The accompanying condensed consolidated financial statements of Performance Food Group Company and subsidiaries (the "Company") as of March 29, 2003 and for the three months ended March 29, 2003 and March 30, 2002 are unaudited. The unaudited December 28, 2002 condensed consolidated balance sheet was derived from the audited consolidated balance sheet included in the Company's latest Annual Report on Form 10-K. The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting, and in accordance with Rule 10-01 of Regulation S-X.

In the opinion of management, the unaudited condensed consolidated financial statements contained in this report reflect all adjustments, consisting of only normal recurring accruals, which are necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. References in this Form 10-Q to the 2003 and 2002 quarters refer to the fiscal quarters ended March 29, 2003 and March 30, 2002, respectively.

These unaudited condensed consolidated financial statements, note disclosures and other information should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest Annual Report on Form 10-K.

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the Company's condensed consolidated financial statements and notes thereto. The most significant estimates used by management are related to the accounting for the allowance for doubtful accounts, business combinations, off balance sheet financing activities, incurred but not reported insurance claims, reserve for inventories, sales incentives, vendor rebates and other promotional incentives, bonus accruals, depreciation, amortization and tax liabilities. Actual results could differ from these estimates.

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses accounting for legal obligations associated with the retirement of certain long-lived assets that result from the acquisition, construction, development and the normal operation of long-lived assets. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. The Company adopted the provisions of SFAS No. 143 at the beginning of 2003. The adoption of SFAS No. 143 did not have a material impact on the Company's consolidated financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the existing disclosure requirements for most guarantees. It also clarifies that at the time a company issues a guarantee, it must recognize an initial liability for the fair value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The accounting provisions of FIN 45 were effective on a prospective basis to guarantees issued or modified after December 15, 2002. The disclosure requirements of FIN 45 were effective for financial statements for periods ending after December 15, 2002. The Company adopted the disclosure requirements of FIN 45 in 2002. The Company applied the accounting requirements of FIN 45 to any guarantees issued or modified after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company's consolidated financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends existing accounting literature to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. The statement also requires additional disclosures in both interim and annual financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The accounting provisions (if elected) and the disclosure provisions (required) of SFAS No. 148 were effective for fiscal years ending after December 15, 2002. The Company has currently elected not to adopt the fair-value based method of accounting for stock-based employee compensation. The Company has adopted the disclosure provisions of SFAS No. 148 (see "Stock-Based Compensation" below).

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies in the first interim or annual period beginning after June 15, 2003 to variable interest entities existing or acquired before February 1, 2003. It also applies to all new variable interest entities created or acquired after January 31, 2003. In the third quarter of 2003, the Company will be required to adopt the provisions of FIN 46. Under the current structure of the Company's two master operating lease facilities, it will be required to consolidate these facilities upon the adoption of FIN 46. If consolidated, the Company's property, plant and equipment and current and long-term debt will increase on its consolidated balance sheet. The Company does not expect that FIN 46 will require it to consolidate its receivables purchase facility ("Receivables Facility"). The Company is currently evaluating the impact of adopting FIN 46 on its consolidated financial position and results of operations.

In January 2003, the Emerging Issues Task Force of the FASB, or EITF, reached a final consensus on EITF No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. EITF No. 02-16 clarifies certain aspects for accounting and recording by customers of consideration received from suppliers. Under EITF No. 02-16, consideration received related to growth rebates and agreements containing specified time period restrictions should be recorded as a reduction of cost of goods sold and recognized on a systematic and rational allocation if the amounts are probable and reasonably estimable. In addition, consideration received for certain promotional activities should be recorded as a reduction of those costs, with any excess being recorded as a reduction of cost of goods sold. The Company adopted EITF No. 02-16 at the beginning of 2003. The application of EITF No. 02-16 did not have a material impact on the Company's consolidated financial p osition or results of operations.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The Statement amends and clarifies accounting for derivative instruments. SFAS No. 149 is effective for most contracts entered into or modified after June 30, 2003, except for certain contracts for which it is effective for existing contracts as well. The Company is currently evaluating the impact of the adoption of this statement. However, the Company does not expect the adoption of this statement to have a material impact on its consolidated financial position or results of operations.

At March 29, 2003, the Company had four stock-based employee compensation plans, which are described more fully in its 2002 Annual Report on Form 10-K. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no stock-based employee compensation cost was reflected in net earnings in the condensed consolidated statements of earnings for the 2003 and 2002 quarters. The following table illustrates the effect on net earnings and net earnings per common share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. The fair value of each option was estimated at the grant date using the Black-Scholes option-pricing model.

The Company completed no acquisitions in the 2003 or 2002 quarters. In October 2002, a wholly owned subsidiary of the Company's Pocahontas Foods USA subsidiary acquired all of the assets of All Kitchens, Inc. ("All Kitchens"), a privately owned procurement and merchandising firm based in Boise, Idaho. All Kitchens provides procurement and merchandising services to its distributors. The Company believes that this acquisition will allow it to increase its services to its existing Pocahontas foodservice distributors and to All Kitchens' distributors, as well as expand the Company's geographic base of independent foodservice distributors. In connection with the acquisition of All Kitchens, the Company will be required to pay the prior owner of the acquired assets up to $3.0 million in cash, if certain affiliate distributor targets are achieved through September 2005.

