrill Lynch Entity
disclaims beneficial ownership of all shares not held of record by such
Merrill Lynch Entity. The selling stockholders include the following
entities (the "Merrill Lynch selling stockholders"), each of which owned
of record the number of outstanding shares of common stock indicated after
its name: Merrill Lynch Capital Appreciation Partnership No. B- XVIII,
L.P. (3,377,066), ML Offshore LBO Partnership No. B-XVIII (1,699,096), ML
IBK Positions, Inc. (1,116,140), MLCP Associates L.P. No. II (40,499),
MLCP Associates L.P. No. IV (10,520), Merrill Lynch KECALP L.P. 1994
(52,606), Merrill Lynch KECALP L.P. 1991 (147,089), Merrill Lynch Capital
Appreciation Partnership No. XIII, L.P. (1,255,579), ML Offshore LBO
Partnership No. XIII (31,920), ML Employees LBO Partnership No. I, L.P.
(31,211), Merrill Lynch KECALP L.P. 1987 (23,586) and Merchant Banking
L.P. No. II (23,586).
(3) T. Rowe Price Associates, Inc. reports that it has sole dispositive power
with respect to all of the shares shown, sole voting power with respect to
475,278 of the shares shown and shared voting power with respect to none
of the shares shown.
(4) Includes (i) 209 shares credited to participant account in U.S.
Foodservice's 401(k) retirement savings plan (the "401(k) plan"), which
are voted by the plan's trustees, (ii) outstanding options exercisable
within 60 days to purchase 26,128 shares and (iii) 2,000 shares held by a
family trust for the benefit of Mr. Abramson's minor children, of which
Mr. Abramson acts as the trustee and with respect to which he exercises
voting and investment power.
(5) Mr. Bowman is a director and/or officer of each Merrill Lynch selling
stockholder or the ultimate general partner thereof and, thus, under the
rules and regulations of the SEC may be deemed to be the beneficial owner
of the shares of common stock beneficially owned by the Merrill Lynch
selling stockholders. Accordingly, those shares are included in the table
as beneficially owned by Mr. Bowman and for all directors and executive
officers as a group. Except with respect to 38,750 shares which he owns
directly, Mr. Bowman disclaims beneficial ownership of those shares. The
address of Mr. Bowman is c/o Merrill Lynch Capital Partners, Inc., 225
Liberty Street, New York, New York 10080.
(6) Includes outstanding options exercisable within 60 days to purchase 9,000
shares.
(7) Mr. Fitzgibbons is a director of the ultimate general partner of some of
the Merrill Lynch selling stockholders and, thus, under the rules and
regulations of the SEC may be deemed to be the beneficial owner of the
shares of common stock beneficially owned by those Merrill Lynch selling
stockholders. Accordingly, those shares are included in the table as
beneficially owned by Mr. Fitzgibbons and for all directors and executive
officers as a group. Except with respect to 7,750 shares which he owns
directly, Mr. Fitzgibbons disclaims beneficial ownership of those shares.
The address of Mr. Fitzgibbons is c/o Merrill Lynch Capital Partners,
Inc., 225 Liberty Street, New York, New York 10080.
(8) Includes outstanding options exercisable within 60 days to purchase 7,500
shares.
(9) Includes (i) 772 shares credited to participant account in the 401(k) plan,
which are voted by the plan's trustees, and (ii) outstanding options
exercisable within 60 days to purchase 67,307 shares. Also includes 381
shares held by Mr. Hay's wife as a custodian for their minor children. Mr.
Hay disclaims beneficial ownership of those shares.
(10) Includes (i) 590 shares credited to participant account in the 401(k)
plan, which are voted by the plan's trustees, and (ii) outstanding options
exercisable within 60 days to purchase 28,260 shares.
(11) Includes outstanding options exercisable within 60 days to purchase 5,250
shares.
(12) Includes (i) 709 shares credited to a participant account in the 401(k)
plan, which are voted by the plan's trustees, and (ii) outstanding options
exercisable within 60 days to purchase 17,202 shares.
(13) Includes (i) 11,745 shares credited to a participant account in the 401(k)
plan, which are voted by the plan's trustees, and (ii) outstanding options
exercisable within 60 days to purchase 138,910 shares.
(14) Includes outstanding options exercisable within 60 days to purchase 9,220
shares.
(15) Includes outstanding options exercisable within 60 days to purchase 5,250
shares.
(16) Includes outstanding options exercisable within 60 days to purchase 5,250
shares.
(17) Includes (i) outstanding options exercisable within 60 days to purchase
9,220 shares and (ii) 1,089 shares held of record by Mr. Sweet's wife.
(18) Includes outstanding options exercisable within 60 days to purchase
328,497 shares.
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<PAGE>
Merrill Lynch Selling Stockholders
The Merrill Lynch selling stockholders are entities of which Merrill
Lynch Capital Partners, Inc. ("MLCP") or one of its affiliates is the direct or
indirect managing partner or controlling entity. MLCP initiates and structures
transactions commonly referred to as leveraged or management buyouts involving
publicly owned companies, privately owned companies and subsidiaries and
divisions of both publicly owned and privately owned companies. MLCP manages a
fund of equity capital committed by institutional investors for investment in
the equity portion of leveraged buyout transactions.
The Merrill Lynch selling stockholders were issued the shares of common
stock offered by this prospectus upon conversion of their Rykoff-Sexton common
stock in the Acquisition, which was consummated on December 23, 1997. These
selling stockholders obtained shares of USF through prior investments in two
independent broadline distributors dating back to 1988 and 1992 and received
Rykoff-Sexton common stock in May 1996 when Rykoff-Sexton acquired USF in a
stock-for-stock transaction.
U.S. Foodservice has registered the shares of the Merrill Lynch selling
stockholders under a registration rights agreement among Rykoff-Sexton, the
Merrill Lynch selling stockholders and other former Rykoff-Sexton stockholders.
Upon consummation of the Acquisition, U.S. Foodservice assumed Rykoff-Sexton's
rights and obligations under the registration rights agreement. Under this
agreement, U.S. Foodservice is obligated to pay all expenses of registering the
shares of the Merrill Lynch selling stockholders, except for the underwriting
discount.
As required by the merger agreement relating to the Acquisition, the U.S.
Foodservice board of directors appointed two persons designated by MLCP to the
board of directors following consummation of the Acquisition. The MLCP
designees on the U.S. Foodservice board of directors are Matthias B. Bowman and
Albert J. Fitzgibbons III. As required by the merger agreement, MLCP also has
designated Mr. Bowman to serve on the nominating committee of the board of
directors.
U.S. Foodservice is entitled to the benefits of a standstill agreement
among Rykoff-Sexton and MLCP and the Merrill Lynch selling stockholders
(collectively, the "ML Entities"). The standstill agreement imposes certain
restrictions on the acquisition and transfer of U.S. Foodservice voting
securities by the ML Entities, requires all U.S. Foodservice voting securities
owned by the ML Entities and their affiliates, as a group, to be voted for U.S.
Foodservice's nominees to the board of directors, subject to specified
exceptions, and provides for representation of the ML Entities on the U.S.
Foodservice board of directors and specified board committees. No designees of
the ML Entities have been appointed or elected to the U.S. Foodservice board of
directors under the standstill agreement. The standstill agreement will
terminate upon consummation of the offerings.
Webb Foods Selling Stockholders
We issued an aggregate of 896,057 shares of our common stock to J.
Christopher Reyes, M. Jude Reyes and David K. Reyes, who are former
stockholders of Joseph Webb Foods, Inc., in consideration for our acquisition
of Joseph Webb Foods in the second quarter of fiscal 1999. Before we acquired
Joseph Webb Foods, J. Christopher Reyes served as a director, President and
Secretary of Joseph Webb Foods, M. Jude Reyes served as a director and Vice
President of Joseph Webb Foods, and David K. Reyes served as a director, Vice
President and Assistant Treasurer of Joseph Webb Foods. We do not currently
employ any of these persons. We are obligated to issue additional shares to
these selling stockholders if the business we acquired from them achieves
specified sales targets.
U.S. Foodservice has registered the shares offered by the Webb Foods
selling stockholders under a registration rights agreement which we entered
into when we acquired Joseph Webb Foods. U.S. Foodservice will pay all expenses
of registering the shares of these selling stockholders, except for the
underwriting discount.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
U.S. Foodservice's authorized capital consists of 150,000,000 shares of
common stock, par value $.01 per share, of which 48,261,739 shares were
outstanding as of January 31, 1999, and 5,000,000 shares of preferred stock,
par value $.01 per share, no shares of which are outstanding. No series of
preferred stock has been designated other than 350,000 shares of Series A
Junior Participating Preferred Stock, par value $.01 per share, described below
under "Preferred Share Purchase Rights."
The following summary description of our capital stock and our
shareholder rights plan is not complete and is subject to the provisions of the
U.S. Foodservice certificate of incorporation and bylaws and the Rights
Agreement, as defined below, and the provisions of applicable law. Copies of
these documents have been filed or incorporated by reference as exhibits to the
registration statement of which this prospectus is a part and may be obtained
as described under "Where You Can Find More Information."
Common Stock
Subject to any prior rights of any holders of preferred stock then
outstanding, holders of common stock are entitled to such dividends as may be
declared from time to time by the U.S. Foodservice board of directors out of
funds legally available for dividend payments. Each holder of common stock is
entitled to one vote for each share owned by the holder on all matters
submitted to a vote of common stockholders. Shares of common stock are not
entitled to any cumulative voting rights. If there is a liquidation,
dissolution or winding up of U.S. Foodservice, holders of common stock are
entitled to share equally and ratably in any assets remaining after the payment
of all debt and other liabilities, subject to the prior rights, if any, of
holders of preferred stock. Holders of common stock have no preemptive or other
subscription or conversion rights. The common stock is not subject to
redemption.
Preferred Share Purchase Rights
Each share of common stock has or will have attached to it one preferred
share purchase right (a "Right"). Each Right entitles the registered holder of
common stock to purchase from U.S. Foodservice, upon the occurrence of
specified events, one one-hundredth of a share of Series A Junior Participating
Preferred Stock (the "preferred shares"), of U.S. Foodservice at a price of $95
per one one-hundredth of a Preferred Share (the "purchase price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement, dated as of February 19, 1996, as amended (as the same may be
further amended from time to time, the "Rights Agreement"), between the Company
and The Bank of New York, as Rights Agent.
Until the Distribution Date, as defined below, U.S. Foodservice will not
issue separate certificates evidencing the Rights. Until that date, the Rights
will be evidenced, with respect to any common stock certificate, by that common
stock certificate. The Rights will detach from the common stock and a
Distribution Date will occur upon the earlier of (1) subject to the exceptions
described below, the 10th day following a public announcement that a person or
group of affiliated or associated persons (a "group") has acquired beneficial
ownership of 10% or more of the outstanding common stock (any such person or
group, subject to the exceptions described below, an "Acquiring Person"), or
(2) the 10th business day (or such later date as may be determined by action of
the U.S. Foodservice board of directors prior to such time as any person or
group becomes an Acquiring Person) following the commencement by any person or
group of, or the first public announcement by any person or group of an
intention to make, a tender offer or exchange offer that would result in (A)
beneficial ownership by a group or person of 10% or more of the outstanding
common stock or (B) any person otherwise being deemed an Acquiring Person. The
term "Acquiring Person" will not include (x) U.S. Foodservice, any subsidiary
of U.S. Foodservice, any employee benefit plan of U.S. Foodservice or any
subsidiary of U.S. Foodservice, or any entity holding common stock for or
pursuant to the terms of such plan or (y) Rykoff-Sexton or any ML Entity, but
only to the extent that Rykoff-Sexton or such ML Entity would, absent this
provision, be deemed to be an Acquiring Person solely as the result of the
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<PAGE>
execution and delivery, in connection with the Acquisition, of (1) the
Agreement and Plan of Merger, dated as of June 30, 1997, as amended, (2) the
Stock Option Agreement, dated as of June 30, 1997, by and between the U.S.
Foodservice, as issuer, and Rykoff-Sexton, as grantee, (3) the Support
Agreement, as amended and restated as of June 30, 1997, by and between U.S.
Foodservice and the ML Entities, and acknowledged by Rykoff-Sexton, or (4) the
consummation of the transactions contemplated by those agreements. References
in this paragraph to beneficial ownership of 10% of the outstanding common
stock are references to 15% of the outstanding common stock with respect to any
person who is eligible to report its beneficial ownership of, or who will or
would be eligible upon acquisition of, equity securities of U.S. Foodservice,
including common stock, on Schedule 13G under the Exchange Act, and, without
limiting the foregoing, with respect to whom clause (i) of paragraph (b)(l) of
Rule 13d-1 under the Securities Exchange Act is true and correct.
The Rights Agreement provides that, until the Distribution Date, or
earlier redemption or expiration of the Rights, the Rights will be transferred
with and only with the common stock. Until the Distribution Date, or earlier
redemption or expiration of the Rights, new common stock certificates issued
after March 1, 1996 upon transfer or new issuances of common stock will contain
a notation incorporating the Rights Agreement by reference, and the surrender
for transfer of any certificates for common stock outstanding as of March 1,
1996 also will constitute the transfer of the Rights associated with the common
stock represented by that certificate. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights will be mailed
to holders of record of the common stock as of the close of business on the
Distribution Date, and the separate Right certificates alone will evidence the
Rights. Only common stock issued prior to the Distribution Date will be issued
with Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on February 19, 2006, unless the expiration date is extended or
unless the Rights are earlier redeemed or exchanged by U.S. Foodservice, in
each case as described below.
The purchase price payable, and the number of preferred shares or other
securities or property issuable, upon exercise of the Rights, as well as the
number of Rights outstanding, are subject to adjustment from time to time
pursuant to customary antidilution provisions. The number of outstanding Rights
and the number of one one-hundredths of a preferred share issuable upon
exercise of each Right are also subject to adjustment in the event of a
dividend or other distribution on the common stock payable in common stock or
in securities convertible into common stock or subdivisions, consolidations or
reclassifications of the common stock occurring, in any such case, prior to the
Distribution Date.
Preferred shares purchasable upon exercise of the Rights will not be
redeemable. Each preferred share will be entitled to a minimum preferential
quarterly dividend payment of $1.00 per share, but will be entitled to an
aggregate dividend of 100 times the dividend declared per share of common
stock. If there is a liquidation, the holders of the preferred shares will be
entitled to a minimum preferential liquidation payment of $100 per share, but
will be entitled to an aggregate payment of 100 times the payment made per
share of common stock. Each preferred share will have 100 votes, voting
together with the common stock. If there is a merger, consolidation or other
transaction in which common stock is exchanged, each preferred share will be
entitled to receive 100 times the amount received per share of common stock.
These rights are protected by customary antidilution provisions. Because of the
nature of the dividend, liquidation and voting rights of the preferred shares,
the value of the one one-hundredth interest in a preferred share purchasable
upon exercise of each Right should approximate the value of one share of common
stock.
If any person or group becomes an Acquiring Person, proper provision will
be made so that each holder of a Right, other than Rights beneficially owned by
the Acquiring Person, which will become null and void, will have the right to
receive upon exercise of the Right at the then-current exercise price, instead
of preferred shares, that number of shares of common stock having a market
value of two times the exercise price
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<PAGE>
of the Right. If U.S. Foodservice does not have sufficient common stock issued
but not outstanding, or authorized but unissued, to permit the exercise in full
of the Rights, U.S. Foodservice will be required to take all action necessary
to authorize additional common stock for issuance upon exercise of the Rights.
If, after a good-faith effort, U.S. Foodservice is unable to take all necessary
action, U.S. Foodservice will substitute, for each share of common stock that
would otherwise be issuable upon exercise of a Right, a number of preferred
shares, or fractional preferred shares, with the same market value as that
share of common stock.
If, after a person or group has become an Acquiring Person, U.S.
Foodservice is acquired in a merger or other business combination transaction
or 50% or more of its consolidated assets or earning power are sold, proper
provision will be made so that each holder of a Right, other than Rights
beneficially owned by the Acquiring Person, which will become null and void,
will have the right to receive, upon the exercise of the Right of at its then-
current exercise price and instead of preferred shares, that number of shares
of common stock of the acquiring company, or its parent, which at the time of
the transaction will have a market value of two times the exercise price of the
Right.
The exercise price of a Right at any date will be equal to the purchase
price at that date multiplied by the number of one one-hundredths of a
preferred share for which a Right is exercisable at such date.
At any time after any person or group becomes an Acquiring Person and
before the acquisition by that person or group of 50% or more of the
outstanding common stock, the U.S. Foodservice board of directors may exchange
the Rights, in whole or in part, for common stock at an exchange ratio of one
share of common stock for each Right, subject to adjustment. The U.S.
Foodservice board of directors will not exchange the Rights owned by the
acquiring person or group, which will have become null and void.
With specified exceptions, no adjustment in the purchase price will be
required until cumulative adjustments require an adjustment of at least 1% of
that purchase price. No fractional preferred shares will be issued, other than
fractions which are integral multiples of one one-hundredth of a preferred
share, which may, at the election of U.S. Foodservice, be evidenced by
depositary receipts. Instead of issuing fractional preferred shares, U.S.
Foodservice will make an adjustment in cash based on the market price of the
preferred shares on the last trading day prior to the date of exercise.
