-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MNlh9UET8wLp/epS+Te9HN7HYaVvb1BCzSY6KyOdNY3nUnmcOXx5gR+5FX7T8afb OSCA00VXmW7rV5Glr1ErmA== 0000928385-99-000611.txt : 19990305 0000928385-99-000611.hdr.sgml : 19990305 ACCESSION NUMBER: 0000928385-99-000611 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19990304 FILER: COMPANY DATA: COMPANY CONFORMED NAME: US FOODSERVICE/MD/ CENTRAL INDEX KEY: 0000928395 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 521634568 STATE OF INCORPORATION: DE FISCAL YEAR END: 0627 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-12601 FILM NUMBER: 99557096 BUSINESS ADDRESS: STREET 1: 9830 PATUXENT WOODS DR CITY: COLUMBIA STATE: MD ZIP: 21046 BUSINESS PHONE: 4103127100 MAIL ADDRESS: STREET 1: 9830 PATUXENT WOODS DR CITY: COLUMBIA STATE: MD ZIP: 21046 FORMER COMPANY: FORMER CONFORMED NAME: JP FOODSERVICE INC DATE OF NAME CHANGE: 19940812 10-K/A 1 AMENDMENT #2 TO THE FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-K/A-2 (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 27, 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 Identification No.) incorporation or organization) 9755 Patuxent Woods Drive, Columbia, Maryland 21046 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (410) 312-7100 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered: Common Stock New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE 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 ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [_] The aggregate market value of the registrant's voting stock held by non- affiliates of the registrant at September 18, 1998, based on the closing price of such stock on the New York Stock Exchange on such date, was approximately $1.5 billion. The number of shares of the registrant's Common Stock, $.01 par value, outstanding on September 18, 1998 was 46,889,788. DOCUMENTS INCORPORATED BY REFERENCE Certain information in the Proxy Statement for the 1998 Annual Meeting of Stockholders of the registrant is incorporated by reference into Part III hereof. TABLE OF CONTENTS
Page ---- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 1
i PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. FINANCIAL STATEMENTS The following financial statements of the Company appear on pages F-2 through F-32 of this report and are incorporated by reference in Part II, Item 8: Independent Auditors' Reports Consolidated Balance Sheets as of June 28, 1997 and June 27, 1998. Consolidated Statements of Operations for the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998. Consolidated Statements of Stockholders' Equity for the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998. Consolidated Statements of Cash Flows for the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998. Notes to Consolidated Financial Statements. - 1- 2. FINANCIAL STATEMENT SCHEDULES I. - Condensed Financial Information of Registrant II. - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 3. EXHIBITS The Commission File No. of Rykoff-Sexton, Inc. was 0-8105. 3.1 Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the Company's Registration Statement on Form S-3 (No. 333-59785) and incorporated herein by reference. 3.2 Amended and Restated By-Laws of the Company. Filed as Exhibit 3.2 to the Company's Registration Statement on Form S-3 (No. 333- 41795) and incorporated herein by reference. 4.1 Specimen certificate representing common stock, par value $.01 per share, of the Company. Filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3 (No. 333-27275) and incorporated herein by reference. 4.2.1 Rights Agreement, dated as of February 19, 1996, between the Company and The Bank of New York, as Rights Agent (the "Rights Agreement"). -2- Filed as Exhibit 1 to the Company's Registration Statement on Form 8-A dated February 22, 1996 and incorporated herein by reference. 4.2.2 Amendment No. 1 to the Rights Agreement, dated as of May 17, 1996. Filed as Exhibit 10.26 to Amendment No. 1 to the Company's Registration Statement on Form S-3 (No. 333-07321) and incorporated herein by reference. 4.2.3 Amendment No. 2 to the Rights Agreement, dated as of September 26, 1996. Filed as Exhibit 10.1 to Amendment No. 2 to the Company `s Registration Statement on Form S-3 (No. 333-14039) and incorporated herein by reference. 