In July 2002, the Company acquired all of the outstanding common stock of Thoms-Proestler Company and TPC Logistics, Inc., collectively "TPC," a privately owned, broadline foodservice distributor based in Rock Island, Illinois. TPC services customers located throughout the states of Illinois, Indiana, Iowa and Wisconsin, including the major metropolitan area of Chicago. The Company believes that its acquisition of TPC will further extend its Broadline service area in the Midwest region. In connection with the acquisition of TPC, the Company entered into an earnout agreement whereby it will be required to pay the former shareholders of TPC up to $7.0 million, consisting of cash and additional common shares, if TPC achieves certain targeted levels of growth in sales and operating profit margin, as defined, through July 2004.

In July 2002, the Company also acquired all of the outstanding common stock of Middendorf Meat Company ("Middendorf Meat"), a privately owned, broadline foodservice distributor based in St. Louis, Missouri, through the merger of Middendorf Meat with a wholly owned subsidiary of the Company. Middendorf Meat distributes custom-cut steaks and other foodservice items to independent restaurants, private clubs, hotels and other foodservice establishments in St. Louis and surrounding areas. In connection with the acquisition of Middendorf Meat, the Company entered into an earnout agreement whereby it will be required to pay the former shareholders of Middendorf Meat up to $5.0 million, consisting of cash and additional common shares, if Middendorf Meat achieves certain targeted levels of growth in operating profit, as defined, over a period of up to six years following the acquisition.

In May 2002, the Company acquired all of the outstanding stock of Quality Foods, Inc. ("Quality Foods"), a privately owned, broadline foodservice distributor based in Little Rock, Arkansas, with distribution centers in Little Rock, and Batesville and Magee, Mississippi. Quality Foods provides products and services to traditional foodservice accounts in a region covering Arkansas, Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and Texas. The Company believes that its acquisitions of Middendorf Meat and Quality Foods will extend its service area to a region that is geographically contiguous to its other Broadline businesses. In connection with the acquisition of Quality Foods, the Company entered into an earnout agreement whereby it will be required to pay the former shareholders of Quality Foods up to $24.0 million in cash if Quality Foods achieves certain targeted levels of growth in operating profit, as defined, over a three-year period following the acquisition.

In the 2003 quarter, the Company paid a total of $10.0 million to the former shareholders of Fresh International Corp. and its subsidiaries (collectively "Fresh Express"). This payment was due to certain contractual obligations in the purchase agreement for Fresh Express, which was acquired in 2001. In the 2003 quarter, the Company also paid $1.3 million related to contractual obligations in the purchase agreements for other companies acquired in 2001. The Company recorded these payments to Fresh Express and other companies as additional purchase price, with corresponding increases in goodwill. In January 2003, the Company finalized the purchase price of Middendorf Meat. As a result, in the first quarter of 2003, the Company received $1.6 million in cash from the former owners of Middendorf Meat. Additionally, during the second quarter of 2003, the former owners of Middendorf Meat returned $1.0 million of the Company's common shares. This total of $2.6 million was related to the clo sing net worth adjustment and certain related claims. The Company has recorded and will record these amounts as adjustments to the purchase price of Middendorf Meat and as reductions of goodwill.

In connection with the acquisition of Fresh Express, the Company adopted a plan for integration of the business. The Company initially established an accrual of $8.9 million to provide for certain costs of this plan. This accrual was recorded as a part of the initial allocation of the purchase price of Fresh Express. This plan will combine the Franklin Park, Illinois and the Chicago, Illinois manufacturing plants into one facility, convert the Greencastle, Pennsylvania and the Chicago facility into distribution centers, dispose of certain processing equipment at the Chicago and Greencastle plants and eliminate approximately 500 processing-related jobs at the affected facilities. The following table summarizes the activity related to the accrual for business integration:

Through March 29, 2003, $2.6 million of employee separation costs and $1.2 million of professional fees, lease payments and related costs and dismantling costs have been charged against the accrual. As of March 29, 2003, the Company has converted the Greencastle, Pennsylvania manufacturing facility into a distribution facility and has eliminated 300 processing-related jobs at that facility. The remaining accrual consists of $1.6 million for employee separation, $252,000 for lease and related costs and $586,000 for other costs, including dismantling costs and professional and legal fees.

The condensed consolidated statements of earnings and cash flows reflect the results of the All Kitchens, TPC, Middendorf Meat and Quality Foods acquisitions from the dates of acquisition through March 29, 2003. The unaudited consolidated results of operations on a pro forma basis as though these acquisitions had been consummated as of the beginning of 2002 are as follows:

The above pro forma results are presented for information purposes only and may not be indicative of the operating results that would have occurred had these acquisitions been consummated as of the beginning of 2002. The allocations of the excess purchase price of All Kitchens, TPC, Middendorf Meat and Quality Foods are preliminary and subject to final adjustment, primarily because the Company is finalizing the opening balance sheets for these acquisitions. The Company will complete the allocation of the excess purchase price of these acquisitions within one year of the acquisition dates.

Basic net earnings per common share ("EPS") is computed by dividing net income available to common shareholders (numerator) by the weighted-average number of common shares outstanding (denominator) during the period. Diluted EPS is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be repurchased upon the exercise of stock options.