Upon approval by its board of directors, U.S. Foodservice may redeem the
Rights in whole, but not in part, at any time before any person or group
becomes an Acquiring Person, at a price of $.01 per Right. The redemption of
the Rights may be made effective at such time, on such basis and with such
conditions as the board of directors may establish in its sole discretion.
Immediately upon the action of the board of directors ordering redemption of
the Rights, the right to exercise the Rights will terminate and the only right
of the holders of the Rights will be to receive the redemption price specified
above.
Until a Right is exercised, the holder of the Right, in the capacity of a
holder, will have no rights as a stockholder of U.S. Foodservice, including,
without limitation, the right to vote or to receive dividends. Although the
distribution of the Rights will not be taxable to stockholders or to U.S.
Foodservice, stockholders may, depending upon the circumstances, recognize
taxable income in the event that the Rights become exercisable for common stock
of U.S. Foodservice or other consideration, or for common stock of the
acquiring company or its parent as set forth above.
The Rights Agreement may be amended or supplemented by U.S. Foodservice
from time to time without the approval of any holders of Rights to cure any
ambiguity, to correct or supplement any defective or inconsistent provisions,
or to make any other provisions with respect to the Rights which U.S.
Foodservice may deem necessary or desirable, provided that, from and after the
time that any person or group becomes an Acquiring Person, the Rights Agreement
may not be amended in any manner which would adversely affect the interest of
the holders of Rights.
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Preferred Stock
Under the U.S. Foodservice certificate of incorporation, the board of
directors has the authority, without further action by U.S. Foodservice
stockholders, to issue up to 5,000,000 shares of preferred stock in one or more
series and to fix the voting powers, designations, preferences and the relative
participating, optional or other special rights and qualifications, limitations
and restrictions of each series, including dividend rights, conversion rights,
voting rights, terms of redemption, liquidation preferences and the number of
shares constituting any series. To date, the board of directors has fixed only
the terms of the preferred shares issuable upon exercise of the Rights. Because
the board of directors has the power to establish the preferences and rights of
the shares of any additional series of preferred stock, it may afford holders
of any preferred stock preferences, powers and rights, including voting rights,
senior to the rights of holders of the common stock, which could adversely
affect the holders of the common stock.
Anti-Takeover Effect of Our Charter and Bylaw Provisions
The U.S. Foodservice certificate of incorporation and bylaws contain
certain provisions that could make it more difficult to consummate an
acquisition of U.S. Foodservice by means of a tender offer, a proxy contest or
otherwise.
Classified Board of Directors. The certificate of incorporation and
bylaws provide that the board of directors will be divided into three classes
of directors, with the classes as nearly equal in number as possible. As a
result, approximately one-third of the board of directors will be elected each
year. The classification of the board of directors will make it more difficult
for an acquiror or for other stockholders to change the composition of the
board of directors. The certificate of incorporation provides that, subject to
any rights of holders of preferred stock to elect additional directors under
specified circumstances, the number of directors will be fixed in the manner
provided in the bylaws. The bylaws provide that, subject to any rights of
holders of preferred stock to elect directors under specified circumstances,
the number of directors will be fixed from time to time exclusively by a
resolution adopted by directors constituting a majority of the total number of
directors that U.S. Foodservice would have if there were no vacancies on the
board of directors. In addition, the certificate of incorporation provides
that, subject to any rights of holders of preferred stock, and unless the board
of directors otherwise determines, any vacancies will be filled only by the
affirmative vote of a majority of the remaining directors, though less than a
quorum.
No Stockholder Action by Written Consent. The certificate of
incorporation provides that, subject to the rights of any holders of preferred
stock to act by written consent instead of a meeting, stockholder action
may be taken only at an annual meeting or special meeting of stockholders and
may not be taken by written consent instead of a meeting. Failure to satisfy
any of the requirements for a stockholder meeting could delay, prevent or
invalidate stockholder action.
Stockholder Advance Notice Procedure. The certificate of incorporation
establishes an advance notice procedure for stockholders to make nominations of
candidates for election as directors or to bring other business before an
annual meeting of U.S. Foodservice stockholders. The stockholder notice
procedure provides that only persons that are nominated by a majority of the
board of directors, or a duly authorized board committee, or by a stockholder
who has given timely written notice to the secretary of U.S. Foodservice before
the meeting at which directors are to be elected, will be eligible for election
as directors. This notice is required to include specified information about
the stockholder and each proposed director nominee, a description of all
arrangements or understandings between the stockholder and each proposed
nominee and any other persons, other information regarding each proposed
nominee that would be required to be included in a proxy statement filed under
SEC rules and regulations, and the written consent of each proposed nominee to
serve as a director if elected. The stockholder notice procedure also provides
that the only business that may be conducted at an annual meeting is business
which has been brought before the meeting by, or at the direction of, the board
of directors or by a stockholder who has given timely written notice to the
secretary of U.S. Foodservice. This
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<PAGE>
notice is required to include a brief description of the business desired to be
brought before the meeting, any material interest of the stockholder in that
business, and specified information about the stockholder and the stockholder's
ownership of U.S. Foodservice capital stock.
Section 203 of the Delaware General Corporation Law
U.S. Foodservice is subject to section 203 of the Delaware general
corporation law, which, with specified exceptions, prohibits a Delaware
corporation from engaging in any "business combination" with any "interested
stockholder" for a period of three years following the time that the
stockholder became an interested stockholder unless: (1) before that time, the
board of directors of the corporation approved either the business combination
or the transaction which resulted in the stockholder becoming an interested
stockholder; or (2) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (a) by persons who are
directors and also officers and (b) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer; or (3)
at or after that time, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
Section 203 defines "business combination" to include the following: (1)
any merger or consolidation of the corporation with the interested stockholder;
(2) any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder; (3) subject to
specified exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (4) any transaction involving the corporation that has the effect
of increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or (5) any
receipt by the interested stockholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the
corporation. In general, section 203 defines an "interested stockholder" as any
entity or person beneficially owning 15% or more of the outstanding voting
stock of the corporation and any entity or person affiliated with or
controlling or controlled by that entity or person.
Director Liability and Indemnification of Directors and Officers
The Delaware general corporation law provides that a corporation may
eliminate or limit the personal liability of each director to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director except for liability for any breach of the director's duty of loyalty
to the corporation or its stockholders, for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, in
respect of unlawful dividend payments or stock redemptions or repurchases and
for any transaction from which the director derives an improper personal
benefit. The U.S. Foodservice certificate of incorporation provides for the
elimination and limitation of the personal liability of directors for monetary
damages to the fullest extent permitted by the Delaware general corporation
law. In addition, the certificate of incorporation provides that if the
Delaware general corporation law is amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
the directors will be eliminated or limited to the fullest extent permitted by
the Delaware general corporation law, as so amended. The effect of this
provision is to eliminate the rights of U.S. Foodservice and its stockholders,
through stockholder derivative suits on behalf of U.S. Foodservice, to recover
monetary damages against a director for breach of the fiduciary duty of care as
a director, including breaches resulting from negligent or grossly negligent
behavior, except in the situations described above. The provision does not
limit or eliminate the rights of U.S. Foodservice or any stockholder to seek
non-monetary relief such as an injunction or rescission upon breach of a
director's duty of
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<PAGE>
care. This provision is consistent with section 102(b)(7) of the Delaware
general corporation law, which is designed, among other things, to encourage
qualified individuals to serve as directors of Delaware corporations.
The U.S. Foodservice bylaws provide that U.S. Foodservice will, to the
full extent permitted by the Delaware general corporation law, as amended from
time to time, indemnify, and advance expenses to, each of its currently acting
and former directors and officers.
Listing of Common Stock
The common stock is listed on the New York Stock Exchange under the
symbol "UFS."
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C. serves as transfer agent and
registrar for the common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
As of January 31, 1999, there were approximately 48.3 million outstanding
shares of common stock. All of the shares offered by this prospectus will be
freely transferable without restriction or further registration under the
Securities Act, except that any shares held by a U.S. Foodservice "affiliate,"
as that term is defined under Rule 144 under the Securities Act, will be
subject to the resale limitations of Rule 144. Of U.S. Foodservice's
outstanding shares, other than the shares offered by this prospectus,
approximately 2 million shares were "restricted securities" within the meaning
of Rule 144 or otherwise subject to restrictions on sale under the Securities
Act at January 31, 1999. These shares may not be sold except in compliance with
the registration requirements of the Securities Act or in accordance with an
exemption from registration, such as the exemption provided by Rule 144. As of
January 31, 1999, other than the shares offered by this prospectus,
approximately 1.4 million of these shares were eligible for sale in the public
market under Rule 144 and approximately 600,000 shares were covered by the
registration statement referred to below.
In general, under Rule 144 as currently in effect, a stockholder, or
stockholders whose shares are aggregated, including an affiliate of U.S.
Foodservice, who has beneficially owned "restricted securities" for at least
one year is entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of (1) 1% of the then-outstanding shares of
common stock (approximately 483,000 shares as of January 31, 1999) or (2) the
average weekly trading volume of the common stock on the New York Stock
Exchange during the four calendar weeks preceding the filing of a notice on
Form 144 with the SEC regarding the sale. Sales under Rule 144 also are subject
to other requirements regarding the manner of sale, notice and availability of
current public information about U.S. Foodservice. Shares held by affiliates
that are not "restricted securities" are subject to the foregoing requirements
of Rule 144 other than the one-year holding period. Under Rule 144(k), if a
period of at least two years has elapsed since the later of the date restricted
securities were acquired from U.S. Foodservice and the date they were acquired
from an affiliate of U.S. Foodservice, a stockholder who is not an affiliate of
U.S. Foodservice at the time of sale and has not been an affiliate at any time
during the three months before the sale would be entitled to sell shares of
common stock immediately without compliance with the volume limitations under
Rule 144. This summary is not a complete description of Rule 144.
U.S. Foodservice has granted registration rights with respect to the
common stock primarily to holders of common stock U.S. Foodservice issued in
connection with its acquisition of other foodservice businesses. The offerings
are being made following the exercise of these registration rights. As of
January 31, 1999, in addition to the shares offered by this prospectus,
approximately 600,000 shares of common stock were entitled to the benefits of
these registration rights, all of which were shares covered by a registration
statement which was in effect under the Securities Act. The exercise of
registration rights granted by U.S. Foodservice is subject to notice
requirements, timing restrictions and volume limitations which may be imposed
by the underwriters of an offering. U.S. Foodservice is required to bear the
expenses of all these registrations, except for underwriting discounts and
commissions. We expect to grant registration rights to the stockholders of
other foodservice businesses we may acquire in the future.
U.S. Foodservice and the selling stockholders have entered into "lock-up"
agreements with the underwriters. These persons have agreed, among other
things, not to directly or indirectly offer, sell or otherwise dispose of or
transfer any shares of common stock without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated, on behalf of the
Underwriters, for a period of 90 days after the date of this prospectus,
subject to certain exceptions. See "Underwriting." With this consent, U.S.
Foodservice and the selling stockholders may sell shares before the expiration
of the lock-up period without prior notice to the other stockholders of U.S.
Foodservice or to any public market in which the common stock trades.
We can make no prediction as to the effect, if any, that future sales of
shares of common stock or the availability of shares for future sale will have
on the market price of the common stock prevailing from time to time. Sales of
substantial amounts of common stock, or the perception that these sales could
occur, could adversely affect the prevailing market prices of the common stock
and impair the ability of U.S. Foodservice to raise capital through future
offerings of equity securities.
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CERTAIN U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of U.S.
Foodservice common stock. For purposes of the following discussion, a "Non-U.S.
Holder" is any beneficial owner of common stock other than a person that is for
United States federal income tax purposes (1) a citizen or resident of the
United States, (2) a corporation, partnership or other entity treated as a
corporation or partnership for federal tax purposes, created or organized in or
under the laws of the United States, any state thereof or the District of
Columbia, other than a partnership that is not treated as a United States
person under any applicable Treasury regulations, (3) an estate whose income is
subject to United States federal income tax regardless of its source or (4) a
trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
In addition, certain trusts treated as United States persons for federal income
tax purposes on August 20, 1996 may elect to continue to be so treated to the
extent permitted in applicable Treasury regulations and will not be Non-U.S.
Holders if they make such an election. This discussion does not address all
aspects of United States federal income and estate taxes and does not deal with
foreign, state and local consequences that may be relevant to such holders of
common stock in light of their personal circumstances. Furthermore, this
discussion is based on provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed regulations promulgated under the
Code and administrative and judicial interpretations of the Code and those
regulations, as of the date hereof, all of which are subject to change. Each
prospective purchaser of U.S. Foodservice common stock in the offerings is
advised to consult a tax advisor with respect to current and possible future
tax consequences of acquiring, holding and disposing of common stock as well as
any tax consequences that may arise under the laws of any U.S. state,
municipality or other taxing jurisdiction.
Dividends
U.S. Foodservice does not currently pay cash dividends on its common
stock. See "Price Range of Common Stock and Dividend Policy." Dividends paid to
a Non-U.S. Holder of common stock generally will be subject to withholding of
United Stated federal income tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. However, dividends that are
effectively connected with the conduct of a trade or business by the Non-U.S.
Holder within the United States are not subject to the withholding tax, but
instead are subject to United States federal income tax on a net income basis
at applicable graduated individual or corporate rates. Any such effectively
connected dividends received by a foreign corporation may, under some
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or such lower rate as may be specified by an applicable income tax treaty.
Under current law, dividends paid to an address outside the United States
are presumed to be paid to a resident of such country, unless the payer has
knowledge to the contrary, for purposes of the withholding tax discussed above
and, under the current interpretation of United States Treasury regulations,
for purposes of determining the applicability of a tax treaty rate. Under final
United States Treasury regulations issued on October 7, 1997 (the "Final
Regulations"), effective for payments made after December 31, 1999, a Non-U.S.
Holder of common stock who wishes to claim the benefit of an applicable treaty
rate, and avoid back-up withholding as discussed below, would be required to
satisfy applicable certification and other requirements. Currently, a Non-U.S.
Holder must comply with certification and disclosure requirements to be exempt
from withholding under the effectively connected income exemption discussed
above.
A Non-U.S. Holder of common stock eligible for a reduced rate of United
States withholding tax under an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS").
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<PAGE>
Gain on Disposition of Common Stock
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
U.S. Foodservice common stock unless (1) the gain is effectively connected with
a trade or business of the Non-U.S. Holder in the United States, (2) in the
case of a Non-U.S. Holder who is an individual and holds the common stock as a
capital asset, the holder is present in the United States for 183 or more days
in the taxable year of the sale or other disposition and certain other
conditions are met, or (3) U.S. Foodservice is or has been a "U.S. real
property holding corporation" for United States federal income tax purposes at
any time within the shorter of the five-year period preceding such disposition
or the period the Non-U.S. Holder held the common stock.
U.S. Foodservice has not determined whether it is or has been within the
prescribed period a "U.S. real property holding corporation" for federal income
tax purposes. If U.S. Foodservice is, has been or becomes a U.S. real property
holding corporation, so long as the common stock continues to be regularly
traded on an established securities market within the meaning of Section
897(c)(3), only a Non-U.S. Holder who holds or held, at any time during the
shorter of the five-year period preceding the date of disposition or the
holder's holding period, more than 5% of the common stock will be subject to
U.S. federal income tax on the disposition of the common stock.
An individual Non-U.S. Holder described in clause (1) above will be taxed
on the net gain derived from the sale under regular graduated United States
federal income tax rates. An individual Non-U.S. Holder described in clause (2)
above will be subject to a flat 30% tax on the gain derived from the sale,
which may be offset by United States capital losses, notwithstanding the fact
that the individual is not considered a resident of the United States. If a
Non-U.S. Holder that is a foreign corporation falls under clause (1) above, it
will be taxed on its gain under regular graduated United States federal income
tax rates and, in addition, may be subject to the branch profits tax equal to
30% of its effectively connected earnings and profits within the meaning of the
Code for the taxable year, as adjusted for specified items, unless it qualifies
for a lower rate under an applicable income tax treaty.
Federal Estate Tax
Common stock owned or treated as owned by an individual who is not a
citizen or resident, as defined for either United States federal income or
estate tax purposes, of the United States at the time of death will be
includable in the individual's gross estate for United States federal estate
tax purposes unless an applicable estate tax treaty provides otherwise, and
therefore may be subject to United States federal estate tax.
Information Reporting and Backup Withholding Tax
U.S. Foodservice must report annually to the IRS and to each Non-U.S.
Holder the amount of dividends paid to such holder and the tax withheld with
respect to such dividends, regardless of whether withholding was required.
Copies of the information returns reporting such dividends and withholding also
may be made available to the tax authorities in the country in which the Non-
U.S. Holder resides under the provisions of an applicable income tax treaty.
Under current law, backup withholding, which generally is a withholding
tax imposed at the rate of 31% on certain payments to persons that fail to
furnish certain information under the United States information reporting
requirements, generally will not apply to (1) dividends paid to Non-U.S.
Holders that are subject to withholding at the 30% rate, or lower treaty rate,
discussed above or (2) dividends paid to a Non-U.S. Holder at an address
outside the United States, unless the payer has knowledge that the payee is a
U.S. person. Under the Final Regulations, however, a Non-U.S. Holder generally
will be subject to back-up withholding at a 31% rate unless it meets applicable
certification requirements.