4.2.4 Amendment No. 3 to the Rights Agreement, dated as of June 30, 1997. Filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on July 2, 1997 and incorporated herein by reference. 4.2.5 Amendment No. 4 to the Rights Agreement, dated as of December 23, 1997. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on January 7, 1998 and incorporated herein by reference. 4.3 Common Stock Purchase Warrant Expiring September 30, 2005 issued to Bankers Trust New York Corporation. Filed as Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.1 Employment Agreement, dated as of July 3, 1989, as amended, between the Company and James L. Miller. Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (No. 33- 82724) and incorporated herein by reference. 10.2 Employment Agreement, dated as of August 9, 1991, between the Company and Lewis Hay, III. Filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (No. 33-82724) and incorporated herein by reference. 10.3 Second Amendment, dated as of June 27, 1995, to Employment Agreement, dated as of July 3, 1989, as amended, between the Company and James L. Miller. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 30, 1995 and incorporated herein by reference. 10.4 First Amendment, dated as of June 27, 1995, to Employment Agreement, dated as of August 9, 1991, between the Company and Lewis Hay, III. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 30, 1995 and incorporated herein by reference. 10.5 Severance Agreement, dated as of September 27, 1995, between the Company and Mark P. Kaiser. Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 30, 1995 and incorporated herein by reference. -3- 10.6 Severance Agreement, dated as of September 27, 1995, between the Company and George T. Megas. Filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 30, 1995 and incorporated herein by reference. 10.7 Employment Agreement, dated as of January 4, 1996, between the Company and James L. Miller. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1996 and incorporated herein by reference. 10.8 Employment Agreement, dated as of January 4, 1996, between the Company and Lewis Hay, III. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1996 and incorporated herein by reference. 10.9 Employment Agreement, dated as of January 4, 1996, between the Company and Mark P. Kaiser. Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1996 and incorporated herein by reference. 10.10 Employment Agreement, dated as of January 4, 1996, between the Company and George T. Megas. Filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1996 and incorporated herein by reference. 10.11 Employment Agreement, dated as of June 10, 1996, between the Company and David M. Abramson. Filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 1996 and incorporated herein by reference. 10.12 1994 Stock Incentive Plan, as amended, of U.S. Foodservice. Filed as Exhibit 10.5 to the Company's Registration Statement on Form S-4 (No. 333-32711) and incorporated herein by reference. 10.13 Stock Option Plan for Outside Directors, as amended, of U.S. Foodservice. Filed as Exhibit 10.6 to the Company's Registration Statement on Form S-4 (No. 333-32711) and incorporated herein by reference. 10.14 U.S. Foodservice Supplemental Executive Retirement Plan. Previously filed. 10.15 U.S. Foodservice Restricted Stock Unit Plan. Previously filed. 10.16 Description of the Company's annual bonus plan. Filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (No. 33-82724) and incorporated herein by reference. 10.17 Rykoff-Sexton, Inc. 1993 Director Stock Option Plan, as amended. Previously filed. 10.18 Amended and Restated Support Agreement, dated as of June 30, 1997, among JP Foodservice, Inc. and certain stockholders of Rykoff-Sexton, Inc. Filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on September 9, 1997 and incorporated herein by reference. -4- 10.19 Receivables Purchase Agreement, dated as of May 30, 1996, among JP Foodservice Distributors, Inc., Illinois Fruit & Produce Corp. and Sky Bros., Inc., JPFD Funding Company and the Company. Filed as Exhibit 10.27 to the Company's Registration Statement on Form S-3 (No. 333- 07321) and incorporated herein by reference. 10.20.1 Transfer and Administration Agreement, dated May 30, 1996, among Enterprise Funding Corporation, JPFD Funding Company, JP Foodservice Distributors, Inc., NationsBank, N.A. and certain other financial institutions from time to time parties thereto. Filed as Exhibit 10.28 to the Company's Registration Statement on Form S-3 (No. 333-07321) and incorporated herein by reference. 