In October 2001, the Company issued $201.3 million aggregate principal amount of 5½% convertible subordinated notes due in 2008 (the "Convertible Notes"). The calculation of diluted EPS is done on an "if-converted" basis and without conversion of the Convertible Notes. If the calculation of diluted EPS is more dilutive assuming conversion of the Convertible Notes, the after-tax interest on the Convertible Notes is added to net income in the numerator and the shares into which the Convertible Notes are convertible are added to the dilutive shares in the denominator. In the 2003 quarter, the Convertible Notes were dilutive and were included in the computation of diluted EPS. In the 2002 quarter, the Convertible Notes were not included in the computation of diluted EPS because they were antidilutive. A reconciliation of the numerators and denominators of the basic and diluted EPS computations is as follows:

In July 2001, the Company entered into the Receivables Facility, under which PFG Receivables Corporation, a wholly owned, special-purpose subsidiary, sold an undivided interest in certain of the Company's trade receivables. PFG Receivables Corporation was formed for the sole purpose of buying receivables generated by certain of the Company's operating units and selling an undivided interest in those receivables to a financial institution. Under the Receivables Facility, certain of the Company's operating units sell a portion of their accounts receivable to PFG Receivables Corporation, which in turn, subject to certain conditions, may from time to time sell an undivided interest in these receivables to a financial institution. The Company's operating units continue to service the receivables on behalf of the financial institution at estimated market rates. Accordingly, the Company has not recognized a servicing asset or liability. The amount of the undivided interest in the rece ivables owned by the financial institution cannot exceed $90.0 million at any one time. In July 2002, the Company extended its Receivables Facility through July 11, 2003.

The Company records the sale of the undivided interest in accounts receivable to the financial institution in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Accordingly, at the time the undivided interest in receivables is sold, the receivables are removed from the Company's consolidated balance sheet. The Company records a loss on the sale of the undivided interest in these receivables, which includes a discount, based upon the receivables' credit quality and a financing cost for the financial institution, based upon a 30-day commercial-paper rate. At March 29, 2003, the rate under the Receivables Facility was 1.78% per annum.

The Company received $78.0 million of proceeds from the sale of the undivided interest in receivables under the Receivables Facility in 2001, and continues to securitize its accounts receivable. At March 29, 2003, securitized accounts receivable totaled $117.8 million, which included $78.0 million sold to a financial institution and derecognized from the consolidated balance sheet and included the Company's residual interest in accounts receivable ("Residual Interest") of $39.8 million, which was included in accounts receivable on the Company's consolidated balance sheet. The Residual Interest represents the Company's retained interest in receivables held by PFG Receivables Corporation. The Residual Interest was measured using the estimated discounted cash flows of the underlying accounts receivable, based on estimated collections and a discount rate approximately equivalent to the Company's incremental borrowing rate. The loss on sale of the undivided interest in receivables of $324,0 00 and $438,000 in the 2003 and 2002 quarters, respectively, is included in other expense, net, in the condensed consolidated statements of earnings and represents the Company's cost of securitizing those receivables with the financial institution.

The key economic assumptions used to measure the Residual Interest at March 29, 2003 were a discount rate of 3.00% and an estimated life of approximately 1.5 months. At March 29, 2003, an immediate adverse change in the discount rate and estimated life of 10% and 20%, with other factors remaining constant, would result in a reduction in the fair value of the Residual Interest and corresponding increase in the loss on sale of receivables of approximately $20,000 and $42,000, respectively.

The following table presents details of the Company's intangible assets as of March 29, 2003 and December 28, 2002:

The following table presents the changes in the net carrying amount of goodwill allocated to the Company's reportable segments, as defined in Note 11, during the 2003 quarter:

The Company has two master operating lease facilities. In September 1997, the Company entered into its first master operating lease facility (the "First Facility") to construct or purchase various distribution centers and processing plants. In February 2001, the Company increased the First Facility from $47.0 million to $55.0 million. In September 2002, the lessor sold one processing plant previously included in the First Facility to a third party unaffiliated with the Company. The Company concurrently entered into an operating lease with that unaffiliated third party for the same processing plant. The operating lease has an initial term of 22 years, plus five renewal options of five years each. Also in September 2002, the original expiration date of the leases in the First Facility, the Company extended the expiration date of the remaining leases in this facility to June 9, 2005, and decreased the size of this facility to $35.8 million. As of March 29, 2003, the First Facil ity included three distribution centers. Through March 29, 2003, construction expenditures by the lessor under the First Facility for these three centers totaled $35.8 million.

In June 2000, the Company entered into a $60.0 million master operating lease facility (the "Second Facility") to construct or purchase various office buildings and distribution centers. In September 2002, the lessor sold one distribution center previously included in the Second Facility to a third party unaffiliated with the Company. The Company concurrently entered into an operating lease with that unaffiliated third party for the same distribution center. The operating lease has an initial term of 22 years, plus five renewal options of five years each. Also in September 2002, the Company reduced the size of this facility to $24.2 million. As of March 29, 2003, the Second Facility included two distribution centers and one office building. The leases relating to these three properties, as well as any other leases that the Company may enter into under this facility in the future, end on June 9, 2005. Through March 29, 2003, construction expenditures by the lessor under the Second Fa cility totaled $20.5 million.