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Payment of the proceeds of a sale of common stock by or through a United
States office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury that
it is a Non-U.S. Holder, or otherwise establishes an exemption. In general,
backup withholding and information reporting will not apply to a payment of the
proceeds of a sale of common stock by or through a foreign office of a broker.
If, however, such broker is, for United States federal income tax purposes a
U.S. person, a controlled foreign corporation, or a foreign person that derives
50% or more of its gross income for certain periods from the conduct of a trade
or business in the United States, such payments will be subject to information
reporting, but not backup withholding, unless (i) such broker has documentary
evidence in its records that the beneficial owner is a Non-U.S. Holder and
certain other conditions are met or (ii) the beneficial owner otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as
a refund or a credit against the holder's United States federal income tax
liability provided the required information is furnished to the IRS.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Goldman, Sachs & Co., Salomon Smith Barney Inc., J.C. Bradford & Co. and First
Union Capital Markets Corp. are acting as representatives (the "U.S.
Representatives") of each of the U.S. Underwriters named below (the "U.S.
Underwriters"). Subject to the terms and conditions set forth in a U.S.
purchase agreement (the "U.S. Purchase Agreement") among U.S. Foodservice, the
selling stockholders and the U.S. Underwriters, and concurrently with the sale
of 1,740,991 shares of common stock to the International Managers, as defined
below, the selling stockholders have agreed to sell to the U.S. Underwriters,
and each of the U.S. Underwriters, severally and not jointly, has agreed to
purchase from the selling stockholders, the number of shares of common stock
set forth opposite its name below:
<TABLE>
<CAPTION>
Number
U.S. Underwriter of Shares
---------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
Goldman, Sachs & Co..............................................
Salomon Smith Barney Inc.........................................
J.C. Bradford & Co...............................................
First Union Capital Markets Corp.................................
---------
Total....................................................... 6,963,964
=========
</TABLE>
U.S. Foodservice and the selling stockholders have also entered into an
international purchase agreement (the "International Purchase Agreement" and,
together with the U.S. Purchase Agreement, the "Purchase Agreements") with
certain underwriters outside the United States and Canada (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters") for
whom Merrill Lynch International, Goldman Sachs International, Salomon Brothers
International Limited and J.C. Bradford & Co. are acting as lead managers (the
"Lead Managers"). Subject to the terms and conditions set forth in the
International Purchase Agreement, and concurrently with the sale of 6,963,964
shares of common stock to the U.S. Underwriters pursuant to the U.S. Purchase
Agreement, the selling stockholders have agreed to sell to the International
Managers, and the International Managers, severally and not jointly, have
agreed to purchase from the selling stockholders, an aggregate of 1,740,991
shares of common stock. The initial public offering price per share and the
total underwriting discount per share of common stock are identical under the
U.S. Purchase Agreement and the International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of common stock being sold pursuant to
each such agreement if any of the shares of common stock being sold pursuant to
such agreement are purchased. In the event of a default by an Underwriter, the
U.S. Purchase Agreement and the International Purchase Agreement provide that,
in certain circumstances, the purchase commitments of the non-defaulting
Underwriters may be increased or the Purchase Agreements may be terminated. The
closings with respect to the sale of shares of common stock to be purchased by
the U.S. Underwriters and the International Managers are conditioned upon one
another.
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The U.S. Representatives have advised U.S. Foodservice and the selling
stockholders that the U.S. Underwriters propose initially to offer the shares
of common stock to the public at the initial public offering price set forth on
the cover page of this prospectus, and to certain dealers at such price less a
concession not in excess of $ per share of common stock. The U.S.
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share of common stock to certain other dealers. After the initial
public offering, the public offering price, concession and discount may change.
U.S. Foodservice has granted options to the U.S. Underwriters,
exercisable for 30 days after the date of this prospectus, to purchase up to an
aggregate of 1,044,594 additional shares of common stock at the public offering
price set forth on the cover page of this prospectus, less the underwriting
discount. The U.S. Underwriters may exercise these options solely to cover
over-allotments, if any, made on the sale of the common stock offered hereby.
To the extent that the U.S. Underwriters exercise these options, each U.S.
Underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares of common stock proportionate to such U.S.
Underwriter's initial amount reflected in the foregoing table. U.S. Foodservice
has granted options to the International Managers, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of 261,149
additional shares of common stock to cover over-allotments, if any, on terms
similar to those granted to the U.S. Underwriters.
The following table shows the per share and total public offering price,
underwriting discount to be paid to the U.S. Underwriters and the International
Managers and the proceeds before expenses to the selling stockholders and, if
the over-allotment options are exercised in full, to U.S. Foodservice. This
information is presented assuming either no exercise or full exercise by the
U.S. Underwriters and the International Managers of their over-allotment
options.
<TABLE>
<CAPTION>
Total
-----
Per Without With
Share Option Option
----- ------- ------
<S> <C> <C> <C>
Public offering price................................ $ $ $
Underwriting discount................................ $ $ $
Proceeds to selling stockholders..................... $ $ $
Proceeds, before expenses, to U.S. Foodservice....... $ $ $
</TABLE>
The expenses of the offerings, exclusive of the underwriting discount,
are estimated at $0.9 million and are payable by U.S. Foodservice.
The shares of common stock are being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part.
U.S. Foodservice and the selling stockholders have agreed, subject to
certain exceptions, not to directly or indirectly (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of or
otherwise dispose of or transfer any shares of common stock or securities
convertible into or exchangeable or exercisable for or repayable with common
stock, whether now owned or hereafter acquired by the person executing the
agreement or with respect to which the person executing the agreement hereafter
acquires the power of disposition, or file or cause the filing of a
registration statement under the Securities Act with respect to the foregoing,
or (2) enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of the common stock or any
securities convertible into or exchangeable or exercisable for or repayable
with common stock, whether any such swap or transaction described in
clause (1) or (2) above is to be settled by delivery of common stock or other
securities, in cash or otherwise, without the prior written consent of Merrill
Lynch on behalf of the Underwriters for a period of 90 days after the date of
this prospectus. With this consent, U.S. Foodservice and the selling
stockholders may sell shares before the expiration of such 90-day period
without prior notice to the other stockholders of U.S. Foodservice or to any
public market in which the common stock trades. The foregoing lock-up
agreements provide, however, that U.S. Foodservice may do any of the following:
(1) issue common stock under its employee or
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director stock, bonus or compensation plans, or grant options to purchase
common stock or other awards under such plans, in each case as such plans are
in effect on the date of this prospectus, and file one or more registration
statements on Form S-8 covering the offering and sale of securities issuable
under such plans; (2) issue common stock or securities convertible into or
exchangeable or exercisable for or repayable with common stock to owners of
businesses which U.S. Foodservice may acquire in the future, whether by merger,
acquisition of assets or capital stock or otherwise, as consideration for the
acquisition of such businesses or to management employees of such businesses in
connection with any such acquisition, enter into and implement collar and other
price protection arrangements in connection with any such acquisition, and file
one or more registration statements on Form S-4 covering the offering and sale
of common stock or such other securities by U.S. Foodservice to such owners in
connection with such acquisitions; (3) in connection with the future
acquisition of any business, whether by merger, acquisition of assets or
capital stock or otherwise, that has outstanding warrants, options or other
securities convertible into or exchangeable or exercisable for or repayable
with common stock or other equity securities, or that maintains employee or
director bonus or compensation plans providing for the issuance of common stock
or options to purchase common stock or other awards, (A) issue substantially
similar new warrants, options or other securities to replace the outstanding
options, warrants or other securities of such acquired business or assume the
obligations of such acquired business under such outstanding warrants, options
or other securities or such plans, and issue common stock pursuant to any such
warrants, options or other securities, as in effect on the date of such
issuance or assumption, or grant options to purchase common stock or other
awards and issue common stock under any such plans, as in effect on the date of
acquisition, and (B) file one or more registration statements on Form S-8
covering the offering and sale of securities issuable under such plans; (4)
issue common stock pursuant to acquisition agreements existing on the date of
this prospectus which were entered into by U.S. Foodservice to effect the
acquisitions of Lone Star Institutional Grocers, Inc., J.H. Haar & Sons, L.L.C.
and Joseph Webb Foods, Inc., as described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Introduction," as
such agreements are in effect on the date of this prospectus, and implement
collar and other price protection provisions contained in such agreements; (5)
issue common stock upon exercise of an outstanding warrant to purchase 71,460
shares of common stock as of January 31, 1999, subject to anti-dilution
adjustments, as such warrant is in effect on the date of this prospectus; and
(6) file one or more shelf registration statements covering the resale of (A)
common stock issued to owners of businesses acquired by U.S. Foodservice prior
to the date of this prospectus under registration rights agreements existing on
the date of this prospectus, as such agreements are in effect on the date of
this prospectus, and (B) common stock issued in accordance with clause (2) of
this sentence to owners of businesses acquired by U.S. Foodservices subsequent
to the date of this prospectus, whether by merger, acquisition of assets or
capital stock or otherwise, as consideration for the acquisition of such
businesses under registration rights agreements entered into in connection with
such acquisitions.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell shares
of common stock to each other for purposes of resale at the initial public
offering price, less an amount not greater than the selling concession. Under
the terms of the Intersyndicate Agreement, the U.S. Underwriters and any
dealers to whom they sell shares of common stock will not offer to sell or sell
shares of common stock to persons who are non-U.S. or non-Canadian persons or
to persons they believe intend to resell to persons who are non-U.S. or non-
Canadian persons, and the International Managers and any dealers to whom they
sell shares of common stock will not offer to sell or sell shares of common
stock to U.S. persons or to Canadian persons or to persons they believe intend
to resell to U.S. or Canadian persons, except in the case of transactions
pursuant to the Intersyndicate Agreement.
The Underwriters will not confirm sales of the common stock to any
account over which they exercise discretionary authority without the prior
specific written approval of the customer.
Because U.S. Foodservice may be deemed to be an affiliate of or to have a
conflict of interest with Merrill Lynch and Merrill Lynch International, the
offerings will be conducted in accordance with Conduct Rule 2720 of the
National Association of Securities Dealers, Inc.
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U.S. Foodservice and the selling stockholders have agreed to indemnify
the U.S. Underwriters and the International Managers against certain
liabilities, including certain liabilities under the Securities Act, or to
contribute to payments the U.S. Underwriters and International Managers may be
required to make in respect thereof.
Until the distribution of the common stock is completed, SEC rules may
limit the ability of the Underwriters and certain selling group members to bid
for and purchase the common stock. As an exception to these rules, the U.S.
Representatives are permitted to engage in certain transactions that stabilize
the price of the common stock. These transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the common
stock.
If the Underwriters create a short position in the common stock in
connection with the offerings, i.e., if they sell more shares of common stock
than are set forth on the cover page of this prospectus, the U.S.
Representatives may reduce that short position by purchasing common stock in
the open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment options described
above.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither U.S. Foodservice nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the common
stock. In addition, neither U.S. Foodservice nor any of the Underwriters makes
any representation that the U.S. Representatives will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
Merrill Lynch and Merrill Lynch International may use this prospectus for
offers and sales related to market-making transactions in common stock. Merrill
Lynch and Merrill Lynch International may act as principal or agent in these
transactions, and the sales will be made at market prices or at negotiated
prices related to prevailing market prices at the time of sale.
Some of the Underwriters and their affiliates engage in transactions
with, and perform services for, U.S. Foodservice, and have engaged, and may in
the future engage, in commercial banking and investment banking transactions
with U.S. Foodservice. In that regard, some of the selling stockholders are
affiliates of Merrill Lynch and Merrill Lynch International. See "Principal and
Selling Stockholders."
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC under the Securities Exchange Act. Our Securities
Exchange Act file number for our SEC filings is 0-24954. You may read and copy
any document we file at the following SEC public reference rooms in Washington,
D.C. and at the following SEC regional offices:
450 Fifth Street, 7 World Trade Center 500 West Madison
N.W. Suite 1300 Street
Room 1024 New York, New York Suite 1400
Washington, D.C. 10048 Chicago, Illinois
20549 60661
You may obtain information on the operation of the public reference rooms
by calling the SEC at 1-800-SEC-0330.
We file information electronically with the SEC. Our SEC filings also are
available from the SEC's Internet site at http://www.sec.gov, which contains
reports, proxy and information statements, and other information regarding
issuers that file electronically.
You also may inspect our SEC filings and other information concerning
U.S. Foodservice at the offices of the New York Stock Exchange located at 20
Broad Street, New York, New York 10005.
This prospectus is part of a registration statement we filed with the
SEC. The SEC allows us to "incorporate by reference" certain documents we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
will make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act until the Offerings are terminated:
1. the Annual Report on Form 10-K for our fiscal year ended June 27, 1998,
which we filed on September 25, 1998, including the information we
incorporated by reference in our Form 10-K from our definitive proxy
statement for our 1998 annual meeting of stockholders, which we filed on
October 9, 1998;
2. our first amendment to our Annual Report on Form 10-K/A-1, which we
filed on January 14, 1999, and our second amendment to our Annual Report
on Form 10-K/A-2, which we filed on March 4, 1999;
3. the Quarterly Report on Form 10-Q for our fiscal quarter ended September
26, 1998, which we filed on November 10, 1998, and the Quarterly Report
on Form 10-Q for our fiscal quarter ended December 26, 1998, which we
filed on February 9, 1999;
4. our amendment to our Quarterly Report on Form 10-Q/A-1 for our fiscal
quarter ended September 26, 1998, which we filed on January 14, 1999;
and
5. the Current Reports on Form 8-K which we filed on September 11, 1998 and
December 18, 1998.
We will provide a copy of the information we incorporate by reference, at
no cost, to each person to whom this prospectus is delivered. To request a copy
of any or all of this information, you should write or telephone us at the
following address and telephone number:
Investor Relations
U.S. Foodservice
9755 Patuxent Woods Drive
Columbia, Maryland 21046
Telephone: (410) 312-7100
62
<PAGE>
LEGAL MATTERS
Hogan & Hartson L.L.P., Washington, D.C., will give its opinion as to the
validity of the shares offered by this prospectus. Brown & Wood llp, San
Francisco, California will act as counsel to the Underwriters.
EXPERTS
U.S. Foodservice. The consolidated financial statements of U.S.
Foodservice and subsidiaries as of June 28, 1997 and June 27, 1998 and for the
years then ended have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of U.S. Foodservice, formerly JP
Foodservice, Inc., for the year ended June 29, 1996 prior to restatement for
the Acquisition and included in the consolidated financial statements of U.S.
Foodservice for the year ended June 29, 1996 appearing elsewhere herein, have
been included in this prospectus in reliance on the report of
PricewaterhouseCoopers LLP, independent public accountants, appearing elsewhere
herein and given on the authority of said firm as experts in auditing and
accounting.
Valley Industries, Inc. The combined financial statements of Valley
Industries, Inc. and subsidiaries and Z Leasing Company, a general partnership,
for the year ended January 31, 1996, included in the consolidated financial
statements of U.S. Foodservice for the year ended June 29, 1996 appearing
elsewhere herein, have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of such firm as
experts in accounting and auditing.
Rykoff-Sexton. The audited consolidated financial statements of Rykoff-
Sexton and subsidiaries as of June 28, 1997 and for the fiscal years ended June
28, 1997 and April 27, 1996 and the nine-week transition period ended June 29,
1996 included in the consolidated financial statements of U.S. Foodservice as
of June 29, 1997 and for the two-year period then ended appearing elsewhere
herein, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
63
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Reports........................................... F-2
Consolidated Balance Sheets as of June 28, 1997 and June 27, 1998....... F-6
Consolidated Statements of Operations for the fiscal years ended June
29, 1996, June 28, 1997 and June 27, 1998.............................. F-7
Consolidated Statements of Stockholders' Equity for the fiscal years
ended June 29, 1996, June 28, 1997 and June 27, 1998................... F-8
Consolidated Statements of Cash Flows for the fiscal years ended June
29, 1996, June 28, 1997 and June 27, 1998.............................. F-9
Notes to Consolidated Financial Statements.............................. F-10
Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheet as of December 26, 1998............ F-29
Condensed Consolidated Statements of Operations and Comprehensive Income
(Loss) for the six months ended December 27, 1997 and December 26,
1998................................................................... F-30
Condensed Consolidated Statements of Cash Flows for the six months ended
December 27, 1997 and December 26, 1998................................ F-31
Notes to Condensed Consolidated Financial Statements.................... F-32
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
U.S. Foodservice:
We have audited the accompanying consolidated balance sheets of U.S.
Foodservice (formerly JP Foodservice, Inc.) and subsidiaries as of June 28,
1997 and June 27, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We 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 42 percent of the related 1997 consolidated financial statement
totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion on the 1997 consolidated financial statements,
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 for the year ended June 29, 1996, prior to their restatement for
the pooling of interests transaction described in note 3 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 for the
year ended June 29, 1996, were audited by other auditors whose report,
presented herein dated August 14, 1997, expressed an unqualified opinion on
those statements.
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 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 and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the 1997 and 1998 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 June 27, 1998, and the results of
their operations and their cash flows for each of the years then ended in
conformity with generally accepted accounting principles.
We also audited the combination of the accompanying consolidated
financial statements for the year ended June 29, 1996, after restatement for
the Rykoff-Sexton, pooling of interests transaction and in our opinion, such
financial statements have been properly combined on the basis described in note
3 to the consolidated financial statements.