10.20.2 Amendment No. 1, dated as of July 1, 1996, to the Transfer and Administration Agreement, dated as of May 30, 1996, by and among JPFD Funding Company, JP Foodservice Distributors, Inc., Enterprise Funding Corporation, NationsBank, N.A., and the financial institutions from time to time parties thereto. Filed as Exhibit 10.33 to the Company's Registration Statement on Form S-3 (No. 333-07321) and incorporated herein by reference. 10.20.3 Amendment No. 2, dated as of May 19, 1997, to the Transfer and Administration Agreement, dated as of May 30, 1996, by and among JPFD Funding Company, JP Foodservice Distributors, Inc., Enterprise Funding Corporation, NationsBank, N.A., and the financial institutions from time to time parties thereto. Filed herewith. Filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997 and incorporated herein by reference. 10.21.1 Indenture, dated as of November 1, 1993, between Rykoff- Sexton, Inc. and Norwest Bank Minnesota, N.A., as trustee (incorporated by reference from Rykoff-Sexton, Inc.'s Quarterly Report on Form 10-Q for the fiscal quarter ended October 30, 1993). 10.21.2 Supplemental Indenture, dated as May 17, 1996, among Rykoff- Sexton, Inc., the guarantors listed on the signature pages thereof and Norwest Bank Minnesota, N.A., as trustee. Filed as Exhibit 4.1.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.21.3 Second Supplemental Indenture, dated as of December 23, 1997, among Rykoff-Sexton, Inc., the guarantors listed on the signature pages thereof and Norwest Bank Minnesota, N.A., as trustee. Filed as Exhibit 4.1.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.21.4 Third Supplemental Indenture, dated as of February 10, 1998, among Rykoff-Sexton, Inc., the guarantors listed on the signature pages thereof and Norwest Bank Minnesota, N.A., as trustee. Previously filed. 10.22 Registration Rights Agreement, dated as of May 17, 1996, by Rykoff-Sexton, Inc. and the other signatories listed on the signature pages thereto (incorporated by reference from Rykoff- Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended April 27, 1996). -5- 10.23.1 Five Year Credit Agreement, dated as of December 23, 1997, among Rykoff-Sexton, Inc. and JP Foodservice Distributors, Inc., the Lenders Parties Thereto, NationsBank, N.A., as Administrative Agent, NationsBanc Montgomery Securities, Inc. and Chase Securities, Inc., as Co-Arrangers, The Chase Manhattan Bank, as Syndication Agent, and Bank of America, NT & SA, as Documentation Agent. Filed as Exhibit 10.1.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.23.2 Five Year Guaranty Agreement, dated as of December 23, 1997, among JP Foodservice, Inc., the Subsidiaries of the Borrowers identified therein and NationsBank, N.A., as Administrative Agent. Filed as Exhibit 10.1.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.24.1 364-Day Credit Agreement, dated as of December 23, 1997, among Rykoff-Sexton, Inc. and JP Foodservice Distributors, Inc., the Lenders Parties Thereto, NationsBank, N.A., as Administrative Agent, NationsBanc Montgomery Securities, Inc. and Chase Securities, Inc., as Co-Arrangers, The Chase Manhattan Bank, as Syndication Agent, and Bank of America, NT & SA, as Documentation Agent. Filed as Exhibit 10.2.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.24.2 364-Day Guaranty Agreement, dated as of December 23, 1997, among JP Foodservice, Inc., the Subsidiaries of the Borrowers identified therein and NationsBank, N.A., as Administrative Agent. Filed as Exhibit 10.2.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.25.1 Participation Agreement, dated as of April 29, 1994, entered into among Rykoff-Sexton, Inc., as Lessee ("Lessee"), Tone Brothers, Inc., as Sublessee ("Sublessee"), BA Leasing & Capital Corporation, as Agent ("Agent"), Manufacturers Bank and Pitney Bowes Credit Corporation, as Lessors (the "Lessors") (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended April 30, 1994). 10.25.2 Waiver, Consent and Fifth Amendment to Participation Agreement, dated as of December 23, 1997, among Lessee, Hudson Acquisition Corp., Agent and the Lessors. Filed as Exhibit 10.3.