Under both of these master operating lease facilities, the lessor owns the distribution centers and office building, incurs the related debt to construct the properties, and thereafter leases each property to the Company. The Company has entered into leases for each of the properties in these facilities. Upon the expiration of the leases under the First and Second Facilities, the Company may seek to renew the leases. If it is unable to or chooses not to renew the leases, it has the option of facilitating the sale of the properties to third parties or purchasing the properties at their original cost. If the properties in the First Facility and the Second Facility are sold to third parties for less than their aggregate original cost, the Company is obligated, under residual value guarantees, to pay the lessor an amount equal to the lesser of either the shortfall or 88% and 85%, respectively, of original cost. Because of the location and condition of each of the distribution centers and the office building in the First and Second Facilities, the Company believes that the anticipated fair value of these properties could eliminate or substantially reduce its exposure under the residual value guarantees.

The Company's leases under the two master operating lease facilities qualify for operating lease accounting treatment under SFAS No. 13, Accounting for Leases. Therefore, the buildings and the debt incurred to construct them of $56.3 million as of March 29, 2003 were not included on the Company's consolidated balance sheet. In the third quarter of 2003, the Company will be required to adopt the provisions of FIN 46. Under the current structure of the First and Second Facilities, the Company will be required to consolidate these facilities upon the adoption of FIN 46. If consolidated, the Company's property, plant and equipment and current and long-term debt will increase on its consolidated balance sheet. The Company is currently evaluating the impact of adopting FIN 46 on its consolidated financial position and results of operations.

At March 29, 2003, the Company's Fresh-cut segment had contracts to purchase produce totaling $82.5 million. These contracts expire at various times throughout 2003 and 2004. Amounts due under these contracts were not included on the Company's consolidated balance sheet at March 29, 2003, in accordance with generally accepted accounting principles.

From time to time, the Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation currently pending will not have a material adverse effect on the Company's financial condition or results of operations.

The Company has entered into various guarantee agreements. These agreements arose in transactions related to the acquisition of certain businesses, residual value guarantees on the Company's two master operating lease facilities and residual value guarantees on certain of its operating leases. The Company adopted the disclosure provisions of FIN 45 in 2002 and the accounting provisions of FIN 45 in the 2003 quarter, discussed in Note 2. The disclosures required by FIN 45 related to these guarantees are included below.

In connection with certain acquisitions, the Company has entered into earnout agreements with certain of the former owners of the businesses that the Company has acquired. These agreements are based upon certain net earnings and synergy targets, as defined in each agreement, and discussed in more detail in Note 3. These earnout payments are for companies acquired from 2000 to 2002, and may include payments in cash and/or shares of the Company's common stock. As of March 29, 2003, the maximum potential earnout obligation, assuming all future earnout targets are met in their earliest possible years, totaled $49.4 million: $14.7 million in the remainder of 2003, $21.0 million in 2004, $12.0 million in 2005 and $1.7 million in 2006. These contingent payments are not recorded on the Company's consolidated balance sheet at March 29, 2003, in accordance with generally accepted accounting principles. If paid, these earnout payments would increase the goodwill of the companies acquired. If th e future earnout targets are not met, these maximum amounts will be lower, or the Company may not be required to make any payments.

The Company has entered into numerous operating leases, including leases of buildings, equipment, tractors and trailers. In certain of these leases, the Company has provided residual value guarantees to the lessors. As of March 29, 2003, the undiscounted maximum amount of potential future payments under these guarantees is approximately $6.5 million, which would be mitigated by the fair value of the leased assets at lease expiration. These leases have expiration dates ranging from 2003 to 2010.

The Company has residual value guarantees under its two master operating lease facilities, described in Note 9. These residual value guarantees are not recorded on the Company's consolidated balance sheet as of March 29, 2003, in accordance with generally accepted accounting principles. The undiscounted maximum amount of potential future payments under residual value guarantees relative to the properties in the First and Second Facilities is $48.5 million. As of March 29, 2003, because of the location and condition of each of the properties in the First and Second Facilities, the Company believes that the anticipated fair value of these properties could eliminate or substantially reduce its exposure under the residual value guarantees.

The Company has three operating segments: broadline foodservice distribution ("Broadline"); customized foodservice distribution ("Customized"); and fresh-cut produce processing ("Fresh-Cut"). Broadline markets and distributes more than 58,000 national and proprietary brand food and non-food products to a total of approximately 46,000 street and chain customers. Broadline consists of 19 distribution facilities that design their own product mix, distribution routes and delivery schedules to accommodate the needs of a large number of customers whose individual purchases vary in size. In addition, Broadline operates three locations that provide merchandising services to independent foodservice distributors. Customized services family and casual-dining chain restaurants. These customers generally prefer a centralized point of contact that facilitates item and menu changes, tailored distribution routing and customer service. The Customized distribution network distributes nationwide and internationally from seven distribution facilities. Fresh-cut purchases, processes, packages and distributes a variety of packaged, ready-to-eat salads and other fresh-cut produce nationwide to food retailers. Fresh-cut also distributes various fresh produce offerings, primarily to third-party distributors for resale mainly to quick-service restaurants located throughout the United States. Fresh-cut operations are conducted at eight manufacturing/distribution facilities.