/s/ KPMG LLP
Baltimore, Maryland
August 14, 1998
F-2
<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 accompanying consolidated statements of operations, stockholders' equity
and cash flows as of and for the fiscal year ended June 29, 1996 present
fairly, in all material respects, the results of operations and cash flows of
JP Foodservice, Inc. and its subsidiaries for the fiscal year 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 revenues of $121,504,000 for the year
ended January 31, 1996. This statement was 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 audit 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 audit and the report of
other auditors provide a reasonable basis for the opinion expressed above. We
have not audited the consolidated financial statements of JP Foodservice, Inc.
for any period subsequent to June 29, 1996.
/s/ PricewaterhouseCoopers LLP
Baltimore, 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-3
<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 statements of earnings, stockholders' and
partners' equity, and cash flows of Valley Industries, Inc. and Subsidiaries
and Z Leasing Company (A General Partnership), collectively, the Company, for
the year 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 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined results of the Company's
operations and their cash flows for the year ended January 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Las Vegas, Nevada
June 17, 1996
F-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rykoff-Sexton, Inc.:
We have audited the consolidated balance sheet of Rykoff-Sexton, Inc. (a
Delaware Corporation) and subsidiaries as of June 28, 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the fiscal years ended June 28, 1997, and April 27, 1996, 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 the results of their operations and
their cash flows for the fiscal years ended June 28, 1997, and April 27, 1996,
and the nine-week transition period ended June 29, 1996, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Philadelphia, PA
August 14, 1997
F-5
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 28, June 27,
1997 1998
---------- ----------
(Note 3)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 74,432 $ 57,817
Receivables, net....................................... 162,648 215,459
Residual interest in accounts receivable sold.......... 99,069 106,581
Inventories............................................ 314,897 349,583
Other current assets................................... 29,919 28,548
Deferred income taxes.................................. 28,944 39,294
---------- ----------
Total current assets................................. 709,909 797,282
Property and equipment, net.............................. 437,736 437,265
Goodwill, net of accumulated amortization of $31,304 and
$45,960................................................. 541,519 561,695
Other noncurrent assets.................................. 29,354 21,549
Deferred income taxes.................................... 13,665 --
---------- ----------
Total assets......................................... $1,732,183 $1,817,791
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................... $ 22,492 $ 604
Current obligations under capital leases............... 5,690 6,933
Accounts payable....................................... 321,442 381,151
Accrued expenses....................................... 125,482 120,778
---------- ----------
Total current liabilities............................ 475,106 509,466
Long-term debt........................................... 621,788 650,679
Obligations under capital leases......................... 33,458 29,946
Deferred income taxes.................................... -- 6,064
Other noncurrent liabilities............................. 22,685 36,916
---------- ----------
Total liabilities.................................... 1,153,037 1,233,071
---------- ----------
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 46,334,816 shares
outstanding........................................... 443 463
Additional paid-in-capital............................. 526,979 579,537
Retained earnings...................................... 51,724 4,720
---------- ----------
Total stockholders' equity........................... 579,146 584,720
---------- ----------
Commitments and contingent liabilities (notes 9 and 15)
---------- ----------
Total liabilities and stockholders' equity........... $1,732,183 $1,817,791
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Years Ended (Notes 3
and 4)
----------------------------------
June 29, June 28, June 27,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................. $3,238,781 $5,169,406 $5,506,949
Cost of sales............................. 2,586,096 4,166,332 4,465,281
---------- ---------- ----------
Gross profit.............................. 652,685 1,003,074 1,041,668
Operating expenses........................ 590,446 845,901 876,170
Amortization of intangible assets......... 4,244 15,349 15,354
Restructuring costs (reversal)............ (6,441) (4,000) 53,715
Charge for impairment of long-lived
assets................................... 29,700 -- 35,530
---------- ---------- ----------
Income from operations.................... 34,736 145,824 60,899
Interest expense and other financing
costs, net............................... 32,527 76,063 73,894
Nonrecurring charges...................... 1,517 5,400 17,822
---------- ---------- ----------
Income (loss) before income taxes and
extraordinary charge..................... 692 64,361 (30,817)
Provision for income taxes................ 559 26,075 6,475
---------- ---------- ----------
Income (loss) before extraordinary
charge................................... 133 38,286 (37,292)
Extraordinary charge on early
extinguishment of debt, (net of income
taxes of $6,325)......................... -- -- (9,712)
---------- ---------- ----------
Net income (loss)......................... $ 133 $ 38,286 $ (47,004)
========== ========== ==========
Net income (loss) per common share:
Basic:
Before extraordinary charge........... $ 0.00 $ 0.88 $ (0.83)
Extraordinary charge.................. -- -- (0.21)
---------- ---------- ----------
Net income (loss) per common share.. $ -- $ 0.88 $ (1.04)
========== ========== ==========
Diluted:
Before extraordinary charge........... $ 0.00 $ 0.87 $ (0.83)
Extraordinary charge.................. -- -- (0.21)
---------- ---------- ----------
Net income (loss) per common share.. $ 0.00 $ 0.87 $ (1.04)
========== ========== ==========
Weighted average common shares:
Basic................................... 30,388,000 43,451,000 45,320,000
Diluted................................. 30,515,000 44,063,000 45,320,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Distribution in
Common paid-in Retained excess of net
stock capital earnings book value Total
------ ---------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Balance July 1, 1995.... $ 301 $ 278,057 $ 79,257 $ (44,943) $ 312,672
Net income............ -- -- 133 -- 133
Dividends and
distributions to
stockholders of
acquired companies... -- -- (1,599) -- (1,599)
Stock options
exercised, including
related tax benefit.. 2 3,558 -- -- 3,560
Treasury stock
purchased and
canceled............. -- (40) -- -- (40)
Employee stock
purchases............ -- 338 -- -- 338
Contributions to
401(k) plan.......... 1 1,611 -- -- 1,612
Net activity for the
period April 28, 1996
to June 29, 1996
(note 3):
Net loss of Rykoff-
Sexton, Inc........ -- -- (60,180) -- (60,180)
Shares issued for US
Foodservice, Inc.
(note 4)........... 100 203,572 -- -- 203,672
Other net activity.. -- 53 -- -- 53
----- --------- -------- --------- ---------
Balance June 29, 1996... 404 487,149 17,611 (44,943) 460,221
Net income............ -- -- 38,286 -- 38,286
Reclassification in
connection with Sara
Lee Offering......... -- (44,943) -- 44,943 --
Public stock
offering............. 31 65,944 -- -- 65,975
Stock issued in
connection with
business
acquisitions......... 4 9,754 -- -- 9,758
Dividends to
stockholders of
acquired companies... -- -- (1,670) -- (1,670)
Stock options
exercised, including
related tax benefit.. 3 3,692 -- -- 3,695
Treasury stock
purchased and
canceled............. -- (12) -- -- (12)
Stock compensation.... -- 554 -- -- 554
Employee stock
purchases............ -- 837 -- -- 837
Contributions to
401(k) plan.......... 1 1,554 -- -- 1,555
Adjustments with
respect to
acquisitions......... -- 2,450 (2,503) -- (53)
----- --------- -------- --------- ---------
Balance June 28, 1997... 443 526,979 51,724 -- 579,146
Net loss.............. -- -- (47,004) -- (47,004)
Stock issued in
connection with
business
acquisitions......... 5 17,593 -- -- 17,598
Stock options
exercised, including
related tax benefit.. 13 32,009 -- -- 32,022
Treasury stock
purchased and
canceled............. (4) (12,413) -- -- (12,417)
Stock compensation.... 5 12,212 -- -- 12,217
Employee stock
purchases............ -- 1,197 -- -- 1,197
Contributions to
401(k) plan.......... 1 1,960 -- -- 1,961
----- --------- -------- --------- ---------
Balance June 27, 1998... $ 463 $ 579,537 $ 4,720 $ -- $ 584,720
===== ========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended (Notes 3
and 4)
------------------------------
June 29, June 28, June 27,
1996 1997 1998
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $ 133 $ 38,286 $ (47,004)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation of property and equipment........ 28,193 41,834 44,475
Amortization of intangible assets............. 4,244 15,349 15,354
Gain on disposal of property and equipment.... (1,489) (1,649) (1,670)
Write-off of deferred financing costs......... -- -- 9,172
Non-cash restructuring charge................. -- -- 13,110
Charge for impairment of long-lived assets.... 29,700 -- 35,530
Deferred income taxes......................... (5,456) 8,848 9,379
Changes in operating assets and liabilities,
net of effects from purchase acquisitions:
(Increase) decrease in receivables........... (36,571) 22,990 (39,765)
(Increase) decrease in inventories........... (13,035) 12,952 (22,109)
(Increase) decrease in other current
assets...................................... (13,636) 10,623 1,905
Increase (decrease) in accounts payable and
accrued expenses............................ 2,284 (33,819) 45,985
Other......................................... 2,475 732 6,298
-------- --------- ---------
Net cash provided by (used in) operating
activities................................. (3,158) 116,146 70,660
-------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment........... (53,591) (88,436) (95,511)
Costs of businesses acquired, net of cash
acquired..................................... (11,451) (35,964) (38,742)
(Issuance) collection of note receivable...... (5,500) 5,500 --
Proceeds from sales of property and
equipment.................................... 2,649 10,321 32,086
Other......................................... (6,363) 1,816 (123)
-------- --------- ---------
Net cash used in investing activities....... (74,256) (106,763) (102,290)
-------- --------- ---------
Cash flows from financing activities:
Net increase in borrowings under revolving
lines of credit.............................. 36,000 47,700 438,500
Proceeds from issuance of long-term debt...... 51,024 25,953 --
Principal payments on long-term debt.......... (3,433) (105,614) (439,843)
Payments of obligations under capital lease... (4,536) (5,957) (6,184)
Net proceeds from public offerings of common
stock........................................ -- 65,975 --
Purchases of treasury stock................... (40) (12) (12,417)
Proceeds from other issuances of common
stock........................................ 3,863 5,086 33,219
Dividends paid by Rykoff-Sexton, Inc.......... (884) (1,670) --
Other......................................... (2,180) (681) 1,740
-------- --------- ---------
Net cash provided by financing activities... 79,814 30,780 15,015
-------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................... 2,400 40,163 (16,615)
Cash and cash equivalents:
Beginning of period........................... 20,649 34,269 74,432
-------- --------- ---------
End of period................................. $ 23,049 $ 74,432 $ 57,817
-------- --------- ---------
Supplemental disclosure of cash paid during the
year for:
Interest...................................... $ 32,166 $ 59,035 $ 54,454
Income taxes.................................. $ 11,781 $ 15,777 $ 851
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<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. Upon the acquisition of Rykoff-
Sexton, Inc. ("Rykoff-Sexton") on December 23, 1997, the Company became the
second largest broadline foodservice distributor in the United States. The
Company's market area includes most of the continental 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 generally relate to activities of the Company prior to its
acquisition of Rykoff-Sexton on December 23, 1997.
NOTE 2--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.
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 volume purchases are recognized upon the sale of the product, while
allowances and credits associated with the Company's merchandising activities
are recognized as the services are performed.
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.
F-10
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
Cost for substantially all inventories is determined using the first-in,
first-out method. Inventories consist primarily of finished goods.
F. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
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:
<TABLE>
<S> <C>
Buildings and improvements................................... 15-40 years
Machinery and equipment...................................... 3-15 years
Leasehold improvements....................................... Life of lease
Delivery vehicles............................................ 3-10 years
</TABLE>
The Company capitalizes the costs of computer software developed or
obtained for internal use.
G. Goodwill
Goodwill is 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.
H. Other Noncurrent Assets
Other noncurrent assets consist principally of deferred financing costs,
noncompete agreements, and other deferred costs. Deferred financing costs
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 of the related debt.
I. 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.
F-11
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
J. 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.
K. Net Income (Loss) Per Common Share
The Company adopted Statement of Financial Accounting Standard No. 128,
Earnings Per Share, as of December 27, 1997, and, accordingly, has restated all
prior periods in accordance with the pronouncement. The impact on adoption was
not material. Basic net income (loss) per common share is based on the weighted
average number of common shares outstanding. Diluted net income (loss) per
common share is based on the weighted average number of common shares and
dilutive securities outstanding. Dilutive securities consist of outstanding
stock options and warrants.
L. Derivative Instruments
The Company uses interest rate swap, cap and collar contracts to manage
its exposure to fluctuations in interest rates. The interest rate differential
on interest rate contracts used to hedge underlying debt obligations is
reflected as an adjustment to interest expense over the life of the contract.
Upon early termination of an interest rate 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 applies the intrinsic value method to account for stock-based
compensation to employees and directors.
N. Accounting Estimates
The preparation of consolidated 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 consolidated
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
Statement of Financial Accounting Standards--During 1997 and 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standard ("SFAS") No. 130, Reporting Comprehensive Income, SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information, and SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activity. SFAS No.
130 and 131 generally require additional financial statement disclosure. SFAS
No. 133 establishes accounting and reporting
F-12
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
standards for derivative instruments and for hedging activities and requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The Company expects
to adopt SFAS No. 130 and No. 131 during fiscal 1999 and SFAS No. 133 during
fiscal 2000, in accordance with the pronouncements, and is currently evaluating
the impact, if any, that SFAS No. 133 will have on its consolidated financial
statements.
Statement of Positions--During 1998, the American Institute of Certified
Public Accountants issued Statement of Position ("SOP") No. 98-5, Reporting on
the Costs of Start-Up Activities. SOP No. 98-5 requires that costs incurred
during a start-up activity be expensed as incurred and that the initial
application of the SOP, as of the beginning of the fiscal year in which the SOP
is adopted, be reported as a cumulative effect of a change in accounting
principle. The Company expects to adopt SOP 98-5 in fiscal 2000. The cumulative
effect of adoption is not expected to be material.
P. Reclassifications
Certain amounts in the prior years' consolidated financial statements
have been reclassified to conform to the current year's presentation.
NOTE 3--BASIS OF PRESENTATION AND ACQUISITION OF RYKOFF-SEXTON, INC.
On December 23, 1997, Rykoff-Sexton, the nation's third-largest broadline
foodservice distributor based on net sales, was merged into a wholly owned
subsidiary of JP Foodservice. In connection with the merger, JP Foodservice
issued 22,657,498 shares of common stock with an approximate value of $782
million. Each outstanding share of common stock of Rykoff-Sexton was 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, the consolidated financial statements for the years ended
June 29, 1996 and June 28, 1997 have been restated to include consolidated
financial information for Rykoff-Sexton.
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 that date. The consolidated statements
of operations for the years ended June 28, 1997 ("fiscal 1997") and June 29,
1996 ("fiscal 1996") combine the results of JP Foodservice for such periods
with the results of Rykoff-Sexton for the fiscal years ended June 28, 1997 and
April 27, 1996, 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. Rykoff-Sexton's 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. The results for the
transition period include a restructuring charge of $57.6 million ($35.7
million after tax) related to the Rykoff-Sexton acquisition of USF.
In connection with the acquisition, the Company incurred restructuring
costs, asset impairment charges, transaction costs and certain other operating
charges resulting from the integration of the two businesses during the year
ended June 27, 1998 ("fiscal 1998"). These charges, which approximate $138
million or $2.20 per share after income tax benefit, are further described as
follows:
F-13
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
Restructuring Costs--In connection with the Acquisition, management of
the combined companies developed and implemented a restructuring plan that
included the consolidation of duplicate distribution centers and the
centralization of certain general and administrative functions. The Company has
closed or is closing 13 distribution centers located in California, Florida,
Iowa, Maryland, Massachusetts, Minnesota, Missouri, Nevada, Ohio, Pennsylvania
and Virginia. Operations from such facilities are being consolidated with
facilities in the same geographic region. In addition, virtually all of Rykoff-
Sexton's corporate overhead functions, most of which are resident in Wilkes-
Barre, Pennsylvania, have or will be consolidated with such functions in
Columbia, Maryland. Nine of the facility consolidations were completed by June
27, 1998, with the four remaining locations to be completed in fiscal 1999. As
of June 27, 1998, the consolidation of the corporate overhead functions was
virtually complete.
As a result of management's restructuring plan, the Company recognized a
restructuring charge of $56.7 million, of which $13.1 million consisted of non-
cash charges. These restructuring costs consisted primarily of $26.8 million
for change in control payments to former executives of Rykoff-Sexton, which
were generally triggered upon the Acquisition, and the decision to close the
Wilkes-Barre, Pennsylvania headquarters; $12.2 million for severance and
benefits payable to approximately 800 sales, warehouse and clerical personnel
under a one-time termination plan instituted at the closed distribution centers
and 50 individuals in corporate positions; $10.8 million for lease payments
expected to be made after the date of closure for four leased distribution
facilities and the Wilkes-Barre office facility; and $6.9 million for idle
facility and facility closure costs, including costs associated with cleaning
closed facilities and maintaining the closed facilities until they are sold or
subleased, including costs such as property taxes, utilities, security and
groundskeeping charges. Severance and benefits were based on severance and
other agreements with employees and included an estimate of health and other
benefits. Lease commitments were based on amounts due under terminated lease
agreements or facilities to be vacated for which the Company is obligated to
pay. Idle facility and facility closure costs relate primarily to closing of
duplicate facilities, including estimated expenses associated with cleaning and
maintaining closed facilities until they are sold or subleased.