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.25.3 Guaranty, dated as of December 23, 1997, of JP Foodservice, Inc. in favor of Agent. Filed as Exhibit 10.3.8 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.26.1 Receivables Sale Agreement, dated as of November 15, 1996, among Rykoff-Sexton, Inc., John Sexton & Co., Biggers Brothers, Inc., White Swan, Inc., F.H. Bevevino & Company, Inc., Roanoke Restaurant Service, Inc., King's Foodservice, Inc., U.S. Foodservice of Florida, Inc., US Foodservice of Atlanta, Inc., RS Funding Inc. and US Foodservice Inc., as Servicer (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 28, 1997). -6- 10.26.2 Servicing Agreement, dated as of November 15, 1996, among RS Funding Inc., as Company, US Foodservice Inc., as Servicer, Rykoff-Sexton, Inc. and its other subsidiaries named therein as Sub-Servicers and The Chase Manhattan Bank, Trustee (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 28, 1997). 10.26.3 Pooling Agreement, dated as of November 15, 1996, among RS Funding Inc., as Company, US Foodservice Inc., as Servicer, and The Chase Manhattan Bank, as Trustee (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 28, 1997). 10.26.4 Series 1996-1 Supplement to Pooling Agreement among RS Funding Inc., as Company, US Foodservice Inc., as Servicer, and The Chase Manhattan Bank, as Trustee (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 28, 1997). 10.27 Indenture of Trust, dated as of November 1, 1996, between La Mirada Industrial Development Authority and Bankers Trust Company of California, N.A. (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 28, 1997). 10.28 Loan Agreement, dated as of November 1, 1996, among La Mirada Industrial Development Authority and Bankers Trust Company of California, N.A. (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 28, 1997). 10.29.1 Reimbursement Agreement, dated as of November 1, 1996, between Rykoff-Sexton, Inc. and the First National Bank of Chicago (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 28, 1997). 10.29.2 Amendment, Consent and Assumption Agreement, dated as of December 18, 1997, among Rykoff-Sexton, Inc., Hudson Acquisition Corp. and The First National Bank of Chicago. Filed as Exhibit 10.7.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.30.1 Commitment Agreement, dated as of August 10, 1992, between BRB Holdings, Inc. and its subsidiaries and Sara Lee Corporation (incorporated by reference from Rykoff-Sexton, Inc.'s Registration Statement on Form S-4 (No. 333-02715)). 10.30.2 Amendment Number One to BRB Holdings Commitment Agreement, dated as of September 27, 1995, by Sara Lee Corporation and BRB Holdings, Inc. and guaranteed by US Foodservice Inc. (incorporated by reference from Rykoff-Sexton, Inc.'s Registration Statement on Form S-4 (No. 333-02715)). 10.31.1 Commitment Agreement, dated as of August 10, 1992, between WS Holdings Corporation and its subsidiaries and Sara Lee Corporation (incorporated by reference from Rykoff-Sexton's Registration Statement on Form S-4 (No. 333-02715)). -7- 10.32.2 Amendment Number One to WS Holdings Commitment Agreement, dated as of September 27, 1995, by Sara Lee Corporation and WS Holdings Corporation (incorporated by reference from Rykoff- Sexton, Inc.'s Registration Statement on Form S-4 (File No. 333- 02715)). 10.33 Standstill Agreement, dated as of as of May 17, 1996, by Rykoff- Sexton, Inc. and the other signatories listed on the signature pages thereto (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended April 27, 1996). 10.34 Participation Agreement, dated as of June 29, 1998, among JP Foodservice Distributors, Inc., the signatories listed on the signature pages thereto as Guarantors, First Security Bank, National Association, as Owner Trustee, the Various Banks and Other Lending Institutions Parties Thereto, as Holders and Lenders, and First Union National Bank, as Agent. Previously filed. 10.35 Credit Agreement, dated as of June 29, 1998, among First Security Bank, National Association, as Borrower, the Several Lenders Parties Thereto, and First Union National Bank, as Agent. Previously filed. 10.36 Lease Agreement, dated as of June 29, 1998, between First Security Bank, National Association, as Lessor, and JP Foodservice Distributors, Inc., as Lessee, relating to the corporate headquarters of U.S. Foodservice. Previously filed. 21 Subsidiaries of the Company. Previously filed. 23.1 Consent of PricewaterhouseCoopers LLP, independent public accountants. Filed herewith. 23.2 Consent of KPMG LLP, independent public accountants. Filed herewith. 23.3 Consent of KPMG LLP, independent public accountants. Filed herewith. 23.4 Consent of Arthur Andersen LLP, independent public accountants. Filed herewith. 27 Financial Data Schedule. Previously filed. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company in the fourth quarter of fiscal 1998. -8- U.S. FOODSERVICE AND SUBSIDIARIES Index to Consolidated Financial Statements