Unless this Form 10-Q indicates otherwise or the context otherwise requires, the terms "we," "our," "us," or "Performance Food Group" as used in this Form 10-Q refer to Performance Food Group Company and its subsidiaries. References in this Form 10-Q to the 2003 and 2002 quarters refer to our fiscal quarters ended March 29, 2003 and March 30, 2002, respectively, unless otherwise expressly stated or the context otherwise requires. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q.

The following table sets forth, for the periods indicated, the components of our condensed consolidated statements of earnings expressed as a percentage of net sales:

Net sales. Net sales increased $272.2 million, or 27.3%, to $1.27 billion in the 2003 quarter from net sales of $996.9 million in the 2002 quarter. Net sales in our existing operations for the 2003 quarter increased 10.7% over the 2002 quarter, while acquisitions contributed the remaining 16.6% of our total sales growth for the 2003 quarter. Net sales in existing operations exclude the net sales of an acquired business for the first 12 months following the acquisition date of that business. We estimate food price deflation was approximately 1% for the 2003 quarter.

Broadline net sales increased $191.9 million, or 42.6%, to $642.9 million in the 2003 quarter from $451.0 million in the 2002 quarter. Net sales in our existing Broadline operations for the 2003 quarter increased 5.8% over the 2002 quarter. Broadline sales at our existing operations in the 2003 quarter were driven by increased sales to existing customers and sales to new customers. Acquisitions contributed the remaining 36.8% of our total Broadline sales growth for the 2003 quarter. Broadline acquisition sales growth was the result of our 2002 acquisitions of Quality Foods, Inc., Middendorf Meat Company and Thoms-Proestler Company and TPC Logistics, Inc., collectively TPC, discussed below in "Business Combinations." Our Broadline segment net sales of $642.9 million in the 2003 quarter represented 50.7% of our consolidated net sales, up from 45.2% of our consolidated net sales in the 2002 quarter. The increase as a percentage of our consolidated net sales is due primarily to our acqui sitions of Quality Foods in May 2002, and Middendorf Meat and TPC in July 2002. We estimate that our Broadline segment experienced food price inflation of less than 1% for the 2003 quarter.

Customized net sales increased $71.9 million, or 21.1%, to $413.0 million in the 2003 quarter from $341.1 million in the 2002 quarter. This increase in net sales is primarily due to sales to 200 more Ruby Tuesday casual-dining chain restaurants beginning in the third quarter of 2002, sales to 265 more TGI Friday's casual-dining restaurants beginning in the fourth quarter of 2002, sales to 70 Mimi's Café casual-dining restaurants beginning in the 2003 quarter and the continued growth in sales to existing customers. Our Customized segment net sales of $413.0 million in the 2003 quarter represented 32.5% of our consolidated net sales, down from 34.2% of our consolidated net sales in the 2002 quarter. The decrease as a percentage of our consolidated net sales is due primarily to our Broadline segment acquisitions discussed above. We estimate that our Customized segment experienced food price deflation of approximately 1% for the 2003 quarter.

Fresh-cut net sales increased $9.5 million, or 4.6%, to $217.3 million in the 2003 quarter from $207.8 million in the 2002 quarter. This increase in net sales is due primarily to increased sales of premium salad blends to retail customers and increased sales of a variety of fresh-cut produce to foodservice customers. Our Fresh-cut segment net sales of $217.3 million in the 2003 quarter represented 16.8% of our consolidated net sales, down from 20.6% of our consolidated net sales in the 2002 quarter. The decrease as a percentage of our consolidated net sales is due primarily to our Broadline segment acquisitions discussed above. We estimate that our Fresh-cut segment experienced food price deflation of approximately 5% for the 2003 quarter. Most of the deflation was the result of an industry-wide lettuce shortage in the 2002 quarter, which caused higher lettuce prices in the 2002 quarter. We expect the impact of this deflation to continue into the second quarter of 2003. Adding back the impact of this deflation, sales increased approximately 10% in the 2003 quarter over the 2002 quarter.

Cost of goods sold. Cost of goods sold increased $226.2 million, or 26.8%, to $1.07 billion in the 2003 quarter from $843.6 million in the 2002 quarter, due primarily to the increase in net sales. As a percentage of net sales, cost of goods sold decreased to 84.3% in the 2003 quarter compared to 84.6% in the 2002 quarter. The decrease in cost of goods sold as a percentage of net sales is due mainly to decreased lettuce prices in our Fresh-cut segment over the 2002 quarter, as discussed above in "Net sales," and increased sales to street customers and sales of our proprietary brands in our Broadline segment.

Gross profit. Gross profit increased $46.0 million, or 30.0%, to $199.3 million in the 2003 quarter from $153.3 million in the 2002 quarter. Gross profit margin, which we define as gross profit as a percentage of net sales, increased to 15.7% in the 2003 quarter, compared to 15.4% in the 2002 quarter. The increase in gross profit margin was due primarily to the realization of integration synergies from our 2001 acquisition of Fresh International Corp. and its subsidiaries, collectively, Fresh Express, decreased lettuce prices over the 2002 quarter in our Fresh-cut segment and increased sales to street customers and sales of our proprietary brands in our Broadline segment. Sales to street customers, which include independent restaurants, hotels, cafeterias, schools, healthcare facilities and other institutional customers, are typically at higher price points than sales to chain customers, due to higher costs involved in those sales and generate higher gross profit margins.

