<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A-1
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 0-24954
U.S. FOODSERVICE
(Exact name of registrant as specified in its charter)
Delaware 52-1634568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9755 Patuxent Woods Drive 21046
Columbia, Maryland (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (410) 312-7100
Not Applicable
--------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--------- ---------
The number of shares of the registrant's common stock, par value $.01 per
share, outstanding at November 6, 1998 was 47,287,425 shares.
<PAGE>
U.S. FOODSERVICE
INDEX
-----
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
--------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 27, 1998 and September 26, 1998 1
Condensed Consolidated Statements of Operations
Three months ended September 27, 1997
and September 26, 1998 2
Condensed Consolidated Statements of Cash Flows
Three months ended September 27, 1997
and September 26, 1998 3
Notes to Condensed Consolidated Financial Statements 4 - 5
Item 2. Management's Discussion and Analysis of Financial 6 - 9
Condition and Results of Operations
Signature 10
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
U.S. FOODSERVICE AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS JUNE 27, SEPTEMBER 26,
1998* 1998
--------------- -------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 57,817 $ 57,648
Receivables, net 215,459 269,483
Residual interest in accounts
receivable sold 106,581 120,234
Inventories 349,583 366,991
Other current assets 28,548 32,052
Deferred income taxes 39,294 39,319
---------- ----------
Total current assets 797,282 885,727
Property and equipment, net 437,265 431,473
Goodwill and other noncurrent assets 583,244 580,404
---------- ----------
Total assets $1,817,791 $1,897,604
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 604 $ 401
Current obligations under capital leases 6,933 5,891
Accounts payable 381,151 401,433
Accrued expenses 120,778 110,226
---------- ----------
Total current liabilities 509,466 517,951
Noncurrent liabilities
Long-term debt 650,679 635,445
Obligations under capital leases 29,946 29,515
Deferred income taxes 6,064 6,064
Other noncurrent liabilities 36,916 100,531
---------- ----------
Total liabilities 1,233,071 1,289,506
---------- ----------
Commitments and contingent liabilities
Stockholders' equity 584,720 608,098
---------- ----------
Total liabilities and stockholders' equity $1,817,791 $1,897,604
========== ==========
</TABLE>
* Amounts were derived from the Company's audited consolidated balance sheet.
SEE ACCOMPANYING NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
---------- ----------
<S> <C> <C>
Net sales $ 1,338,828 $ 1,478,370
Cost of sales 1,082,582 1,208,393
----------- -----------
Gross profit 256,246 269,977
Operating expenses 216,845 221,008
Amortization of intangible assets 3,681 3,930
----------- -----------
Income from operations 35,720 45,039
Interest expense 18,927 16,196
----------- -----------
Income before income taxes 16,793 28,843
Provision for income taxes 7,002 11,931
----------- -----------
Net income and comprehensive income $ 9,791 $ 16,912
=========== ===========
Basic earnings per common share $ 0.22 $ 0.36
=========== ===========
Basic weighted average common
shares outstanding 45,247,000 46,542,000
Diluted earnings per common share $ 0.22 $ 0.36
=========== ===========
Diluted weighted average common
shares outstanding 45,518,000 47,171,000
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 9,791 $ 16,912
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 15,621 15,053
Other adjustments (1,349) (721)
Changes in net operating assets, net of effects
from acquisitions (41,192) (22,813)
-------- --------
Net cash (used in) provided by operating activities (17,129) 8,431
-------- --------
Cash flows from investing activities
Additions to property and equipment (26,360) (17,612)
Cost of businesses acquired, net of cash acquired 483
Proceeds from disposals of property 745 4,873
Proceeds from sale of manufacturing division assets 20,755
-------- --------
Net cash (used in) provided by investing activities (25,615) 8,499
-------- --------
Cash flows from financing activities
Increase (decrease)under revolving credit line, net 15,000 (2,200)
Increase (decrease) in long-term debt, net 6,195 (17,587)
Principal payments under capital lease obligations (3,060) (1,630)
Proceeds from employee stock purchases 9,010 4,738
Other (270) (420)
-------- --------
Net cash provided by (used in) financing activities 26,875 (17,099)
-------- --------
Net decrease in cash and cash equivalents (15,869) (169)
Cash and cash equivalents:
Beginning of period 74,432 57,817
-------- --------
End of period $ 58,563 $ 57,648
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
U.S. FOODSERVICE AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements of U.S. Foodservice and its
consolidated subsidiaries (the "Company") at September 26, 1998 and for the
three months ended September 27, 1997 and September 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.