PAGE Consolidated Financial Statements: Independent Auditors' Reports........................................... F-2 Consolidated Balance Sheets as of June 28, 1997 and June 27, 1998...... F-7 Consolidated Statements of Operations for the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998....................... F-8 Consolidated Statements of Stockholders' Equity for the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998................. F-9 Consolidated Statements of Cash Flows for the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998....................... F-10 Notes to Consolidated Financial Statements............................. F-12
F-1 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. In connection with our audits of the consolidated financial statements, we have also audited the consolidated financial statement schedules listed under Item 14 (a)(2). These consolidated financial statements and the financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedules 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. Also in our opinion, the related consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth herein. F-2 We also audited the combination of the accompanying consolidated financial statements and schedules as of June 28, 1997, and for each of the years in the two-year period then ended, after restatement for the Rykoff-Sexton, pooling of interests transaction and in our opinion, such financial statements and schedules 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-3 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-4 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 Linthicum, Maryland August 2, 1996, except as to Note 16, which is as of September 10, 1996 and except as to the pooling of interests with Valley Industries, Inc. and with Squeri Food Service, Inc. which is as of November 14, 1996 F-5 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-6 U.S. FOODSERVICE AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------- June 28, June 27, 1997 1998 - ---------------------------------------------------------------------------------------------- (Note 3) 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 - ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-7 U.S. FOODSERVICE AND SUBSIDIARIES Consolidated Statements of Operations (Dollars in thousands, except per share amounts)
_____________________________________________________________________________________________________________ Fiscal Years Ended (Notes 3 and 4) --------------------------------------------- June 29, June 28, June 27, 1996 1997 1998 - ------------------------------------------------------------------------------------------------------------- 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 =============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. F-8 U.S. FOODSERVICE AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------- Additional Distribution in Common paid-in Retained excess of net stock capital earnings book value Total - ------------------------------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
F-9 U.S. FOODSERVICE AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------- Fiscal Years Ended (Notes 3 and 4) ---------------------------------------- June 29, June 28, June 27, 1996 1997 1998 - -------------------------------------------------------------------------------------------------------------- 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) - --------------------------------------------------------------------------------------------------------------
(Continued) F-10 U.S. FOODSERVICE AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------- Fiscal Years Ended (Notes 3 and 4) ----------------------------------------------- June 29, June 28, June 27, 1996 1997 1998 - ------------------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------------------ The accompanying notes are an integral part of these consolidated financial statements.