Operating expenses. Operating expenses increased $37.0 million, or 28.1%, to $168.9 million in the 2003 quarter compared with $131.9 million in the 2002 quarter. As a percentage of net sales, operating expenses were 13.3% in both the 2003 and 2002 quarters.

Operating profit. Operating profit increased $9.0 million, or 42.0%, to $30.4 million in the 2003 quarter from $21.4 million in the 2002 quarter. Operating profit margin, which we define as operating profit as a percentage of net sales, increased to 2.4% in the 2003 quarter from 2.1% in the 2002 quarter. The increase in our operating profit margin was due mainly to favorable changes in product mix in our Fresh-cut segment and changes in pricing and product mix and increased warehouse efficiencies in our Customized segment, offset somewhat by the impact of our 2002 Broadline acquisitions, discussed above, increased fuel costs and harsh winter weather, which affected restaurant business and shipping.

Operating profit margin in our Broadline segment remained at 1.9% in both the 2003 and 2002 quarters. Operating profit margin improved as a result of increased street sales and sales of our proprietary brands, partially offset by the impact of lower operating profit margins at Quality Foods, which we acquired in May 2002.

Operating profit margin in our Customized segment increased to 1.2% in the 2003 quarter from 1.0% in the 2002 quarter, mainly as a result of changes in pricing and product mix and improved efficiencies in warehousing.

Operating profit margin in our Fresh-cut segment increased to 8.4% in the 2003 quarter from 6.2% in the 2002 quarter. This increase in operating profit margin is the result of favorable changes in product mix towards more items with higher margins, such as premium salad blends, and the realization of integration synergies from our 2001 acquisition of Fresh Express. We had net costs of $3.2 million in the 2003 quarter related to a retail consumer test of a fresh-cut fruit product line, Real! Fresh! Fruit!™ We expect these additional start-up expenses to continue to impact the operating profit margin of our Fresh-cut segment through 2003.

Other expense, net. Other expense, net, decreased $285,000 to $3.9 million in the 2003 quarter from $4.2 million in the 2002 quarter. Included in other expense, net, was a gain of $956,000 on the sale of our investment in a fresh-cut produce facility sold in the 2003 quarter. Other expense, net, also included interest expense of $4.8 million in the 2003 quarter, compared with interest expense of $4.3 million in the 2002 quarter. Interest expense was higher in the 2003 quarter primarily because of higher average borrowing levels as a result of our acquisitions in 2002, partially offset by lower interest rates. In the 2003 and 2002 quarters, other expense, net, also included a loss on the sale of the undivided interest in receivables of $324,000 and $438,000, respectively, related to the receivables purchase facility, referred to as the Receivables Facility. The Receivables Facility is discussed in "Liquidity and Capital Resources."

Income tax expense. Income tax expense increased $3.6 million to $10.1 million in the 2003 quarter from $6.5 million in the 2002 quarter. As a percentage of earnings before income taxes, the provision for income taxes was 38.0% for the 2003 quarter and 37.5% for the 2002 quarter. The increase in the effective tax rate in 2003 is the result of increased state income taxes due to acquisitions completed in previous years.

Net earnings. Net earnings increased $5.7 million, or 52.7%, to $16.4 million in the 2003 quarter compared to $10.8 million in the 2002 quarter. As a percentage of net sales, net earnings increased to 1.3% in the 2003 quarter from 1.1% in the 2002 quarter.

Diluted net earnings per common share. Diluted net earnings per common share, or EPS, is computed by dividing net income available to common shareholders plus dilutive after-tax interest on the 5½% convertible subordinated notes due in 2008 by the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Diluted EPS increased 45.8% to $0.35 in the 2003 quarter compared to $0.24 in the 2002 quarter. After-tax interest expense of $1.9 million and common share equivalents of 6.1 million related to the Convertible Notes are included in the computation of diluted EPS in the 2003 quarter because of the Convertible Notes' dilutive effect on EPS. For the 2002 quarter, the common share equivalents for the Convertible Notes and related interest expense were excluded from the calculation of diluted EPS because of the Convertible Notes' antidilutive effect on EPS.

We completed no acquisitions in the 2003 or 2002 quarters. In October 2002, a wholly owned subsidiary of our Pocahontas Foods USA subsidiary acquired all of the assets of All Kitchens, Inc., a privately owned procurement and merchandising firm based in Boise, Idaho. All Kitchens provides procurement and merchandising services to its distributors. We believe that this acquisition will allow us to increase our services to our existing Pocahontas foodservice distributors and to All Kitchens' distributors, as well as expand our geographic base of independent foodservice distributors. In connection with the acquisition of All Kitchens, we will be required to pay the prior owner of the acquired assets up to $3.0 million in cash, if we achieve certain affiliate distributor targets through September 2005.

In July 2002, we acquired all of the outstanding common stock of TPC, a privately owned, broadline foodservice distributor based in Rock Island, Illinois. TPC services customers located throughout the states of Illinois, Indiana, Iowa and Wisconsin, including the major metropolitan area of Chicago. We believe that our acquisition of TPC will further extend our Broadline service area in the Midwest region. In connection with the acquisition of TPC, we entered into an earnout agreement whereby we will be required to pay the former shareholders of TPC up to $7.0 million, consisting of cash and additional common shares, if TPC achieves certain targeted levels of growth in sales and operating profit margin, as defined, through July 2004.