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.
Accordingly, the condensed consolidated statement of operations and the
condensed consolidated statement of cash flows for the three months ended
September 27, 1997 have been restated to include consolidated information for
Rykoff-Sexton.
Net sales and net income previously reported by the separate enterprises and the
combined amounts presented in the accompanying condensed consolidated statement
of operations for the three-month period ended September 27, 1997 are as follows
(dollars in thousands):
Net sales:
Rykoff-Sexton $ 870,938
U.S. Foodservice 467,890
----------
Combined $1,338,828
==========
Net income:
Rykoff-Sexton $ 2,849
U.S. Foodservice 6,942
----------
Combined $ 9,791
==========
NOTE 2 RESTRUCTURING COSTS
In connection with the Acquisition, the Company recorded a $56.7 million
restructuring charge during the year ended June 27, 1998. The restructuring
costs consisted primarily of $26.8 million for change in control payments to
former executives of Rykoff-Sexton and $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 first quarter of fiscal 1999, 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 their operations with facilities in the same geographic region. As of
September 28, 1998, consolidation of nine of the distribution centers was
complete. Consolidation of two additional locations will be completed by
December 1998, with consolidation of the remaining two locations being completed
by the end of the fiscal year.
During the quarter, the Company expended $1.1 million of severance and benefits,
$.6 million of lease commitments and $3.0 million of idle facility and facility
closure costs. At September 26, 1998, $6.2 million of severance and benefits,
$9.8 million of lease commitments and $4.9 million of idle facility and facility
closure costs have yet to be expended. Of these amounts, the Company expects to
expend an additional $10.0 million in 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.
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.
NOTE 3 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 agreement, 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 of 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 the rate of 6% pr year. Based on current product
prices, the supply agreement obligates the Company to purchase in excess of $750
million of product over the next six years. The Company may incur substantial
penalties if its 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.
4
<PAGE>
NOTE 4 - RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
During the first quarter of fiscal 1999, 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 and net income were the same.
NOTE 5 - 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 6 - SUBSEQUENT EVENTS
Haar Acquisition
- ----------------
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 Metropolitan market. Annual sales for Haar for its fiscal year ended
September 30, 1998 totaled $57.0 million. Under the terms of the acquisition,
the Company acquired all of the membership interests of Haar in exchange for
550,543 shares of the Company's common stock. The transaction will be accounted
for as a pooling of interests.
Webb Acquisition
- ----------------
Effective October 30, 1998, the Company signed a definitive purchase agreement
for the acquisition of Joseph Webb Foods, Inc ("Webb"), a broadline foodservice
distributor serving the San Diego and Southern California markets. Annual sales
for Webb for its fiscal year ended December 31, 1997 were $157.4 million.
Subject to customary regulatory approvals and certain other conditions, it is
anticipated that the transaction will close by the end of November 1998. Under
the terms of the stock purchase agreement, the Company will acquire 100% of the
stock of Webb in exchange for approximately 940,000 shares of the Company's
common stock and $100,000 in cash. 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 will be
accounted for as a purchase.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward-Looking Statements
- ---------------------------
Statements in this Management's Discussion and Analysis of Financial Condition
and Results of Operations with respect to management's expectations regarding
the Company's liquidity needs and resources constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements are
subject to risks and uncertainties that could cause the Company's actual results
to differ materially. Such risks and uncertainties include the sensitivity of
the Company's business to national and regional economic conditions, the effects
of inflation and deflation in food prices, the highly competitive markets in
which the Company operates and the Company's ability to integrate acquired
businesses. The Company's Annual Report on Form 10-K for the fiscal year ended
June 27, 1998, filed with the Securities and Exchange Commission on September
25, 1998, discusses some of the important factors that could cause the Company's
actual results to differ materially from those in such forward-looking
statements.