During the six-month period ended June 28, 1998, the Company expended
$19.3 million of severance and benefits; $.4 million of lease commitments and
$1.7 million of idle facility and facility closure costs. As of June 27, 1998,
the following had yet to be expended: $7.3 million of severance and benefits,
of which $2 million relates to deferred change in control payments; $10.4
million of lease commitments; and $5.2 million of idle facility and facility
closure costs. Management anticipates that $12.0 million will be expended in
fiscal 1999 and $5.4 million will be expended in fiscal 2000. The remaining
cash charges of $5.4 million relate primarily to losses on lease commitments,
the last of which expires in fiscal 2008. The Company is funding these
expenditures through, among other things, realization of cost savings resulting
from the integration of the two businesses, proceeds from the disposition of
closed facilities and income tax benefits. To date, the Company has experienced
no significant changes in the restructuring plan.
Asset Impairment Charge--The Company recognized a non-cash asset
impairment charge of $35.5 million, of which $7.6 million related to write-down
to net realizable value of buildings and improvements of nine owned facilities
being closed; $3.1 million related to write-down to net realizable value of
buildings which were held for sale at the date of the merger, $12 million
related to costs deferred for a new management information system which is not
being placed in service as the result of the merger and $12.8 million related
to other long-term assets at facilities being closed.
Other Operating Charges--The Company charged $8.6 million to cost of
goods sold and $19.4 million to operating expenses for writedowns of inventory,
receivables and other current assets resulting from
F-14
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
operating unit consolidation and realignment during fiscal 1998. The charges
related principally to receivable write-offs resulting from the rationalization
of customer and vendor relationships and inventory write-downs resulting from
the reductions in the number of products distributed by the combined company
following the merger, particularly at divisions being closed and consolidated.
Nonrecurring Charges--The Company recorded nonrecurring charges of
approximately $17.8 million for merger costs and expenses (consisting primarily
of legal and other professional fees) required to complete the transaction.
Net sales 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 Years Ended
---------------------------
June 29, 1996 June 28, 1997
------------- -------------
<S> <C> <C>
Net sales:
JP Foodservice............................... $1,449,303 $1,691,913
Rykoff-Sexton................................ 1,789,478 3,477,493
---------- ----------
Combined................................... $3,238,781 $5,169,406
========== ==========
Net income (loss):
JP Foodservice............................... $ 16,913 $ 22,248
Rykoff-Sexton................................ (16,780) 16,038
---------- ----------
Combined................................... $ 133 $ 38,286
========== ==========
</TABLE>
NOTE 4--OTHER ACQUISITIONS
Acquisitions Accounted for as Poolings of Interests
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 shares of common stock 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 shares of common stock for all of
Squeri's common shares and ownership interests.
The fiscal years of Valley and Squeri have been conformed with the
Company's fiscal year as of June 29, 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 29, 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. The loss from operations during this period
was primarily attributable to one-time bonus awards paid to management
employees at Valley, start-up costs related to new contracts, higher than
normal operating costs at Valley due to the construction of a new facility and
higher professional service costs incurred to support the effort to sell these
businesses. The net sales and net income of Valley and Squeri, on a combined
basis, included in the consolidated financial results of the Company for the
year ended June 29, 1996 were $206,627 and $2,856, respectively.
F-15
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
In connection with the mergers of Valley and Squeri, the Company recorded
nonrecurring charges of approximately $5.4 million for merger costs and
expenses (consisting primarily of legal and professional fees) required to
complete the transactions.
Acquisitions Accounted for as Purchases
Westlund Acquisition--On March 20, 1998, the Company completed the
acquisition of Westlund Provisions, Inc. ("Westlund"), a foodservice
distributor specializing in custom-cut meats located in Minneapolis, Minnesota.
Under the terms of the acquisition, the Company acquired all of the outstanding
common stock and assumed certain liabilities of Westlund in exchange for
229,070 shares of the Company's common stock. The excess of the purchase price
over the fair value of the net assets acquired of approximately $8.5 million
has been allocated to goodwill and is being amortized using the straight-line
method over 40 years. Results of Westlund for the period March 21, 1998 to June
27, 1998 have been included in the Company's fiscal 1998 consolidated statement
of operations.
Sorrento Acquisition--On January 23, 1998, the Company completed the
acquisition of Sorrento Food Service, Inc. ("Sorrento"), a broadline
foodservice distributor located in Buffalo, New York. Under the terms of the
acquisition, the Company acquired all of the outstanding common stock and
assumed or discharged certain liabilities of Sorrento and paid cash
consideration of approximately $39 million. The excess of the purchase price
over the fair value of the net assets acquired of approximately $18.2 million
has been allocated to goodwill and is being amortized using the straight-line
method over 40 years. Results of Sorrento for the period January 24, 1998 to
June 27, 1998 have been included in the Company's fiscal 1998 consolidated
statement of operations.
Outwest Acquisition--On October 30, 1997, the Company completed the
acquisition of Outwest Meat Company ("Outwest"), a foodservice distributor
specializing in meats, located in Las Vegas, Nevada. Under the terms of the
acquisition, the Company acquired all of the common stock of Outwest in
exchange for 372,917 shares of the Company's common stock. The excess of the
purchase price over the fair value of the net assets acquired of approximately
$7.1 million has been allocated to goodwill and is being amortized using the
straight-line method over 40 years. Results of Outwest for the period November
1, 1997 to June 27, 1998 have been included in the Company's fiscal 1998
consolidated statement of operations.
Pro Forma Information--Unaudited pro forma information for fiscal 1997
and fiscal 1998, as if the Westlund, Sorrento and Outwest acquisitions had
occurred on the first day of the fiscal year, is shown below, in thousands,
except for share data.
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------
June 28, June 27,
1997 1998
---------- ----------
<S> <C> <C>
Net sales......................................... $5,388,722 $5,631,176
Income from operations............................ $ 150,127 $ 65,163
Income (loss) before extraordinary item........... $ 39,454 $ (36,918)
Net income (loss)................................. $ 39,454 $ (46,630)
Income (loss) per common share before
extraordinary item:
Basic........................................... $ 0.90 $ (0.81)
Diluted......................................... $ 0.88 $ (0.81)
Net income (loss) per common share:
Basic........................................... $ 0.90 $ (1.02)
Diluted......................................... $ 0.88 $ (1.02)
</TABLE>
F-16
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
Mazo-Lerch Acquisition--On June 19, 1997, JP Foodservice completed the
acquisition of Mazo-Lerch Company, Inc. ("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 shares of JP Foodservice common stock. The
excess of the purchase price over the fair value of net tangible assets
acquired of approximately $1.3 million has been allocated to goodwill and is
being amortized using the straight-line method over 40 years. Results of Mazo-
Lerch for the period June 20, 1997 to June 28, 1997, are included in the fiscal
1997 consolidated statement of operations.
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
shares of JP Foodservice common stock 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, are included in the fiscal
1997 consolidated statement of operations.
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 share of 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 included the costs of acquisition. Liabilities assumed in
the acquisition approximated $477.2 million. In addition, all outstanding
shares of the 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 was allocated to
goodwill and is being amortized using the straight-line method over 40 years.
Results of USF for the period May 17, 1996 to June 29, 1996, are included in
the adjustment to retained earnings for the period April 28, 1996 to June 29,
1996 related to Rykoff-Sexton. The Company's consolidated statements of
operations include results for USF for periods after June 29, 1996.
H&O Foods Acquisition--On November 1, 1995, Rykoff-Sexton acquired
substantially all of the assets of H&O Foods, Inc. ("H&O"), a regional,
institutional distributor located in Nevada. The aggregate purchase price was
approximately $29.6 million, which included 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. Results for H&O for the
period November 2, 1995 to April 29, 1996 are included in the fiscal 1996
consolidated statement of operations.
F-17
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
NOTE 5--RECEIVABLES
Receivables are composed of the following:
<TABLE>
<CAPTION>
June 28, June 27,
1997 1998
-------- --------
<S> <C> <C>
Customer accounts and notes............................ $ 90,073 $121,491
Less allowance for doubtful accounts................... (15,710) (15,818)
-------- --------
Net customer........................................... 74,363 105,673
Other, net, principally from suppliers................. 88,285 109,786
-------- --------
$162,648 $215,459
======== ========
</TABLE>
The Company sells customer accounts receivable under two securitization
arrangements aggregating $250 million (see Note 8).
NOTE 6--PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
June 28, June 27,
1997 1998
--------- ---------
<S> <C> <C>
Land, buildings and improvements..................... $ 338,750 $ 368,850
Machinery and equipment.............................. 285,675 273,769
Assets held under capital leases (Note 9)............ 50,113 52,740
--------- ---------
674,538 695,359
Accumulated depreciation............................. (236,802) (258,094)
--------- ---------
$ 437,736 $ 437,265
========= =========
</TABLE>
The Company capitalizes interest costs as part of major asset
construction projects. Capitalized interest was $1,077, $1,071 and $3,081 in
fiscal 1996, 1997 and 1998, respectively.
As of June 28, 1998, land and buildings for seven closed distribution
facilities with a carrying value of approximately $24.6 million are held for
sale. Each of the properties is currently listed for sale and the Company
expects to dispose of such properties over the next two years. The effect of
suspending depreciation on such properties was not material.
F-18
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
NOTE 7--LONG-TERM DEBT
Long-term debt is composed of the following:
<TABLE>
<CAPTION>
June 28, June 27,
1997 1998
-------- --------
<S> <C> <C>
Revolving lines of credit................................ $ 63,700 $502,200
Term loans............................................... 330,125 --
Industrial development revenue bonds..................... 25,900 25,900
8.875% Senior subordinated notes......................... 129,287 120,163
8.55% Senior notes payable............................... 85,000 --
Other.................................................... 10,268 3,020
-------- --------
Total long-term debt................................... 644,280 651,283
Less current maturities of long-term debt................ 22,492 604
-------- --------
$621,788 $650,679
======== ========
</TABLE>
Revolving Line of Credit--In connection with the acquisition of Rykoff-
Sexton, the Company entered into a bank credit facility which provides for a
$550 million five-year revolving credit facility and a $200 million
revolving/term facility (the "Credit Facility") which is renewable annually.
Borrowings outstanding under the Credit Facility bear interest at the Company's
option at a rate equal to the sum of (a) the London Interbank Offered Rate
(LIBOR), a specified prime rate plus .5%, or the federal funds rate plus .5%
and (b) an applicable margin. The applicable margin will vary from .175% to
.55%, based on a formula tied to the Company's leverage from time to time. At
June 27, 1998, borrowing rates were based on LIBOR plus an applicable margin of
.45% and averaged 6.17%. Annual facility fees are based on the same formula and
will vary from .055% to .2%. 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. At June 27, 1998, borrowings of
$502,200 were outstanding and the Company had available borrowings of $211,800
under the Credit Facility.
The Credit Facility includes a number of covenants which require the
maintenance of certain financial ratios and restrict the Company's ability to
pay dividends and to incur additional indebtedness.
At June 28, 1997, JP Foodservice had a $175 million unsecured revolving
line of credit agreement. The agreement required quarterly interest payments on
outstanding borrowings at the prime rate or, at the Company's option, LIBOR
plus .275% per annum. At June 28, 1997, Rykoff-Sexton had a credit facility
which consisted of a $150 million revolving line of credit and three term
loans. Borrowings under the Rykoff-Sexton line of credit required monthly or
quarterly interest payments based on LIBOR plus 2.5%. The Rykoff-Sexton term
loans required interest at LIBOR plus margins ranging from 2.5% to 3.25%. The
JP Foodservice line of credit and the Rykoff-Sexton line of credit and term
loans were replaced by the Credit Facility.
Senior Subordinated Notes--In 1993, Rykoff-Sexton 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 the
Company, in whole or in part, at 104.44% of their principal amount beginning
November 1998, and thereafter at prices
F-19
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
declining annually to 100% on and after November 2001. The Company retired
$9.2 million of the 8 7/8% Notes in fiscal 1998.
Industrial Development Revenue Bonds--These bonds are secured by a
letter of credit issued on behalf of Rykoff-Sexton which is secured by a real
estate lien against a distribution 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 indices at the election of the
Company. The interest rate on the bonds approximates LIBOR plus .625% (6.33%
at June 27, 1998).
Extraordinary Item--In connection with the refinancing of the JP
Foodservice and the Rykoff-Sexton indebtedness described above, the Company
recorded an extraordinary charge of $9.7 million (net of $6.3 million income
tax benefit). The charge 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 payable, which were retired in full.
Derivative Financial Instruments--The Company enters into interest rate
swaps, caps and collars to manage its exposure to interest rates on floating
rate long-term debt. As of June 27, 1998, the Company has effectively capped
its interest rate exposure at 7.85% on approximately $400 million of its
floating rate debt for the next twelve months.
The Company has entered into a swaption agreement for a notional amount
of $129 million which can be exercised by the holder commencing in November
1998. The Company received $5.6 million upon execution of the swaption
agreement and will receive an additional amount ranging from $1.9 million to
$5.7 million when, and if, the swaption is exercised by the holder. The
amounts received from the holder will be amortized over the life of the swap
arrangement.
If the Company had terminated each of the contracts on June 27, 1998, it
would have had a loss of approximately $1.8 million.
Interest expense and other financing costs were $32,527, $76,063 and
$73,894 in fiscal 1996, 1997 and 1998, respectively. Interest expense included
amortization of deferred financing cost of $735, $2,680 and $1,945,
respectively. Other financing costs of $235, $15,978 and $14,190 in fiscal
1996, 1997 and 1998, respectively, represent costs associated with the
Company's trade accounts receivable securitization arrangements (see Note 8).
The Company's aggregate annual principal payments applicable to long-
term debt are as follows:
<TABLE>
<S> <C>
Fiscal Years Ended
1999.............................................................. $ 604
2000.............................................................. 271
2001.............................................................. 284
2002.............................................................. 288
2003.............................................................. 502,442
Thereafter........................................................ 147,394
--------
$651,283
========
</TABLE>
F-20
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
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 $656,000.
NOTE 8--TRADE ACCOUNTS RECEIVABLE SECURITIZATION ARRANGEMENTS
The Company maintains revolving securitization arrangements for accounts
receivable of $200 million and $50 million. Under the arrangements, receivables
are sold by the Company to wholly owned, bankruptcy remote subsidiaries, which
in turn sell interests in the receivables to third-party investors. In order to
maintain the designated receivable balances, the Company is required to sell
interests in new receivables as existing receivables are collected. Under the
$200 million agreement, all customer receivables of participating subsidiaries
of the Company are sold to a master trust and the Company acquires a
participation interest in the master trust equal to the amount in excess of the
$200 million third-party interest. Under the $50 million agreement, the Company
sells an undivided percentage ownership interest in a designated pool of
accounts receivable to an independent issuer of receivable-backed paper. Under
both arrangements, the Company effectively retains credit risk and is
responsible for collection and administration activities. The Company's
interest in the master trust and its retained interest in the undivided pool of
receivables have been included in the accompanying consolidated balance sheets
as residual interest in accounts receivable sold. The Company accounts for the
retained interest in accounts receivable at fair value. The net realizable
value of the receivable portfolio approximates fair value due to the rapid
collection of accounts sold.
NOTE 9--LEASES
The Company leases its corporate office facilities and certain
distribution facilities and equipment under operating leases. The Company
leases certain of its delivery fleet under capital leases. Charges to
operations for all operating leases were $35,282, $50,656 and $50,504 in fiscal
1996, 1997 and 1998, 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 Years Ended leases leases
------------------ --------- --------
<S> <C> <C>
1999................................................... $ 42,486 $ 9,775
2000................................................... 37,431 8,388
2001................................................... 29,606 7,724
2002................................................... 25,389 4,794
2003................................................... 16,908 5,369
Thereafter............................................. 42,127 36,020
-------- --------
Total minimum lease payments........................... 193,947 72,070
Less interest portion.................................. 35,191
--------
Obligations under capital leases....................... 36,879
Less current obligations............................... 6,933
--------
$ 29,946
========
</TABLE>
During fiscal years 1996, 1997 and 1998, the Company's additions to
property and equipment of $4,536, $5,957 and $2,979, respectively, were
financed through capital lease obligations.
F-21
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
NOTE 10--INCOME TAXES
The components of income taxes with respect to income (loss) before
extraordinary charge are as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------
June 29, June 28, June 27,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal.................................... $ 4,426 $14,224 $(1,857)
State and local............................ 1,589 3,003 (1,047)
------- ------- -------
Total current............................ 6,015 17,227 (2,904)
------- ------- -------
Deferred tax expense (benefit):
Federal.................................... (4,896) 10,354 7,216
State and local............................ (560) (1,506) 2,163
------- ------- -------
Total deferred........................... (5,456) 8,848 9,379
------- ------- -------
$ 559 $26,075 $ 6,475
======= ======= =======
</TABLE>
In addition, in fiscal 1998, the Company recognized current federal and
state income tax benefits of $5,230 and $1,095, respectively, with respect to
the loss on early extinguishment of debt of $16,037.