F-11 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. (Continued) F-12 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 2 - CONTINUED E. INVENTORIES Inventories consist principally of fresh, frozen and packaged foods and related non-food products. Inventories are valued at the lower of cost or market, and include the cost of purchased merchandise (net of applicable purchase rebates), and for manufactured products, the cost of material, labor and factory overhead. Cost for substantially all inventories is determined using the first-in, first- out 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: Buildings and improvements 15-40 years Machinery and equipment 3-15 years Leasehold improvements Life of lease Delivery vehicles 3-10 years 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. (Continued) F-13 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 2 - CONTINUED 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. 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. (Continued) F-14 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 2 - CONTINUED 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 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. (Continued) F-15 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 3 - CONTINUED 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: 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 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 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 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 $12.7 million related to other long-term assets at facilities being closed. (Continued) F-16 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 3 - CONTINUED 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 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:
Fiscal Years Ended ---------------------------------------- June 29, 1996 June 28, 1997 - ----------------------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------------------
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 (Continued) F-17 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 4 - CONTINUED 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. 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. (Continued) F-18 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 4 - CONTINUED 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.
FISCAL YEARS ENDED ------------------------------- JUNE 28, 1997 JUNE 27, 1998 ------------------------------- 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) ================================================================================
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 (Continued) F-19 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 4 - CONTINUED 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. NOTE 5 - RECEIVABLES Receivables are composed of the following:
June 28, June 27, 1997 1998 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
The Company sells customer accounts receivable under two securitization arrangements aggregating $250 million (see Note 8). (Continued) F-20 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 6 - PROPERTY AND EQUIPMENT The components of property and equipment are as follows:
June 28, June 27, 1997 1998 - ------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------
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. NOTE 7 - LONG-TERM DEBT Long-term debt is composed of the following:
June 28, June 27, 1997 1998 - -------------------------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------------------------
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 (Continued) F-21 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 7 - CONTINUED .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 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. (Continued) F-22 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 7 - CONTINUED 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:
Fiscal Years Ended - -------------------------------------------------------------------------------- 1999 $ 604 2000 271 2001 284 2002 288 2003 502,442 Thereafter 147,394 - -------------------------------------------------------------------------------- $ 651,283 - --------------------------------------------------------------------------------
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, (Continued) F-23 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 8 - CONTINUED 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 receivables in the accompanying consolidated balance sheets. 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.
Operating Capital Fiscal Years Ended leases leases - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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. (Continued) F-24 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (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:
Fiscal Years Ended ----------------------------------- June 29, June 28, June 27, 1996 1997 1998 - -------------------------------------------------------------------------------- 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 ================================================================================
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:
June 28, June 27, 1997 1998 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