Overview
- --------
Effective December 23, 1997, Rykoff-Sexton was merged into a wholly owned
subsidiary of U.S. Foodservice (the "Acquisition"). The transaction was
accounted for under the pooling of interests method. Accordingly, the condensed
consolidated statements of operations and cash flows for the three-month period
ended September 27, 1997 have been restated to include consolidated information
for Rykoff-Sexton.
Net Sales
- ---------
The Company's net sales of $1.48 billion for the three months ended September
26, 1998 (the "1999 fiscal quarter") represented a 10.4% increase from the $1.34
billion net sales level achieved for the three months ended September 27, 1997
(the "1998 fiscal quarter"). The acquisitions of Outwest Meat Company
("Outwest") in the second quarter of fiscal 1998 and Sorrento Food Service, Inc.
("Sorrento") and Westlund Provisions, Inc. ("Westlund") in the third quarter of
fiscal 1998 accounted for sales growth of 4.0 % for the 1999 fiscal quarter. The
Company acquired Outwest for Common Stock valued at $10.5 million and assumed
$2.1 million of long-term liabilities. Of the purchase price paid in Common
Stock, the Company allocated $7.3 million to goodwill, $4.8 million to working
capital and $0.4 million to property and equipment. The Company acquired
Sorrento for cash consideration of approximately $39 million, of which it
allocated $18.5 million to goodwill, $15.8 million to working capital, $4.2
million to property and equipment and $0.5 million to deposits and other assets.
Growth in both multi-unit (or "chain") account sales and independent account (or
"street") sales contributed to the increase in sales. Chain account sales
increased 15.3% for the 1999 fiscal quarter. A significant portion of this
increase was related to the expansion of sales to existing chain customers
resulting from the national distribution capability created through the
Acquisition. Street sales increased 7.3% for the 1999 fiscal quarter principally
from 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 (street sales as a percentage of total net sales) decreased to 59.6 % in the
1999 fiscal quarter from 61.3% in the 1998 fiscal quarter.
Gross Profit
- ------------
The Company's gross profit margin decreased to 18.3% in the 1999 fiscal quarter
from 19.1% in the 1998 fiscal quarter. The decrease was primarily attributable
to a continuing shift in product mix from certain high-margin items to higher
turnover, lower-margin items ("center-of-the-plate" entree products) in the
former Rykoff-Sexton operations, as well as an increase in chain sales as a
percentage of net sales in the 1999 fiscal quarter. The effects of this shift
were offset in part by the growth of the Company's private and signature brand
product sales in the 1999 fiscal quarter. Sales of these products, which
generally have higher gross margins than national brand products of comparable
quality, increased by 3.0% in the 1999 fiscal quarter over the prior
corresponding quarter.
Operating Expenses
- ------------------
Operating expenses increased by 1.9% ($4.2 million) in the 1999 fiscal quarter
over the 1998 fiscal quarter. As a percentage of net sales, operating expenses
decreased to 14.9% in the 1999 fiscal quarter from 16.2% in the 1998 fiscal
quarter. The decrease was primarily attributable to operating efficiencies
resulting from the Acquisition restructuring plan, cost reductions achieved
through the consolidation of the Company'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 the shift in product mix
toward "center-of-the plate" items.
Income from Operations
- ----------------------
Income from operations (after amortization charges of $3.9 million in the 1999
fiscal quarter and $3.7 million in the 1998 fiscal quarter) increased 26.1%
($9.3 million) in the 1999 fiscal quarter from the 1998 fiscal quarter. The
increase was attributable to the increase in sales and the reduction of
operation expenses as a percentage of sales.
6
<PAGE>
Interest Expense
- ----------------
Interest expense for the 1999 fiscal quarter decreased $2.7 million or 14.4%
from the 1998 fiscal quarter. The reduced interest expense was attributable to
lower overall interest rates under the credit facility established in connection
with the Acquisition.
Provision for Income Taxes
- --------------------------
During the three-month periods ending September 26, 1998 and September 27, 1997,
the Company recognized tax expense at effective rates of 41.4% and 41.7%,
respectively.
Status of Restructuring Plan
- ----------------------------
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 distributions
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 Rykoff-Sexton's corporate overhead functions,
most of which are resident in Wilkes-Barre, Pennsylvania, have been consolidated
with such functions in Columbia, Maryland. As of September 28, 1998,
consolidation of nine of the distribution centers was complete. Consolidation of
two additional locations will be completed by December 1998, with consolidation
of the remaining two locations being completed by the end of the fiscal year.