Temporary differences and the resulting deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
June 28, June 27,
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Loss carryforwards................................... $ 25,474 $ 24,906
Restructuring reserves and asset impairment.......... 22,383 45,821
Allowance for doubtful accounts...................... 6,565 674
Capital leases....................................... 4,331 5,196
Accrued expenses..................................... 19,476 13,751
Other, net........................................... 10,513 1,528
Valuation allowance.................................. (1,398) (648)
-------- --------
Deferred tax assets................................ 87,344 91,228
-------- --------
Deferred tax liabilities:
Property and equipment............................... (30,687) (34,075)
Intangible assets.................................... (4,165) (5,823)
Other, net........................................... (9,883) (18,100)
-------- --------
Deferred tax liabilities........................... (44,735) (57,998)
-------- --------
Net deferred tax assets............................ $ 42,609 $ 33,230
======== ========
</TABLE>
Management believes it is more likely than not that the deferred tax
assets, net of valuation allowances, at June 27, 1998, including federal and
state net operating loss carryforwards, will be realizable
F-22
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
through the combination of future taxable income, alternative tax planning
strategies and the reversal of existing taxable temporary differences.
A reconciliation of the statutory Federal income tax rate to the income
tax rate on income (loss) before income taxes and extraordinary charge, is as
follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------
June 28,
June 29, 1996 1997 June 27, 1998
--------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Computed statutory expense
(benefit)................ $ 242 35.0 % $22,526 35.0 % $(10,786) (35.0)%
State and local income
tax, net of federal tax
benefit.................. (1,140) (164.7) 973 1.5 725 2.4
Permanent differences..... 3,084 445.7 4,853 7.5 17,448 56.6
Reversal of valuation
allowance................ 916 132.4 (2,800) (4.4) (750) (2.4)
Gas tax credit and other.. (2,543) (367.5) 523 0.8 (162) (0.6)
------- ------ ------- ---- -------- -----
$ 559 80.9 % $26,075 40.4 % $ 6,475 21.0 %
======= ====== ======= ==== ======== =====
</TABLE>
Federal net operating loss carryforwards as of June 27, 1998 approximate
$56,154 and expire in various amounts through 2011. Included in such amounts
are net operating losses incurred prior to the USF acquisition. 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
affect 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.
NOTE 11--STOCKHOLDERS' EQUITY
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 sold
its ownership interest of approximately 27% of the Company's outstanding common
stock 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.
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 33,940 shares, 38,902 shares and 32,830 shares during
fiscal 1996, 1997 and 1998, respectively.
Warrants--At June 27, 1998, the Company had warrants outstanding to
purchase 231,066 shares of common stock at $13.11 per share. The warrants
expire on September 30, 2005. Subsequent to June 27, 1998, a warrant to
purchase 159,968 shares of common stock was exercised.
F-23
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
Shareholder Rights Plan--The Company has a shareholder rights plan under
which the issuance of rights, 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, each share of common stock has attached one
preferred share purchase right (a "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
The Company sponsors an employee stock incentive plan and an outside
director stock option plan. The employee plan authorizes the grant, at the
discretion of the Company'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 plan generally have a life of ten
years and vest over a three-year period. The outside director 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. Stockholders of the Company have
authorized for issuance pursuant to the employee plan and the outside director
plan 2,600,000 and 200,000 shares of common stock, respectively.
Rykoff-Sexton sponsored several stock option plans for employees and
directors. In connection with the acquisition, options 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 were
immediately exercisable as the result of the change of control provisions
contained in each of the option agreements.
F-24
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
The aggregate number of shares reserved for the issuance of common stock
under all plans was 3,297,001 at June 27, 1998. Upon a change of control of
the Company, as defined in the plans, all outstanding and previously unvested
options will become immediately exercisable. A summary of changes in
outstanding stock options follows:
<TABLE>
<CAPTION>
Weighted average
Stock exercise price
options per share
---------- ----------------
<S> <C> <C>
Balance July 1, 1995.......................... 1,250,193 $ 17.73
Options granted............................... 1,428,198 15.24
Options cancelled............................. (148,774) 17.55
Options exercised............................. (123,678) 5.71
---------- -------
Balance June 29, 1996......................... 2,405,939 16.62
Options granted............................... 681,545 21.79
Options cancelled............................. (73,695) 16.10
Options exercised............................. (249,848) 12.86
---------- -------
Balance June 28, 1997......................... 2,763,941 18.19
Options granted............................... 693,714 32.46
Options cancelled............................. (231,251) 27.38
Options exercised............................. (1,331,329) 19.11
---------- -------
Balance June 27, 1998......................... 1,895,075 $ 22.49
========== =======
</TABLE>
The following table summarizes information about stock options
outstanding at June 27, 1998:
<TABLE>
<CAPTION>
Number Weighted average Weighted Number Weighted
Range of outstanding remaining average exercisable average
exercise prices June 27, 1998 contractual life exercise price June 27, 1998 exercise price
- --------------- ------------- ---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.13-
$ 4.48 10,749 4.54 $ 0.73 10,749 $ 0.73
$11.00-
$15.75 457,726 6.00 $12.77 410,781 $12.59
$16.65-
$24.84 812,687 7.68 $20.87 434,981 $19.91
$27.56-
$35.19 613,913 8.68 $32.26 21,133 $29.96
--------- -------
1,895,075 7.58 $22.49 877,644 $16.49
========= =======
</TABLE>
F-25
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
The Company applies the intrinsic value method when accounting for stock-
based employee compensation grants. 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 (loss)
and net income (loss) per common share would have been reduced to the pro forma
amounts indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------------
June 29, 1996 June 28, 1997 June 27, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss):
As reported.................. $ 133 $38,286 $(47,004)
Pro forma.................... (145) 36,479 (51,609)
===== ======= ========
Basic earnings (loss) per
share:
As reported.................. $0.00 $ 0.88 $ (1.04)
Pro forma.................... 0.00 0.83 (1.14)
===== ======= ========
Diluted earnings (loss) per
share:
As reported.................. $0.00 $ 0.87 $ (1.04)
Pro forma.................... 0.00 0.83 (1.14)
===== ======= ========
</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, 1997 and 1998: dividend yield of
0%; expected volatility of 41.45%, 45.44% and 41.02% for fiscal 1996, 1997 and
1998, respectively; risk-free interest rate of 6.18%, 6.36% and 6.10% for
fiscal 1996, 1997 and 1998, respectively; and expected lives of five years. The
weighted average fair value of options granted during fiscal 1996, 1997 and
1998 was $6.48, $11.21 and $13.87, respectively.
Pro forma net income (loss) reflects only options granted in fiscal 1996,
1997 and 1998, as compensation cost for options granted prior to July 2, 1995
is not considered. Compensation cost is reflected over the options' vesting
periods of three to four years.
NOTE 13--EMPLOYEE RETIREMENT PLANS
Defined Contribution Plans--The Company and certain of its subsidiaries
sponsor several defined contribution profit sharing plans for which all full-
time non-union employees are generally eligible. Terms of the plans provide for
employee and Company contributions, which may be made in cash or common stock
of the Company. Charges to operations for employer contributions to the plans
were $1,775, $3,911 and $4,521 in fiscal 1996, 1997 and 1998, respectively. Of
such amounts, the Company made contributions in common stock of $1,612, $1,555
and $1,961, respectively.
Multi-Employer Plans--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
F-26
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
pension contributions required by union agreements aggregated $8,459, $8,546
and $9,210 in fiscal 1996, 1997 and 1998, respectively.
Defined Benefit Plans--The Company maintains six 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. Benefits under three of the plans are frozen at June 27, 1998.
Projected benefit obligations of plans for which benefits were not frozen at
June 27, 1998 were $4,956. During fiscal 1998, the Company recognized a
curtailment gain of $7.4 million reflecting the freezing of benefits from one
of those defined benefit plans.
Net pension expense for defined benefit pension plans for fiscal 1996,
1997 and 1998 are included in the following components:
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------
June 29, June 28, June 27,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Service cost-benefits earned during the
period.................................... $ 3,700 $ 5,045 $ 3,061
Interest cost on projected benefit
obligation................................ 4,473 6,055 5,911
Actual return on plan asset................ (5,452) (14,255) (8,556)
Effect of curtailment...................... -- -- (7,390)
Net amortization and deferral.............. (105) 7,555 (537)
------- -------- -------
Net pension expense (income)............... $ 2,616 $ 4,400 $(7,511)
======= ======== =======
</TABLE>
The following table reconciles the pension plans' funded status to
accrued expense as of June 28, 1997 and June 27, 1998:
<TABLE>
<CAPTION>
Fiscal Years
Ended
------------------
June 28, June 27,
1997 1998
-------- --------
<S> <C> <C>
Market value of plan assets in equities and bonds..... $ 88,784 $95,187
-------- -------
Actuarial present value of accumulated benefits:
Vested.............................................. 69,007 86,751
Non-vested.......................................... 4,279 583
Additional benefits based on estimated future salary
levels............................................... 7,248 40
-------- -------
Projected benefit obligations..................... 80,534 87,374
-------- -------
Plan assets more than projected benefit obligations... 8,250 7,813
Unrecognized net obligation to be amortized over 10
years................................................ 2,778 221
Unrecognized net gain................................. (22,365) (8,446)
-------- -------
Accrued pension expense........................... $(11,337) $ (412)
======== =======
</TABLE>
The weighted average discount rates were 7.75% and 6.75% and the expected
long-term rates of return on plan assets were 9.5% and 9% at June 28, 1997 and
June 27, 1998, respectively. As of June 27, 1998, plans are either frozen or
have benefits that accrue based on fixed amounts for each year of service.
F-27
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except where noted)
Other Postretirement Benefit Plans--The Company has several nonpension
postretirement benefit plans, certain of which are contributory. The present
value of future benefits to be paid to current employees and eligible retirees
amounted to approximately $2.3 million at June 27, 1998 and is included in
other noncurrent liabilities in the accompanying consolidated balance sheet.
NOTE 14--OTHER RESTRUCTURINGS
In connection with the USF acquisition 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 3). The restructuring
charge consisted of severance and employee benefits of $10.7 million, lease
related costs of $20.2 million and other closure and integration costs of $26.7
million. During the nine week fiscal year transition period and fiscal 1997,
Rykoff-Sexton charged costs of $28.1 million (consisting of severance and
employee benefits of $4.5 million, lease related costs of $2.7 million and
other closure and integration costs of $20.9 million) against the restructuring
reserve and reversed $4.0 million into income. This reversal related to
severance costs reserved for employees who voluntarily terminated their
employment during fiscal 1997, thereby forfeiting their termination rights.
During fiscal 1998, the Company paid $6.0 million for severance and lease
commitments and reversed $3.0 million of unutilized reserves against
restructuring costs. Based on current management's review of the reserves
remaining to cover the existing commitments which resulted from the prior
restructuring activity, these amounts were not considered necessary. The
reversal related to restructuring activities for which the actual costs were
overestimated or for which contemplated restructuring plans ultimately changed.
As of June 27, 1998, reserves for $1.0 million of severance and benefits, $12.5
million of lease commitments and $3.0 million of other exit costs have yet to
be expended. The Company expects these expenditures to occur at the rate of
approximately $2 million per year for the next four fiscal years and $1 million
per year for the following eight fiscal years.
In fiscal 1996, Rykoff-Sexton recorded a pre-tax charge of $29.7 million
which was principally reflected as a reduction in the net carrying value of
land, buildings and improvements.
In October 1995, Rykoff-Sexton concluded a restructuring plan initiated
in 1993 and credited the remaining unutilized restructuring reserve of $6.4
million into income.
NOTE 15--OTHER 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.
Letters of Credit--The Company utilizes standby letters of credit
principally for worker's compensation self-insurance security deposit
requirements. These letters of credit are irrevocable and have one-year
renewable terms. Outstanding standby and commercial letters of credit as of
June 27, 1998 were approximately $36 million.
NOTE 16--SUBSEQUENT EVENT (UNAUDITED)
On August 28, 1998, the Company completed the outsourcing of the Rykoff-
Sexton Manufacturing Division through the sale of its assets to a third party
and entered into a six-year supply agreement to purchase products from the new
company. Gross proceeds from the supply agreement and asset sale totaled $101
million.
F-28
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 26,
1998
ASSETS ------------
<S> <C>
Current assets
Cash and cash equivalents......................................... $ 64,486
Receivables, net.................................................. 303,909
Residual interest on accounts receivable sold..................... 135,583
Inventories....................................................... 377,125
Other current assets.............................................. 32,853
Deferred income taxes............................................. 37,398
----------
Total current assets............................................. 951,354
Property and equipment, net........................................ 440,997
Goodwill and other noncurrent assets............................... 628,840
----------
Total assets..................................................... $2,021,191
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt.............................. $ 683
Current obligations under capital leases.......................... 5,592
Accounts payable.................................................. 363,253
Accrued expenses.................................................. 104,125
----------
Total current liabilities........................................ 473,653
Noncurrent liabilities
Long-term debt.................................................... 737,101
Obligations under capital leases.................................. 28,328
Deferred income taxes............................................. 6,015
Other noncurrent liabilities...................................... 101,992
----------
Total liabilities................................................ 1,347,089
----------
Commitments and contingent liabilities
Stockholders' equity............................................... 674,102
----------
Total liabilities and stockholders' equity....................... $2,021,191
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
December 27, December 26,
1997 1998
------------ ------------
<S> <C> <C>
Net sales........................................... $2,712,086 $3,011,459
Cost of sales....................................... 2,199,343 2,459,400
---------- ----------
Gross profit........................................ 512,743 552,059
Operating expenses.................................. 449,166 447,694
Amortization of intangible assets................... 7,419 8,077
Restructuring costs................................. 38,037 --
Asset impairment.................................... 32,135 --
---------- ----------
Income (loss) from operations....................... (14,014) 96,288
Interest and other financing costs, net............. 39,246 32,672
Nonrecurring acquisition charges.................... 17,822 --
---------- ----------
Income (loss) before income taxes (benefit) and
extraordinary charge............................... (71,082) 63,616
Provision for income taxes (benefit)................ (10,251) 26,096
---------- ----------
Income (loss) before extraordinary charge........... (60,831) 37,520
Extraordinary charge, net of income tax benefit..... 9,712 2,748
---------- ----------
Net income (loss) and comprehensive income (loss)... $ (70,543) $ 34,772
========== ==========
Net income (loss) per common share:
Basic:
Before extraordinary charge....................... $ (1.35) $ 0.80
Extraordinary charge.............................. (0.22) (0.06)
---------- ----------
Net income (loss) per common share............... $ (1.57) $ 0.74
========== ==========
Diluted:
Before extraordinary charge....................... $ (1.35) $ 0.79
Extraordinary charge.............................. (0.22) (0.06)
---------- ----------
Net income (loss) per common share............... $ (1.57) $ 0.73
========== ==========
Weighted average common shares outstanding:
Basic ........................................... 44,811,000 47,039,000
Diluted.......................................... 44,811,000 47,669,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
December 27, December 26,
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)................................... $(70,543) $ 34,772
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization..................... 31,679 29,984
Write-off deferred financing costs................ 9,152 1,247
Asset impairment.................................. 32,135 --
Restructuring reserve............................. 38,037 --
Other adjustments................................. 3,594 (1,107)
Changes in working capital, net of effects from
acquisitions..................................... (84,355) (110,530)
-------- --------
Net cash used in operating activities................ (40,301) (45,634)
-------- --------
Cash flows from investing activities
Additions to property and equipment................ (60,060) (35,216)
Cost of businesses acquired, net of cash acquired.. (118) (8,438)
Proceeds from disposals of property................ 6,677 7,322
Proceeds from sale of manufacturing division
assets............................................ -- 20,755
Other.............................................. -- (535)
-------- --------
Net cash used in investing activities................ (53,501) (16,112)
-------- --------
Cash flows from financing activities
Net increase in borrowings under revolving lines of
credit............................................ -- 153,300
Increase (decrease) in long-term debt, net......... 80,786 (93,515)
Principal payments under capital lease
obligations....................................... (2,978) (3,116)
Proceeds from employee stock purchases............. 10,474 6,796
Treasury stock purchases........................... (12,417) --
Other.............................................. 1,933 4,950
-------- --------
Net cash provided by financing activities............ 77,798 68,415
-------- --------
Net increase (decrease) in cash and cash
equivalents......................................... (16,004) 6,669
Cash and cash equivalents:
Beginning of period................................ 74,432 57,817
-------- --------
End of period...................................... $ 58,428 $ 64,486
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Dollars in thousands, except where noted)
(Unaudited)
NOTE 1--BASIS OF PRESENTATION
The condensed consolidated financial statements of U.S. Foodservice and
its consolidated subsidiaries (the "Company") at December 26, 1998 and for the
six-month periods ended December 27, 1997 and December 26, 1998, included
herein are unaudited, but include all adjustments (consisting only of normal
recurring entries) which the Company's management believes to be necessary for
the fair presentation of the financial position, results of operations and cash
flows of the Company as of and for the periods presented. Interim results are
not necessarily indicative of results that may be expected for the full year.
NOTE 2--ACQUISITION OF RYKOFF-SEXTON, INC.
On December 23, 1997, Rykoff-Sexton, Inc. ("Rykoff-Sexton") was merged
into a wholly owned subsidiary of U.S. Foodservice (the "Acquisition"). The
transaction was accounted for under the pooling of interests method of
accounting. In connection with the Acquisition, the Company incurred
restructuring costs, asset impairment charges, non-recurring charges and
certain other operating charges resulting from the integration of the two
businesses during the year ended June 27, 1998. These charges are further
described as follows:
Restructuring Costs. In connection with the Acquisition, the Company
recorded a $56.7 million restructuring charge during the year ended June 27,
1998. Of this amount, the Company recognized $41.0 million in the quarter ended
December 27, 1997 and the remainder in the quarter ended March 28, 1998. The
restructuring costs consisted primarily of $26.8 million for change in control
payments to former executives of Rykoff-Sexton, $12.2 million for severance and
benefits, $10.8 million for future lease commitments and $6.9 million for idle
facility and facility closure costs related to the Company's plan to
consolidate and realign certain operating units and consolidate various
overhead functions.