In July 2002, we also acquired all of the outstanding common stock of Middendorf Meat, a privately owned, broadline foodservice distributor based in St. Louis, Missouri, through the merger of Middendorf Meat with a wholly owned subsidiary of ours. Middendorf Meat distributes custom-cut steaks and other foodservice items to independent restaurants, private clubs, hotels and other foodservice establishments in St. Louis and surrounding areas. In connection with the acquisition of Middendorf Meat, we entered into an earnout agreement whereby we will be required to pay the former shareholders of Middendorf Meat up to $5.0 million, consisting of cash and additional common shares, if Middendorf Meat achieves certain targeted levels of growth in operating profit, as defined, over a period of up to six years following the acquisition.

In May 2002, we acquired all of the outstanding stock of Quality Foods, a privately owned, broadline foodservice distributor based in Little Rock, Arkansas, with distribution centers in Little Rock, and Batesville and Magee, Mississippi. Quality Foods provides products and services to traditional foodservice accounts in a region covering Arkansas, Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and Texas. We believe that our acquisitions of Middendorf Meat and Quality Foods will extend our service area to a region that is geographically contiguous to our other Broadline businesses. In connection with the acquisition of Quality Foods, we entered into an earnout agreement whereby we will be required to pay the former shareholders of Quality Foods up to $24.0 million in cash if Quality Foods achieves certain targeted levels of growth in operating profit, as defined, over a three-year period following the acquisition.

In the 2003 quarter, we paid a total of $10.0 million to the former shareholders of Fresh Express. This payment was due to certain contractual obligations in the purchase agreement for Fresh Express, which we acquired in 2001. In the 2003 quarter, we also paid $1.3 million related to contractual obligations in the purchase agreements for other companies acquired in 2001. We recorded these payments to Fresh Express and other companies as additional purchase price, with corresponding increases in goodwill. In January 2003, we finalized the purchase price of Middendorf Meat. As a result, in the first quarter of 2003, we received $1.6 million in cash from the former owners of Middendorf Meat. Additionally, during the second quarter of 2003, the former owners of Middendorf Meat returned $1.0 million of our common shares. This total of $2.6 million was related to the closing net worth adjustment and certain related claims. We have recorded and will record these amounts as adjustments to the purchase price of Middendorf Meat and reductions of goodwill.

In connection with the acquisition of Fresh Express, we adopted a plan for integration of the business. We initially established an accrual of $8.9 million as part of the initial allocation of the purchase price of Fresh Express, to provide for certain costs of this plan. This plan will combine our Franklin Park, Illinois and our Chicago, Illinois manufacturing plants into one facility, convert our Greencastle, Pennsylvania and our Chicago facility into distribution centers, dispose of certain processing equipment at the Chicago and Greencastle plants and eliminate approximately 500 processing-related jobs at the affected facilities. Through March 29, 2003, $2.6 million of employee separation costs and $1.2 million of professional fees, lease payments and related costs and dismantling costs have been charged against the accrual. As of March 29, 2003, we have converted the Greencastle, Pennsylvania manufacturing facility into a distribution facility and have eliminated 300 processing-r elated jobs at that facility. The remaining accrual consists of $1.6 million for employee separation, $252,000 for lease and related costs and $586,000 for other costs, including dismantling costs and professional and legal fees.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses accounting for legal obligations associated with the retirement of certain long-lived assets that result from the acquisition, construction, development and the normal operation of long-lived assets. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. We adopted the provisions of SFAS No. 143 at the beginning of 2003. The adoption of SFAS No. 143 did not have a material impact on our consolidated financial position or results of operations.

In November 2002, the FASB issued FIN 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the existing disclosure requirements for most guarantees. It also clarifies that at the time a company issues a guarantee, it must recognize an initial liability for the fair value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The accounting provisions of FIN 45 were effective on a prospective basis to guarantees issued or modified after December 15, 2002. The disclosure requirements of FIN 45 were effective for financial statements for periods ending after December 15, 2002. We adopted the disclosure requirements of FIN 45 in 2002. We applied the accounting requirements of FIN 45 to any guarantees issued or modified after December 15, 2002. The adoption of FIN 45 did not have a material impact on our cons olidated financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends existing accounting literature to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. The statement also requires additional disclosures in both interim and annual financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The accounting provisions (if elected) and the disclosure provisions (required) of SFAS No. 148 were effective for fiscal years ending after December 15, 2002. We have currently elected not to adopt the fair-value based method of accounting for stock-based employee compensation. We have adopted the disclosure provisions of SFAS No. 148.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies in the first interim or annual period beginning after June 15, 2003 to variable interest entities existing or acquired before February 1, 2003. It also applies to all new variable interest entities created or acquired after January 31, 2003. In the third quarter of 2003, we will be required to adopt the provisions of FIN 46. Under the current structure of our First and Second Facilities, we will be required to consolidate these facilities upon the adoption of FIN 46. If consolidated, our property, plant and equipmen t and current and long-term debt will increase on our consolidated balance sheet. We do not expect that FIN 46 will require us to consolidate our Receivables Facility. We are currently evaluating the impact of adopting FIN 46 on our consolidated financial position and results of operations.