As a result of management's restructuring plan, the Company recognized a
restructuring charge of $56.7 million, of which $13.1 million were non-cash
charges. During the 1999 fiscal quarter, the Company expended $1.1 million of
severance and benefits; $.6 million of lease commitments; and $3.0 million of
idle facility and facility closure costs. As of September 28, 1998, the
following costs have yet to be expended: $6.2 million of severance and benefits,
of which $2.0 million relates to deferred change in control payments; $9.8
million of lease commitments; and $4.9 million of idle facility and facility
closure costs. Management anticipates that $10.0 million will be expended 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.
The Company is funding these expenditures through 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. The Company
does not expect to incur any additional restructuring costs or asset impairment
charges with respect to the Acquisition. Any additional operating costs related
to the integration of the two businesses are not expected to be material.
In connection with the integration plan for the combination of the two
businesses, the Company 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. The Company believes operating cost and interest
savings exceeded $20 million in fiscal 1998 and $8 million in the first quarter
of fiscal 1999. The Company achieved operating cost savings through the
consolidation and re-negotiation of purchasing programs, consolidation and
realignment of distribution facilities and consolidation of the Company's
general and administrative functions. Interest savings were realized through the
refinancing of the Company's senior debt. Based on the results for fiscal 1998
and the first quarter of fiscal 1999 and the status of the integration plan, the
Company believes it can achieve the costs savings estimated for fiscal 1999 and
subsequent periods.
Liquidity and Capital Resources
- -------------------------------
As of September 26, 1998, the Company's total long-term indebtedness, including
current portion, was $671.2 million, with an overall weighted average interest
rate of 6.9% (excluding deferred financing costs). Long-term borrowing decreased
by $21.4 million during the three months ended September 26, 1998 primarily as a
result of receipt of $30.4 million of net cash proceeds from the sale of assets
and employee stock purchases and cash provided by operating activities of $8.4
million offset by capital expenditures of $17.6 million.
The Company's working capital balance (excluding current portion of long-term
debt) of $374.1 million at September 26, 1998 increased by $78.7 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.
The Company made $17.6 million of capital expenditures in the three months ended
September 26, 1998 primarily for facility expansion projects and the upgrading
of management information systems. During the quarter, the Company realized $4.4
million from the sale of redundant facilities. The current net book value of
assets held for sale at September 26, 1998 exceeds $15 million.
From time to time, the Company acquires other foodservice businesses. Any such
business may be acquired for cash, common stock of the Company, or a combination
of cash and common stock.
As of September 26, 1998, $500.0 million of borrowings and $35.9 million of
letters of credit were outstanding under the Company's credit facility and an
additional $213.1 million remained available to finance the Company's working
capital needs and to meet the Company's other liquidity requirements. The
Company believes that the combination of the cash flow generated by its
operations, additional leasing activity, sales of duplicate assets and
borrowings under the 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
- ---------------------------------------------------
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.
The Company's Program. The Company has undertaken a program to address the Year
2000 issue with respect to the following: (i) the Company's information
technology and operating systems (including its billing, accounting and
financial reporting systems); (ii) the Company's non-information technology
systems (such as buildings, equipment, telephone systems and other
infrastructure systems that may contain embedded microcontroller technology);
(iii) certain systems of the Company's major vendors and material service
providers (insofar as such systems relate to the Company's business activities
with such parties); and (iv) the Company's material customers (insofar as the
Year 2000 issue relates to the Company's ability to provide services to such
customers). As described below, the Company's Year 2000 program involves (i) an
assessment of the Year 2000 problems that may affect the Company, (ii) the
development of remedies to address the problems discovered in the assessment
phase, (iii) the testing of such remedies and (iv) the preparation of
contingency plans to deal with worst case scenarios.