During the six months ended December 26, 1998, the Company continued the
implementation of its restructuring plan initiated in December 1997. The plan
included the closure of 13 distribution centers in 11 states and consolidation
of the operations of these centers with facilities in the same geographic
region. As of December 26, 1998, consolidation of 11 of the distribution
centers was complete. The Company expects that consolidation of the remaining
two centers will be completed by the end of fiscal 1999.
During the six months ended December 26, 1998, the Company expended $2.1
million of costs for severance and benefits, $0.7 million of lease commitment
costs and $0.9 million of idle facility and facility closure costs. At December
26, 1998, $5.2 million of costs for severance and benefits, $9.7 million of
lease commitment costs and $4.3 million of idle facility and facility closure
costs have yet to be expended. Of these amounts, the Company expects to expend
$8.4 million during the remainder of fiscal 1999 and $5.4 million in fiscal
2000. The remaining charges of $5.4 million relate primarily to losses on lease
commitments, the last of which expires in fiscal 2008.
Asset Impairment. During the fiscal year ended June 27, 1998, the Company
recognized non-cash asset impairment charges of $35.5 million. Of this amount,
the Company recognized $32.1 million in the quarter ended December 27, 1997 and
the remainder in the quarter ended March 28, 1998. Of these asset impairment
charges, $7.6 million related to the write-down to net realizable value of
buildings and improvements of nine owned facilities being closed; $3.1 million
related to the write-down to net realizable value of buildings which were held
for sale at the date of the Acquisition; $12.0 million related to costs
deferred for a new management information system which is not being placed in
service as a result of the Acquisition; and $12.8 million related to other
long-term assets at facilities being closed.
F-32
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in
thousands, except where noted)
(Unaudited)
The Company does not expect to incur any additional restructuring costs,
asset impairment charges or transaction costs related to the Acquisition. Any
additional operating costs related to the integration of the two businesses are
not expected to be material.
Other Operating Charges. During the six months ended December 27, 1997,
the Company charged $6.1 million to cost of goods sold and $15.6 million to
operating expense for write-downs of inventory, receivables and other current
assets resulting from the operating unit consolidation and realignment during
fiscal 1998. The charges related principally to receivable write-offs resulting
from the rationalization of customer and vendor relationships and inventory
write-downs resulting from the reductions in the number of products distributed
by the combined company following the Acquisition, particularly at divisions
being closed and consolidated.
Nonrecurring Acquisition Charges. During the six months ended December
27, 1997, the Company recorded nonrecurring charges of approximately $17.8
million for merger related costs and expenses (consisting primarily of legal
and other professional fees) required to complete the transaction.
NOTE 3--PRIOR RESTRUCTURING COSTS
In connection with its acquisition of U.S. Foodservice Inc. on May 17,
1996, Rykoff-Sexton recorded a restructuring charge of $57.6 million ($35.7
million after tax) in the transition period ended June 29, 1996. Approximately
$10.7 million of the charge 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 six months ended December 27, 1997, the Company charged
$2.6 million against the restructuring liability and reversed $3.0 million of
unutilized reserves against restructuring costs. The reversal related to
restructuring activities for which the actual costs were overestimated or for
which contemplated restructuring plans ultimately changed. During the six
months ended December 26, 1998, the Company expended $0.1 million of costs for
severance and benefits, $0.7 million for lease commitment costs and $0.5
million for other exit costs. At December 26, 1998, $0.9 million of costs for
severance and benefits, $11.8 million of lease commitment costs and $2.5
million of other exit costs had yet to be expended. The Company expects these
expenditures to occur at the rate of approximately $2 million per year for
fiscal 1999 and the next three fiscal years and $1 million per year for the
following seven fiscal years.
NOTE 4--EXTRAORDINARY CHARGES
During the six months ended December 26, 1998, the Company recorded an
extraordinary charge of $2.7 million (net of a $1.8 million income tax benefit)
related to the redemption and retirement of $75.1 million 8 7/8% Senior
Subordinated Notes due 2003. The extraordinary charge consisted of a $3.3
million redemption premium paid to note holders and the write-off of $1.2
million of unamortized deferred financing costs.
On December 23, 1997, in connection with the consummation of the
Acquisition, the Company entered into a new bank credit facility which provided
for a $550 million five-year revolving credit facility and a $200 million
revolver/term loan facility (collectively, the "New Credit Facility"). During
the six months ended December 27, 1997, the Company applied the proceeds of the
New Credit Facility to refinance substantially all of its indebtedness in order
to lower significantly its overall borrowing costs. As a result of this
refinancing, the Company recorded an extraordinary charge of $9.7 million (net
of $6.3 million income tax benefit) related to the write-off of deferred
financing costs with respect to the extinguished debt and additional payments
to holders of the Company's senior notes due 2004 in accordance with the senior
note terms.
F-33
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in
thousands, except where noted)
(Unaudited)
NOTE 5--OUTSOURCING OF THE MANUFACTURING DIVISION
On August 28, 1998, the Company sold the inventory and fixed assets of its
manufacturing division to a third party. In connection with the sale, the
Company entered into a six-year supply agreement. Under the terms of the sale
and supply agreements, the Company received $85 million in cash and a $16
million subordinated note from the buyer bearing interest at 13% and payable in
August 2006. Interest on the note payable is payable in additional notes through
August 2005 and thereafter in cash. The assets transferred had a net book value
of approximately $20 million, including $10.8 million in inventories. Costs to
complete the transaction were approximately $3 million. Net gain on the sale of
assets and proceeds from entering into the supply agreement aggregated
approximately $78 million.
The supply agreement establishes minimum purchase obligations by the
Company for each of the next six years. First year minimum purchase obligations
are based on purchase levels prior to the sale, with the succeeding years'
purchase obligations increasing at a rate of 6% per year. Based on current
product prices, the supply agreement obligates the Company to purchase in
excess of $750 million of products over the next six years. The Company may
incur substantial penalties if it does not purchase the minimum product
quantities specified in the agreement.
As a result of the Company's significant continuing involvement in the
manufacturing business, $62 million of the gain is being deferred and
recognized over the life of the supply agreement as goods are purchased from
the manufacturing business and sold to the Company's foodservice customers. The
balance of the gain, including interest attributable to the subordinated note
receivable, will not be recognized until such time as the buyer has sufficient
cash flows to demonstrate payment of the principal and interest.
NOTE 6--ACQUISITIONS
Haar - Effective October 23, 1998, the Company completed the acquisition
of J.H. Haar & Sons, L.L. C. ("Haar"), a broadline foodservice distributor
serving the New York City metropolitan market. Annual sales for Haar for its
fiscal year ended September 30, 1998 totaled $57 million. Under the terms of
the acquisition agreement, the Company acquired all of the membership interests
of Haar in exchange for 550,543 shares of the Company's common stock. The
transaction was accounted for as a pooling of interests. Due to the fact that
total assets, net assets and the results of operations were not material to the
Company for any of the prior years, the transaction was recorded as of
September 27, 1998.
Webb - Effective November 16, 1998, the Company completed the acquisition
of Joseph Webb Foods, Inc ("Webb"), a broadline foodservice distributor serving
the San Diego and other Southern California markets. Under the terms of the
acquisition agreement, the Company acquired 100% of the stock of Webb for
896,057 shares of the Company's common stock and $8.0 million in cash,
including transaction costs. In addition, the agreement includes a provision
for future stock payments to the selling shareholders contingent upon
achievement of future sales performance targets. The transaction was accounted
for as a purchase.
Other - During fiscal 1998, the Company acquired Outwest Meat Company
("Outwest"), Sorrento Food Service, Inc. ("Sorrento") and Westlund Provisions,
Inc. ("Westlund").
F-34
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in
thousands, except where noted)
(Unaudited)
The tables below set forth pro forma information for the six-month
periods ended December 27, 1997 and December 26, 1998 giving effect to the
acquisitions of Haar, Webb, Westlund, Sorrento and Outwest as if such
acquisitions had been consummated as of June 28, 1997 (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
December 27, December 26,
1997 1998
------------ ------------
<S> <C> <C>
Net sales........................................... $2,929,085 $3,093,934
Income (loss) before extraordinary charges.......... $ (59,442) $ 36,157
Net income (loss)................................... $ (67,154) $ 33,409
Income (loss) per common share before extraordinary
charge:
Basic.............................................. $ (1.28) $ 0.77
Diluted............................................ $ (1.28) $ 0.76
Net income (loss) per common share:
Basic.............................................. $ (1.48) $ 0.71
Diluted............................................ $ (1.48) $ 0.70
</TABLE>
NOTE 7--RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
During the fiscal quarter ended September 26, 1998, the Company adopted
Statement of Financial Accounting Standard (SFAS) No. 130, Reporting
Comprehensive Income. Adoption had no impact on the Company's condensed
consolidated financial statements, as comprehensive income (loss) and net
income (loss) were the same.
NOTE 8--CONTINGENCIES
From time to time, the Company is involved in litigation and proceedings
arising out of the ordinary course of business. There are no pending material
legal proceedings or environmental investigations to which the Company is a
party or to which the property of the Company is subject as of the date of this
report.
NOTE 9 -- EARNINGS PER SHARE
The following table reconciles the numerators and denominators of the
Company's basic and diluted earnings per share (EPS) computations for income
before extraordinary charge (in thousands):
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
December 27, 1997 December 26, 1998
------------------------------ ---------------------------
Income Income
(loss) Share Per (loss) Share Per
Numerator Denominator share Numerator Denominator share
--------- ----------- ------- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Basic EPS-Income (loss)
before
extraordinary charge... $(60,831) 44,811 $ (1.35) $ 37,520 47,039 $0.80
======== ======= ======== =====
Effect of dilutive
securities:
Warrants............... -- 65
Common stock options... -- 575
Other stock-based com-
pensation
arrangements......... -- 20
------- -------
Diluted EPS-Income
(loss) before extraor-
dinary charge.......... $(60,831) 44,811 $ (1.35) $ 37,520 47,699 $0.79
======== ======= ======= ======== ======= =====
</TABLE>
The effect of stock options outstanding during fiscal 1998 were not
included in the computation of diluted EPS because othe effect would have been
antidilutive.
F-35
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8,704,955 Shares
U.S. FOODSERVICE
Common Stock
---------------
PROSPECTUS
---------------
Merrill Lynch & Co.
Goldman, Sachs & Co.
Salomon Smith Barney
J.C. Bradford & Co.
First Union Capital Markets Corp.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE]
Subject to Completion
Preliminary Prospectus dated March 5, 1999
PROSPECTUS
8,704,955 Shares
U.S. FOODSERVICE
Common Stock
-----------
Stockholders of U.S. Foodservice named in this prospectus are selling
8,704,955 shares of common stock. The international managers are offering
1,740,991 shares outside the United States and Canada and the U.S. underwriters
are offering 6,963,964 shares in the United States and Canada.
Our common stock trades on the New York Stock Exchange under the symbol
"UFS." On March 4, 1999, the last reported sale price of our common stock on
the New York Stock Exchange was $43 11/16 per share.
Investing in our common stock involves risks which are described in the
"Risk Factors" section beginning on page 9 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price..................................... $ $
Underwriting Discount..................................... $ $
Proceeds to Selling Stockholders.......................... $ $
</TABLE>
The international managers may also purchase up to an additional 261,149
shares from U.S. Foodservice at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. The U.S. underwriters may similarly purchase up to an
additional 1,044,594 shares from U.S. Foodservice.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
-----------
Merrill Lynch International
Goldman Sachs International
Salomon Smith Barney International
J.C. Bradford & Co.
-----------
The date of this prospectus is , 1999.
<PAGE>
[ALTERNATE PAGE]
UNDERWRITING
Merrill Lynch International, Goldman Sachs International, Salomon
Brothers International Limited and J.C. Bradford & Co. are acting as lead
managers (the "Lead Managers") of each of the International Managers named
below (the "International Managers"). Subject to the terms and conditions set
forth in an international purchase agreement (the "International Purchase
Agreement") among U.S. Foodservice, the selling stockholders and the
International Managers, and concurrently with the sale of 6,963,964 shares of
common stock to the U.S. Underwriters, as defined below, the selling
stockholders have agreed to sell to the International Managers, and each of the
International Managers, severally and not jointly, has agreed to purchase from
the selling stockholders, the number of shares of common stock set forth
opposite its name below:
<TABLE>
<CAPTION>
Number of
International Manager Shares
--------------------- ---------
<S> <C>
Merrill Lynch International......................................
Goldman Sachs International......................................
Salomon Brothers International Limited...........................
---------
Total....................................................... 1,740,991
=========
</TABLE>
U.S. Foodservice and the selling stockholders have also entered into a
U.S. purchase agreement (the "U.S. Purchase Agreement" and, together with the
International Purchase Agreement, the "Purchase Agreements") with certain
underwriters in the United States and Canada (the "U.S. Underwriters" and,
together with the International Managers, the "Underwriters") for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Goldman, Sachs &
Co., Salomon Smith Barney Inc., J.C. Bradford & Co. and First Union Capital
Markets Corp. are acting as representatives (the "U.S. Representatives").
Subject to the terms and conditions set forth in the U.S. Purchase Agreement,
and concurrently with the sale of 1,740,991 shares of common stock to the
International Managers pursuant to the International Purchase Agreement, the
selling stockholders have agreed to sell to the U.S. Underwriters, and the U.S.
Underwriters, severally and not jointly, have agreed to purchase from the
selling stockholders, an aggregate of 6,963,964 shares of common stock. The
initial public offering price per share and the total underwriting discount per
share of common stock are identical under the International Purchase Agreement
and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of common stock being sold pursuant to
each such agreement if any of the shares of common stock being sold pursuant to
such agreement are purchased. In the event of a default by an Underwriter, the
International Purchase Agreement and the U.S. Purchase Agreement provide that,
in certain circumstances, the purchase commitments of the non-defaulting
Underwriters may be increased or the Purchase Agreements may be terminated. The
closings with respect to the sale of shares of common stock to be purchased by
the International Managers and the U.S. Underwriters are conditioned upon one
another.
58
<PAGE>
[ALTERNATE PAGE]
The Lead Managers have advised U.S. Foodservice and the selling
stockholders that the International Managers propose initially to offer the
shares of common stock to the public at the initial public offering price set
forth on the cover page of this prospectus, and to certain dealers at such
price less a concession not in excess of $ per share of common stock. The
International Managers may allow, and such dealers may reallow, a discount not
in excess of $ per share of common stock to certain other dealers. After
the initial public offering, the public offering price, concession and discount
may change.
U.S. Foodservice has granted options to the International Managers,
exercisable for 30 days after the date of this prospectus, to purchase up to an
aggregate of 261,149 additional shares of common stock at the public offering
price set forth on the cover page of this prospectus, less the underwriting
discount. The International Managers may exercise these options solely to cover
over-allotments, if any, made on the sale of the common stock offered hereby.
To the extent that the International Managers exercise these options, each
International Manager will be obligated, subject to certain conditions, to
purchase a number of additional shares of common stock proportionate to such
International Manager's initial amount reflected in the foregoing table. U.S.
Foodservice has granted options to the U.S. Underwriters, exercisable for 30
days after the date of this prospectus, to purchase up to an aggregate of
1,044,594 additional shares of common stock to cover over-allotments, if any,
on terms similar to those granted to the International Managers.
The following table shows the per share and total public offering price,
underwriting discount to be paid to the International Managers and the U.S.
Underwriters and the proceeds before expenses to the selling stockholders and,
if the over-allotment options are exercised in full, to U.S. Foodservice. This
information is presented assuming either no exercise or full exercise by the
International Managers and the U.S. Underwriters of their over-allotment
options.
<TABLE>
<CAPTION>
Total
-----
Per Without With
Share Option Option
----- ------- ------
<S> <C> <C> <C>
Public offering price................................ $ $ $
Underwriting discount................................ $ $ $
Proceeds to selling stockholders..................... $ $ $
Proceeds, before expenses, to U.S. Foodservice....... $ $ $
</TABLE>
The expenses of the offerings, exclusive of the underwriting discount,
are estimated at $0.9 million and are payable by U.S. Foodservice.
The shares of common stock are being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part.
U.S. Foodservice and the selling stockholders have agreed, subject to
certain exceptions, not to directly or indirectly (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of or
otherwise dispose of or transfer any shares of common stock or securities
convertible into or exchangeable or exercisable for or repayable with common
stock, whether now owned or hereafter acquired by the person executing the
agreement or with respect to which the person executing the agreement hereafter
acquires the power of disposition, or file or cause the filing of a
registration statement under the Securities Act with respect to the foregoing,
or (2) enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of the common stock or any
securities convertible into or exchangeable or exercisable for or repayable
with common stock, whether any such swap or transaction described in
clause (1) or (2) above is to be settled by delivery of common stock or other
securities, in cash or otherwise,
59
<PAGE>
[ALTERNATE PAGE]
without the prior written consent of Merrill Lynch on behalf of the
Underwriters for a period of 90 days after the date of this prospectus. With
this consent, U.S. Foodservice and the selling stockholders may sell shares
before the expiration of such 90-day period without prior notice to the other
stockholders of U.S. Foodservice or to any public market in which the common
stock trades. The foregoing lock-up agreements provide, however, that U.S.