In January 2003, the EITF reached a final consensus on EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. EITF No. 02-16 clarifies certain aspects for accounting and recording by customers of consideration received from suppliers. Under EITF No. 02-16, consideration received related to growth rebates and agreements containing specified time period restrictions should be recorded as a reduction of cost of goods sold and recognized on a systematic and rational allocation if the amounts are probable and reasonably estimable. In addition, consideration received for certain promotional activities should be recorded as a reduction of those costs, with any excess being recorded as a reduction of cost of goods sold. We adopted EITF No. 02-16 at the beginning of 2003. The application of EITF No. 02-16 did not have a material impact on our consolidated financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The Statement amends and clarifies accounting for derivative instruments. SFAS No. 149 is effective for most contracts entered into or modified after June 30, 2003, except for certain contracts for which it is effective for existing contracts as well. We are currently evaluating the impact of the adoption of this statement. However, we do not expect the adoption of this statement to have a material impact on our consolidated financial position or results of operations.

On April 28, 2003, we amended and restated our Credit Facility (as amended and restated, the "Amended and Restated Credit Facility"), which, among other things, increased the facility to $350.0 million from $200.0 million. The Amended and Restated Credit Facility expires in 2006 and bears interest at a floating rate equal to, at our election, the agent bank's prime rate or a spread over LIBOR, which varies based upon our leverage ratio, as defined in the amended and restated credit agreement. The Amended and Restated Credit Facility has an annual commitment fee, ranging from 0.20% to 0.25% of the average daily unused portion of the total facility, based on our leverage ratio, as defined in the amended and restated credit agreement. The Amended and Restated Credit Facility also requires the maintenance of certain financial ratios, as defined in the amended and restated credit agreement, and contains customary events of default. Under the Amended and Restated Credit Facility, our subsidi aries are no longer required to guarantee all of our borrowings, letters of credit or any other obligations, as had previously been required under the original Credit Facility. The Amended and Restated Credit Facility allows for the issuance of up to $90.0 million of standby letters of credit, which reduce borrowings available under the Amended and Restated Credit Facility. At April 28, 2003, we had $104.5 million outstanding under the Amended and Restated Credit Facility and $27.8 million of letters of credit outstanding under the Amended and Restated Credit Facility. Therefore, at April 28, 2003, we had $217.7 million available under the Amended and Restated Credit Facility, subject to compliance with customary borrowing conditions.

This Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, which are based on assumptions and estimates and describe our future plans, strategies and expectations, are generally identifiable by the use of the words "anticipate," "will," "believe," "estimate," "expect," "intend," "seek," "should," "could," "may," "would," or similar expressions. These forward-looking statements may address, among other things, our anticipated earnings, capital expenditures, contributions to our net sales by acquired companies, sales momentum, customer and product sales mix, expected efficiencies in our business and our ability to realize expected synergies from acquisitions. These forward-looking statements are subject to risks, uncertainties and assumptions, all as detailed from time to time in the reports we fil e with the Securities and Exchange Commission.

If one or more of these risks or uncertainties materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from future results, performance or achievements expressed or implied by these forward-looking statements. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements in this section. We undertake no obligation to publicly update or revise any forward-looking statements to reflect future events or developments.

Our primary market risks are related to fluctuations in interest rates. Our primary interest rate risk is from changing interest rates related to our outstanding debt. We currently manage this risk through a combination of fixed and floating rates on these obligations. As of March 29, 2003, our total debt of $353.9 million consisted of fixed and floating-rate debt of $257.9 million and $96.0 million, respectively. In addition, the rates on our Receivables Facility and two master operating lease facilities are floating rates. Substantially all of our floating rates are based on LIBOR, with the exception of the rate on the Receivables Facility, which is based upon a 30-day commercial-paper rate. A 100 basis-point increase in market interest rates on all of our floating-rate debt, our Receivables Facility and our two master operating lease facilities would result in a decrease in net earnings and cash flow of approximately $1.4 million per annum, holding other variables constant.

We maintain disclosure controls and procedures, as defined in Rule 13a-14 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the evaluation of these disclosure con trols and procedures, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. There were no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation.

We announced in March 2002 that we had identified certain accounting errors at one of our Broadline operating subsidiaries, as more fully described in our 2002 Annual Report on Form 10-K. While no claims have been made to date, it is possible that claims may be brought by shareholders against us in connection with the accounting errors and costs related to the claims, including defense costs, could have an adverse effect on our financial condition or results of operations. In addition, at the time of the announcement of the identification of the accounting errors, we contacted the staff of the Securities and Exchange Commission, or SEC, to inform them of our identification of the errors and of our intention to cooperate with the staff of the SEC with respect to any review or inquiry they may conduct. Since that time, we have provided and continue to provide, updates to the staff of the SEC as well as certain documents and testimony requested by the staff. We have conducted an inquiry i nto the accounting errors and have taken appropriate remedial actions in connection with the investigation. Although we believe that we have fully cooperated with the SEC, the SEC could bring enforcement or other action against us. The costs associated with an SEC enforcement action or inquiry or an adverse outcome of any such enforcement action or inquiry could have a material adverse effect on our financial condition or results of operations.

From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation currently pending will not have a material adverse effect on our results of operations or financial condition.