(Continued) F-25 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 10 - CONTINUED 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 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:
Fiscal Years Ended - -------------------------------------------------------------------------------------------------------------------------- June 29, 1996 June 28, 1997 June 27, 1998 - -------------------------------------------------------------------------------------------------------------------------- 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% - ---------------------------------------------------------------------------------------------------------------------------
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 (Continued) F-26 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 11 - CONTINUED 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. 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-27 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 12 - CONTINUED 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:
Weighted average Stock exercise price options per share - ---------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at June 27, 1998:
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 - ------------------------------------------------------------------------------------------------------------------------ $ 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 ---------------- --------------
(Continued) F-28 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 12 - CONTINUED 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):
Fiscal Years Ended ------------------------------------------ June 29, 1996 June 28, 1997 June 27,1998 - -------------------------------------------------------------------------------- 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) - --------------------------------------------------------------------------------
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. (Continued) F-29 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 13 - CONTINUED 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 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:
Fiscal Years Ended ------------------------------------------------------- June 29, June 28, June 27, 1996 1997 1998 - ---------------------------------------------------------------------------------------------------------------------------- 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) - -----------------------------------------------------------------------------------------------------------------------------
F-30 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 13 - CONTINUED The following table reconciles the pension plans' funded status to accrued expense as of June 28, 1997 and June 27, 1998:
Fiscal Years Ended ------------------------------------- June 28, June 27, 1997 1998 - ------------------------------------------------------------------------------------------------------------------------- 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) - -------------------------------------------------------------------------------------------------------------------------
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. 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. 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. 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. 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. F-31 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 14 - CONTINUED 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-32 SCHEDULE I Page 1 of 3 U.S. FOODSERVICE CONDENSED FINANCIAL INFORMATION OF REGISTRANT The following are the condensed balance sheets, statements of operations and cash flows for U.S. Foodservice with its subsidiaries at equity:
JUNE 28, JUNE 27, Condensed Balance Sheets 1997 1998 - --------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Assets - ------ Cash and cash equivalents $ 126 $ 125 Other current assets 125 1 Intra-company receivables 82,384 135,072 Investments in subsidiaries 496,511 449,522 -------- -------- Total assets $579,146 $584,720 ======== ======== Stockholders' Equity - -------------------- Common stock $ 443 $ 463 Additional paid-in-capital 526,979 579,537 Retained earnings 51,724 4,720 -------- -------- Total stockholders' equity $579,146 $584,720 ======== ========
F-33 SCHEDULE I Page 2 of 3 U.S. FOODSERVICE CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FISCAL YEARS ENDED ------------------------------------------------------------- JUNE 29, JUNE 28, JUNE 27, Condensed Statements of Operations 1996 1997 1998 - -------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Operating expenses $ (6) $ (29) $ (15) Net income (loss) of unconsolidated subsidiaries 139 38,315 (46,989) ----- ------- -------- Net income (loss) $ 133 $38,286 $(47,004) ===== ======= ========