Foodservice may do any of the following: (1) issue common stock under its
employee or director stock, bonus or compensation plans, or grant options to
purchase common stock or other awards under such plans, in each case as such
plans are in effect on the date of this prospectus, and file one or more
registration statements on Form S-8 covering the offering and sale of
securities issuable under such plans; (2) issue common stock or securities
convertible into or exchangeable or exercisable for or repayable with common
stock to owners of businesses which U.S. Foodservice may acquire in the future,
whether by merger, acquisition of assets or capital stock or otherwise, as
consideration for the acquisition of such businesses or to management employees
of such businesses in connection with any such acquisition, enter into and
implement collar and other price protection arrangements in connection with any
such acquisition, and file one or more registration statements on Form S-4
covering the offering and sale of common stock or such other securities by U.S.
Foodservice to such owners in connection with such acquisitions; (3) in
connection with the future acquisition of any business, whether by merger,
acquisition of assets or capital stock or otherwise, that has outstanding
warrants, options or other securities convertible into or exchangeable or
exercisable for or repayable with common stock or other equity securities, or
that maintains employee or director bonus or compensation plans providing for
the issuance of common stock or options to purchase common stock or other
awards, (A) issue substantially similar new warrants, options or other
securities to replace the outstanding options, warrants or other securities of
such acquired business or assume the obligations of such acquired business
under such outstanding warrants, options or other securities or such plans, and
issue common stock pursuant to any such warrants, options or other securities,
as in effect on the date of such issuance or assumption, or grant options to
purchase common stock or other awards and issue common stock under any such
plans, as in effect on the date of acquisition, and (B) file one or more
registration statements on Form S-8 covering the offering and sale of
securities issuable under such plans; (4) issue common stock pursuant to
acquisition agreements existing on the date of this prospectus which were
entered into by U.S. Foodservice to effect the acquisitions of Lone Star
Institutional Grocers, Inc., J.H. Haar & Sons, L.L.C. and Joseph Webb Foods,
Inc., as described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Introduction," as such agreements are in
effect on the date of this prospectus, and implement collar and other price
protection provisions contained in such agreements; (5) issue common stock upon
exercise of an outstanding warrant to purchase 71,460 shares of common stock as
of January 31, 1999, subject to anti-dilution adjustments, as such warrant is
in effect on the date of this prospectus; and (6) file one or more shelf
registration statements covering the resale of (A) common stock issued to
owners of businesses acquired by U.S. Foodservice prior to the date of this
prospectus under registration rights agreements existing on the date of this
prospectus, as such agreements are in effect on the date of this prospectus,
and (B) common stock issued in accordance with clause (2) of this sentence to
owners of businesses acquired by U.S. Foodservices subsequent to the date of
this prospectus, whether by merger, acquisition of assets or capital stock or
otherwise, as consideration for the acquisition of such businesses under
registration rights agreements entered into in connection with such
acquisitions.
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares
of common stock to each other for purposes of resale at the initial public
offering price, less an amount not greater than the selling concession. Under
the terms of the Intersyndicate Agreement, the U.S. Underwriters and any
dealers to whom they sell shares of common stock will not offer to sell or sell
shares of common stock to persons who are non-U.S. or non-Canadian persons or
to persons they believe intend to resell to persons who are non-U.S. or non-
Canadian persons, and the International Managers and any dealers to whom they
sell shares of common stock will not offer to sell or sell shares of common
stock to U.S. persons or to Canadian persons or to persons they believe intend
to resell to U.S. or Canadian persons, except in the case of transactions
pursuant to the Intersyndicate Agreement.
60
<PAGE>
[ALTERNATE PAGE]
The Underwriters will not confirm sales of the common stock to any
account over which they exercise discretionary authority without the prior
specific written approval of the customer.
Because U.S. Foodservice may be deemed to be an affiliate of or to have a
conflict of interest with Merrill Lynch and Merrill Lynch International, the
offerings will be conducted in accordance with Conduct Rule 2720 of the
National Association of Securities Dealers, Inc.
U.S. Foodservice and the selling stockholders have agreed to indemnify
the International Managers and the U.S. Underwriters against certain
liabilities, including certain liabilities under the Securities Act, or to
contribute to payments the International Managers and U.S. Underwriters may be
required to make in respect thereof.
Until the distribution of the common stock is completed, SEC rules may
limit the ability of the Underwriters and certain selling group members to bid
for and purchase the common stock. As an exception to these rules, the U.S.
Representatives are permitted to engage in certain transactions that stabilize
the price of the common stock. These transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the common
stock.
If the Underwriters create a short position in the common stock in
connection with the offerings, i.e., if they sell more shares of common stock
than are set forth on the cover page of this prospectus, the U.S.
Representatives may reduce that short position by purchasing common stock in
the open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment options described
above.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither U.S. Foodservice nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the common
stock. In addition, neither U.S. Foodservice nor any of the Underwriters makes
any representation that the U.S. Representatives will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
Purchasers of the shares offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price set forth on the cover
page hereof.
Merrill Lynch International and Merrill Lynch may use this prospectus for
offers and sales related to market-making transactions in common stock. Merrill
Lynch International and Merrill Lynch may act as principal or agent in these
transactions, and the sales will be made at market prices or at negotiated
prices related to prevailing market prices at the time of sale.
Some of the Underwriters and their affiliates engage in transactions
with, and perform services for, U.S. Foodservice, and have engaged, and may in
the future engage, in commercial banking and investment banking transactions
with U.S. Foodservice. In that regard, some of the selling stockholders are
affiliates of Merrill Lynch and Merrill Lynch International. See "Principal and
Selling Stockholders."
Each International Manager has agreed that (i) it has not offered or sold
and, prior to the expiration of the period of six months from the closing date
of the offerings, will not offer or sell any shares of common stock to persons
in the United Kingdom, except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
do not constitute an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995; (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the common
stock in, from or otherwise involving the United Kingdom; and (iii) it has only
issued or passed on
61
<PAGE>
[ALTERNATE PAGE]
and will only issue or pass on in the United Kingdom any document received by
it in connection with the issuance of common stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996, as amended, or is a person to whom
such document may otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of common
stock, or the possession, circulation or distribution of this prospectus or any
other material relating to U.S. Foodservice, the selling stockholders or shares
of common stock, where action for that purpose is required. Accordingly, the
shares of common stock may not be offered or sold, directly or indirectly, and
neither this prospectus nor any other offering material or advertisements in
connection with the shares of common stock may be distributed or published, in
or from any country or jurisdiction except in compliance with any applicable
rules and regulations of any such country or jurisdiction.
62
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ALTERNATE PAGE]
8,704,955 Shares
U.S. FOODSERVICE
Common Stock
----------------
PROSPECTUS
----------------
Merrill Lynch International
Goldman Sachs International
Salomon Smith Barney International
J.C. Bradford & Co.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale and distribution of the securities being registered. All amounts
except the SEC registration and NASD filing fees are estimated.
<TABLE>
<CAPTION>
Item Amount
---- --------
<S> <C>
SEC registration fee............................................... $122,284
NYSE listing fee................................................... *
NASD filing fee.................................................... 32,500
Blue Sky fees and expenses......................................... *
Printing expenses.................................................. *
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
Transfer Agent and Registrar fees.................................. *
Miscellaneous...................................................... *
--------
Total............................................................ $ *
========
</TABLE>
- --------
* To be filed by amendment.
Item 15. Indemnification of Directors and Officers
Reference is made to the provisions of Article XII of the registrant's
Restated Certificate of Incorporation filed as Exhibit 4.1 hereto and the
provisions of Article XII of the registrant's Amended and Restated By-laws
filed as Exhibit 4.2 hereto.
The registrant is a Delaware corporation, subject to the applicable
indemnification provisions of the General Corporation Law of the State of
Delaware (the "DGCL"). Section 145 of the DGCL provides for the
indemnification, under certain circumstances, of any person in connection with
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than derivative actions), brought or threatened involving
such persons because of such person's service in any such capacity with respect
to another corporation or other entity at the request of such corporation.
The registrant's Amended and Restated By-Laws provide for the
indemnification of the officers and directors of the registrant to the fullest
extent permitted by the DGCL. Article XII of the By-Laws provides that each
person who was or is made a party to (or is threatened to be made a party to)
any civil or criminal action, suit or proceeding by reason of the fact that
such person is or was a director or officer of the registrant shall be
indemnified and held harmless by the registrant to the fullest extent
authorized by the DGCL against all expense, liability and loss (including,
without limitation, attorneys' fees) incurred by such person in connection
therewith, if such person acted in good faith and in a manner such person
reasonably believed to be or not opposed to the best interests of the
registrant and had no reason to believe that such person's conduct was illegal.
Article XII of the registrant's Restated Certificate of Incorporation
provides that, to the fullest extent permitted by the DGCL, the registrant's
directors will not be personally liable to the registrant or its stockholders
for monetary damages resulting from a breach of their fiduciary duties as
directors. However, nothing contained in such Article XII shall eliminate or
limit the liability of directors (i) for any breach of the director's duty of
loyalty to the registrant or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
the law, (iii) under Section 174 of the DGCL or (iv) for any transaction from
which the director derived an improper personal benefit.
II-1
<PAGE>
The registrant maintains directors and officers liability insurance,
which covers directors and officers of the registrant against certain claims or
liabilities arising out of the performance of their duties.
In the registration rights agreements with the Company pursuant to which
the securities offered hereby are being registered, the selling stockholders
have agreed to indemnify the registrant, its directors, officers and agents and
each person, if any, who controls the registrant against certain liabilities,
including certain liabilities under the Securities Act.
Item 16: Exhibits
(a) Exhibits
The following Exhibits are filed herewith or incorporated herein by
reference:
<TABLE>
<C> <S>
*1.1 Form of U.S. Purchase Agreement.
*1.2 Form of International Purchase Agreement.
4.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on Form
S-3 (Commission File No. 333-59785)).
4.2 Amended and Restated By-Laws of the Company (incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form S-3
(Commission File No. 333-41795)).
4.3 Specimen certificate representing common stock, par value $.01 per
share, of the Company (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3 (Commission File No. 333-
27275)).
4.4 Rights Agreement, dated as of February 19, 1996, between U.S.
Foodservice and The Bank of New York, as Rights Agent (the "Rights
Agreement") (incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A dated February 22, 1996).
4.5 Amendment No. 1 to Rights Agreement, dated as of May 17, 1996
(incorporated by reference to Exhibit 10.26 to Amendment No. 1 to the
Company's Registration Statement on Form S-3 (Commission File No. 333-
07321)).
4.6 Amendment No. 2 to Rights Agreement, dated as of September 26, 1996
(incorporated by reference to Exhibit 10.1 to Amendment No. 2 to the
Company's Registration Statement on Form S-3 (Commission File No. 333-
14039)).
4.7 Amendment No. 3 to Rights Agreement, dated as of June 30, 1997
(incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on July 2, 1997).
4.8 Amendment No. 4 to Rights Agreement, dated as of December 23, 1997
(incorporated by reference to the Company's Current Report on Form 8-K
filed on January 7, 1998).
* 5.1 Opinion of Hogan & Hartson L.L.P., counsel to the Company, regarding the
validity of the securities being offered.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2 Consents of KPMG LLP, independent accountants.
23.3 Consent of Arthur Andersen LLP, independent accountants.
*23.4 Consent of Hogan & Hartson L.L.P. (contained in Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
</TABLE>
- --------
* To be filed by amendment.
Item 17. Undertakings
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered
II-2
<PAGE>
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the General Corporation Law of the State of
Delaware, the Restated Certificate of Incorporation or the Amended and
Restated By-Laws of registrant, indemnification agreements entered into
between registrant and its officers and directors, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Columbia, State of Maryland, on March 5, 1999.
U.S. FOODSERVICE
/s/ James L. Miller
By: _________________________________
James L. Miller
President and Chief Executive
Officer (Duly Authorized Officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Lewis Hay, III, David M. Abramson and
George T. Megas, and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration
statement, and any registration statement filed pursuant to Rule 462(b) under
the Securities Act of 1933 in connection therewith, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James L. Miller Chairman of the Board, March 5, 1999
______________________________________ President and Chief
James L. Miller Executive Officer
(Principal Executive
Officer)
/s/ Lewis Hay, III Director, Executive Vice March 5, 1999
______________________________________ President and Chief
Lewis Hay, III Financial Officer
(Principal Financial
Officer)
/s/ George T. Megas Vice President and Chief March 5, 1999
______________________________________ Accounting Officer
George T. Megas (Principal Accounting
Officer)
/s/ Michael J. Drabb Director March 5, 1999
______________________________________
Michael J. Drabb
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C>
/s/ David M. Abramson Director March 5, 1999
______________________________________
David M. Abramson
/s/ Eric E. Glass Director March 5, 1999
______________________________________
Eric E. Glass
/s/ Mark P. Kaiser Director March 5, 1999
______________________________________
Mark P. Kaiser
/s/ Paul I. Latta, Jr. Director March 5, 1999
______________________________________
Paul I. Latta, Jr.
/s/ Dean R. Silverman Director March 5, 1999
______________________________________
Dean R. Silverman
/s/ Jeffrey D. Serkes Director March 5, 1999
______________________________________
Jeffrey D. Serkes
/s/ James P. Miscoll Director March 5, 1999
______________________________________
James P. Miscoll
/s/ Bernard Sweet Director March 5, 1999
______________________________________
Bernard Sweet
/s/ Albert J. Fitzgibbons III Director March 5, 1999
______________________________________
Albert J. Fitzgibbons III
/s/ Matthias B. Bowman Director March 5, 1999
______________________________________
Matthias B. Bowman
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibits
------- --------
<C> <S>
* 1.1 Form of U.S. Purchase Agreement.
* 1.2 Form of International Purchase Agreement.
4.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-3 (Commission File No. 333-59785)).
4.2 Amended and Restated By-Laws of the Company (incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form S-3
(Commission File No. 333-41795)).
4.3 Specimen certificate representing common stock, par value $.01 per
share, of the Company (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3 (Commission File No. 333-
27275)).
4.4 Rights Agreement, dated as of February 19, 1996, between U.S.
Foodservice and The Bank of New York, as Rights Agent (the "Rights
Agreement") (incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A dated February 22, 1996).
4.5 Amendment No. 1 to Rights Agreement, dated as of May 17, 1996
(incorporated by reference to Exhibit 10.26 to Amendment No. 1 to the
Company's Registration Statement on Form S-3 (Commission File No. 333-
07321)).
4.6 Amendment No. 2 to Rights Agreement, dated as of September 26, 1996
(incorporated by reference to Exhibit 10.1 to Amendment No. 2 to the
Company's Registration Statement on Form S-3 (Commission File No. 333-
14039)).
4.7 Amendment No. 3 to Rights Agreement, dated as of June 30, 1997
(incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on July 2, 1997).
4.8 Amendment No. 4 to Rights Agreement, dated as of December 23, 1997
(incorporated by reference to the Company's Current Report on Form 8-K
filed on January 7, 1998).
* 5.1 Opinion of Hogan & Hartson L.L.P., counsel to the Company, regarding
the validity of the securities being offered.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2 Consents of KPMG LLP, independent accountants.
23.3 Consent of Arthur Andersen LLP, independent accountants.
*23.4 Consent of Hogan & Hartson L.L.P. (contained in Exhibit 5.1).
24 Power of Attorney (included in signature page).
</TABLE>
- --------
*To be filed by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 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 Food Service, Inc. which
is as of November 14, 1996 relating to the consolidated financial statements of
JP Foodservice, Inc., which appears in such Prospectus. We also consent to the
application of such report to the Financial Statement Schedules for the year
ended June 29, 1996 listed under Item 14(a) of U.S. Foodservice's (formerly JP
Foodservice, Inc.) Annual Report on Form 10-K/A-1/A-2 for the year ended June
27, 1998 when such schedules are read in conjunction with the financial
statements referred to in our report. We also consent to the references to us
under the heading "Experts" in such Prospectus.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
March 4, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
U.S. Foodservice:
We consent to the use in this registration statement of our report dated August
14, 1998, relating to the consolidated balance sheets of U.S. Foodservice and
Subsidiaries as of June 28, 1997 and June 27, 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended, and to the reference to our firm under the heading "Experts" in such
registration statement.
/s/ KPMG LLP
Baltimore, Maryland
March 4, 1999
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Valley Industries, Inc. and
Z Leasing Company:
We consent to the use in this registration statement of our report dated June
17, 1996, with respect to the combined statements of earnings, stockholders' and
partners' equity, and cash flows of Valley Industries, Inc. and Subsidiaries and
Z Leasing Company (A General Partnership) for the year ended January 31, 1996,
and to the reference to our firm under the heading "Experts" in such
registration statement of U.S. Foodservice.
/s/ KPMG LLP
Baltimore, Maryland
March 4, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use 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 U.S. Foodservice's (formerly JP Foodservice, Inc.)
Form 8-K/A-1 dated March 9, 1998 and Form 10-K dated September 24, 1998,
as amended by Form 10-K/A-2, into this Form S-3 Registration Statement dated
March 4, 1999, and to all references to our Firm included in this
Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, PA
March 4, 1999