7
<PAGE>
Assessment Phase. In order to determine the extent to which its internal
systems are vulnerable to the Year 2000 issue, the Company is currently
evaluating the systems that are date sensitive. The Company's 37 distribution
centers 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 October 31, 1998, information systems
used by ten of the distribution centers are Year 2000 compliant. The Company's
data processing systems represent its most significant challenge with respect to
Year 2000 compliance. The Company expects that its evaluation of its internal
systems will be completed by December 31, 1998. In addition, in the second
quarter of fiscal 1999, the Company will complete sending letters to certain of
its significant hardware, software and other equipment vendors and other
material service providers, as well as to its significant customers, requesting
them to provide the Company with detailed, written information concerning
existing or anticipated Year 2000 compliance by their systems insofar as the
systems relate to such parties' business activities with the Company. The
Company expects that it will complete its distribution of these inquires by
December 31, 1998.
Remediation and Testing Phase. The activities conducted during the remediation
and testing phase are intended to address potential Year 2000 problems in
Company-developed computer software and in its 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, the Company has evaluated the program applications and identified
the Year 2000 problems and is in the process of taking steps to attempt to
remediate such problems and individually test the applications to confirm that
the remediating changes are effective and have not adversely affected the
functionality of the applications. The Company 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, the Company will
conduct integrated testing for the purpose of demonstrating functional
integrated systems operation. Following completion of its internal, integrated
systems testing, the Company intends to conduct laboratory-simulated integrated
systems testing in an attempt to demonstrate substantial Year 2000 compliance of
the Company's systems as they interface with external systems and equipment of
major vendors, other material service providers and material customers.
During fiscal 1998, among other activities, the Company 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 13 distribution
centers and its corporate headquarters. As of the date of this report, the
Company has initiated software and hardware remediation efforts at the remaining
distribution centers and its corporate headquarters. The Company currently
seeks to have most of its software remediated by December 1998 and to have all
of its information systems at its distribution centers and its corporate
headquarters Year 2000 compliant by July 1999.
Contingency Plans. The Company is developing contingency plans to handle its
most reasonably likely worst case Year 2000 scenarios, which it has not yet
identified fully. The Company 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. The Company intends to complete
its contingency plans by January 1999.
Costs Related to the Year 2000 Issue. To date, the Company has incurred
approximately $0.8 million in costs for its Year 2000 program. It has also
expended approximately $10.0 million of capital expenditures on new information
processing systems that are already Year 2000 compliant. The Company currently
estimates that it will incur additional costs, which are not expected to exceed
approximately $5.0 million, to complete its Year 2000 compliance work with
respect to the Company's major information systems. Of such additional costs,
approximately $3.0 million are expected to be incurred during fiscal 1999 and
approximately $2.0 million are expected to be incurred during fiscal 2000.
These costs will be expensed as incurred. The Company 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. However, there
can be no assurance that the foregoing cost estimate will not change as the
Company completes its assessment.
8
<PAGE>
Risks Related to the Year 2000 Issue. Although the Company's Year 2000 efforts
are intended to minimize the adverse effects of the Year 2000 issue on the
Company's business and operations, the actual effects of the issue and the
success or failure of the Company's efforts described above cannot be known
until the year 2000. Failure by the Company and its major vendors, other
material service providers and material customers to address adequately their
respective Year 2000 issues in a timely manner (insofar as such issues relate to
the Company's business) could have a material adverse effect on the Company's
business, results of operations and financial condition.
Changes in 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 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.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
The following information constitutes forward-looking information. See
"Forward-Looking Statements."
The Company's major market risk exposure is to changing interest rates. The
Company's policy is to manage interest rates through the use of a combination of
fixed and floating rate debt. The Company uses interest rate swap, cap and
collar contracts to manage its exposure to fluctuations in interest rates on
floating long-term debt. Certain management monitoring processes are designed
to minimize the impact of sudden and sustained changes in interest rates. As of
September 26, 1998, the Company's long-term indebtedness consists of fixed rate
and variable rate debt of $111.2 million and $524.6 million, respectively.
Substantially all of the Company's floating rate debt is based on LIBOR. The
Company had 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, the Company sells $250.0 million of accounts receivable on a
revolving basis under accounts receivable securitization arrangements. 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. The
Company also uses fixed-rate capital leases to finance certain of its trucks and
trailers.
Currently, the Company does not use foreign currency forward contracts or
commodity contracts and does not have any material foreign currency exposure.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. FOODSERVICE
(Registrant)
DATE: January 14, 1999 /s/ Lewis Hay, III
----------------------------------------
Lewis Hay, III, Executive Vice President
and Chief Financial Officer
(Duly Authorized Officer)
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