F-34 SCHEDULE I Page 3 of 3 U.S. FOODSERVICE CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FISCAL YEARS ENDED ------------------------------------ JUNE 29, JUNE 28, JUNE 27, Condensed Statements of the Cash Flows 1996 1997 1998 - ----------------------------------------------------------------------------------------------------- (IN THOUSANDS) Cash flows from operating activities: Net income (loss) $ 133 $ 38,286 $(47,004) Adjustments to reconcile net income (loss) to net cash used in operating activities Net (income) loss of unconsolidated subsidiaries (139) (38,315) 46,989 Non-cash restructuring charge 12,217 Increase (decrease) in other assets 129 (6) 124 Increase in other assets (1,869) (68,817) (35,090) Other 1,961 ------- -------- -------- Net cash used in operating activities (1,746) (68,852) (20,803) ------- -------- -------- Cash flows from financing activities: Net proceeds from initial public offering 65,975 Purchases of treasury stock (12,417) Proceeds from issuance of other common stock 33,219 Proceeds from employee stock purchase 1,846 2,869 ------- -------- -------- Net cash provided by financing activities 1,846 68,844 20,802 ------- -------- -------- Net increase (decrease) in cash and cash equivalents 100 (8) (1) Cash and cash equivalents, at beginning of period 34 134 126 ------- -------- -------- Cash and cash equivalents, at end of period $ 134 $ 126 $ 125 ======= ======== ========
F-35 SCHEDULE II U.S. FOODSERVICE VALUATION AND QUALIFYING ACCOUNTS (1) (IN THOUSANDS)
ADDITIONS ----------------------------- BALANCE AT CHARGED CHARGED AMOUNTS BALANCE BEGINNING TO COSTS AND TO OTHER CHARGED OFF AT END OF Description OF PERIOD EXPENSES ACCOUNTS (2) TO RECOVERIES PERIOD (4) - -------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts $6,856 $5,600 $108 $4,616 $7,948
YEAR ENDED JUNE 28, 1997
ADDITIONS ----------------------------- BALANCE AT CHARGED CHARGED AMOUNTS BALANCE BEGINNING TO COSTS AND TO OTHER CHARGED OFF AT END OF Description OF PERIOD EXPENSES ACCOUNTS (3) TO RECOVERIES PERIOD (4) - -------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts $7,948 $7,854 $10,608 $10,445 $15,965
YEAR ENDED JUNE 27, 1998
ADDITIONS ----------------------------- BALANCE AT CHARGED CHARGED AMOUNTS BALANCE BEGINNING TO COSTS AND TO OTHER CHARGED OFF AT END OF Description OF PERIOD EXPENSES ACCOUNTS (2) TO RECOVERIES PERIOD (4) - -------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts $15,965 $12,254 $480 $12,581 $16,118
(1) See Note 3 to consolidated financial statements for basis of presentation. (2) Other charges consist of reserves acquired through purchase acquisitions. (3) Other charges consist of $7,439 in reserves acquired through purchase acquisitions during the year, net increase in reserves of $8,562 during the transition period from pooled acquisitions, less amounts written off by Rykoff-Sexton, Inc. during the period April 27, 1996 to June 29, 1996 of $5,393. (4) Includes $100, $255, and $300 with respect to supplier receivables at June 29, 1996, June 28, 1997, and June 27, 1998, respectively. F-36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 /s/ Lewis Hay, III ------------------------------------------------- By: Lewis Hay, III, Executive Vice President and Chief Financial Officer (Duly Authorized Officer) Date: March 4, 1999 EX-23.1 2 EXHIBIT 23.1 EXHIBIT 23.1 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-88140, 33-88142, 33-88144, 33-88146, 33-81011, 333-37359, 333-43185, and 333-47759) of JP Foodservice, Inc. and Form S-3 (No. 333-67553) of U.S. Foodservice (formerly JP Foodservice, Inc.) 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, which appears on page F-5 of U.S. Foodservice (formerly JP Foodservice, Inc.) on Form 10-K/A-2 for the year ended June 27, 1998. /s/ PRICEWATERHOUSECOOPERS LLP PRICEWATERHOUSECOOPERS LLP Baltimore, Maryland March 1, 1999 EX-23.2 3 EXHIBIT 23.2 EXHIBIT 23.2 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors U.S. Foodservice: We hereby consent to the incorporation by reference in the registration statements on Form S-3 (333-67553) and Form S-8 (Nos. 33-88140, 33-88142, 33- 88144, 33-88146, 33-81011, 333-37359, 333-43185 and 333-47759) of U.S. Foodservice of our report, dated August 14, 1998, with respect 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, cash flows and schedules for each of the years then ended, which report appears in the Form 10-K/A-2 for the year ended June 27, 1998. /s/ KPMG LLP KPMG LLP Baltimore, Maryland March 1, 1999 EX-23.3 4 EXHIBIT 23.3 EXHIBIT 23.3 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors Valley Industries, Inc. and Z Leasing Company: We hereby consent to the inclusion of our report, dated June 17, 1996, with respect to the combined 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, in the Form 10-K/A-2 for the year ended June 27, 1998 of U.S. Foodservice. We also consent to the incorporation by reference of such report in the registration statements on Form S-3 (333-67553) and Form S-8 (Nos. 33-88140, 33-88142, 33-88144, 33-88146, 33-81011, 333-37359, 333-43185 and 333-47759) of U.S. Foodservice. /s/ KPMG LLP KPMG LLP Baltimore, Maryland March 1, 1999 EX-23.4 5 EXHIBIT 23.4 EXHIBIT 23.4 ------------ CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated August 14, 1997, originally included in Rykoff-Sexton, Inc.'s Form 10-K, as amended by Form 10-K/A, for the fiscal year ended June 28, 1997, and subsequently included in this Form 10-K/A-2 dated September 24, 1998, into U.S. Foodservice's (formerly JP Foodservice, Inc.) previously filed Registration Statements on Form S-8 (File Nos. 33-88140, 33-88142, 33-88144, 33-88146, 33- 81011, 333-37359, 333-43185, 333-47759) and Form S-3 (File No. 333-67553). /s/ Arthur Andersen LLP Philadelphia, PA March 1, 1999 -----END PRIVACY-ENHANCED MESSAGE-----