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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 1997
Commission file number 0-22192
PERFORMANCE FOOD GROUP COMPANY
(Exact name of registrant as specified in its charter)
Tennessee 54-0402940
(State or other jurisdiction (I.R.S.Employer
of incorporation or organization) Identification Number)
6800 Paragon Place, Ste. 500
Richmond, Virginia 23230
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code:
(804) 285-7340
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of class)
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 the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant on March 23, 1998 was approximately $ 202,660,290.The
market value calculation was determined using the closing sale price of
the Registrant's common stock on March 23, 1998, as reported on The
Nasdaq Stock Market.
Shares of common stock, $.01 par value per share, outstanding on
March 23, 1998, were 12,511,606.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Documents from which portions are incorporated by
reference
Part III Portions of the Registrant's Proxy Statement relating to
the Registrant's Annual Meeting of Shareholders to be
held on April 29, 1998 are incorporated by reference
into Items 10,11, 12 and 13.
PERFORMANCE FOOD GROUP COMPANY
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Part I
Item 1. Business.................................................... 3
The Company and its Business Strategy...................... 3
Customers and Marketing.................................... 3
Products and Services...................................... 4
Suppliers and Purchasing................................... 5
Operations................................................. 6
Competition................................................ 8
Regulation................................................. 8
Tradenames................................................. 8
Employees.................................................. 8
Risk Factors............................................... 9
Executive Officers........................................ 11
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Shareholders............. 13
Part II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 13
Item 6. Selected Consolidated Financial Data........................ 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 22
Part III
Item 10. Directors and Executive Officers of the Registrant......... 23
Item 11. Executive Compensation..................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 23
Item 13. Certain Relationships and Related Transactions............. 23
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................... 23
2
PERFORMANCE FOOD GROUP COMPANY
PART I
Item 1. Business.
The Company and its Business Strategy
Performance Food Group Company and subsidiaries (the
"Company") markets and distributes a wide variety of food and food-related
products to the foodservice, or "away-from-home eating," industry. The
foodservice industry consists of two major customer types: "traditional"
foodservice customers consisting of independent restaurants, hotels,
cafeterias,schools, healthcare facilities and other institutional customers,
and "multi-unit chain" customers consisting of regional and national quick-
service restaurants and casual dining restaurants. Products and services
provided to the Company's traditional and multi-unit chain customers are
supported by identical physical facilities, vehicles, equipment and personnel.
The Company's customers are located primarily in the Southern, Southwestern,
Midwestern and Northeastern United States. The Company operates through a
number of subsidiaries, each of which focuses on specific regional markets
or sectors of the foodservice distribution industry.
The Company's objective is to continue to grow its foodservice
distribution business through internal growth and acquisitions. The Company's
internal growth strategy is to increase sales to existing customers and
identify new customers for whom the Company can act as the principal supplier.
The Company also intends to consider, from time to time, strategic
acquisitions of other foodservice distribution companies both to further
penetrate existing markets and to expand into new markets. Finally, the
Company strives to achieve higher productivity in its existing operations.
The Company uses a 52/53 week fiscal year ending on the Saturday
closest to December 31. The fiscal years ended December 27, 1997, December
28, 1996 and December 30, 1995 (all 52 week years) are referred to herein as
1997, 1996 and 1995, respectively.
Customers and Marketing
The Company believes that foodservice customers select a distributor
based on timely and accurate delivery of orders, consistent product quality,
value added services and price. These services include assistance in managing
inventories, menu planning and controlling costs through increased electronic
computer communications and more efficient deliveries. An additional
consideration for certain of the Company's larger, multi-unit chain customers is
the operational efficiency gained by dealing with one, or a limited number of,
foodservice distributors.
The Company's traditional foodservice customers include
independent restaurants, hotels, cafeterias, schools, healthcare facilities and
other institutional customers. The Company has attempted to develop long-term
relationships with these customers by focusing on improving efficiencies and
increasing the average size of deliveries to these customers. The Company's
traditional foodservice customers are supported in this effort by more than 425
sales and marketing representatives and product specialists. Sales
representatives service customers in person or by telephone, accepting and
processing orders, reviewing account balances, disseminating new product
information and providing business assistance and advice where appropriate.
The Company has an ongoing emphasis on educating sales representatives about
the Company's products and giving them the tools necessary to deliver added
value to the basic delivery of food and food-related items. Sales
representatives are generally compensated through a combination of commission
and salary based on a combination of factors relating to profitability and
collections. These representatives use laptop computers to assist customers
by entering orders, checking product availability and pricing and developing
menu planning ideas on a real-time basis. No single traditional foodservice
customer accounted for more than 2% of the Company's consolidated net sales
in 1997.
The Company's principal multi-unit customers are generally
franchisees or corporate-owned units of family dining, casual theme and quick-
service restaurants. These customers include two rapidly growing casual theme
restaurant concepts, Cracker Barrel Old Country Stores, Inc. ("Cracker Barrel")
and Outback Steakhouse, Inc. ("Outback"), as well as approximately 2,800
Wendy's, Subway, Kentucky Fried Chicken, Dairy Queen, Popeye's and
Church's quick-service restaurants. The Company's primary customers for its
fresh-cut produce products include approximately 6,750 McDonald's, Taco
Bell, Burger King, Pizza Hut Kentucky Fried Chicken, Hardee's, and Popeye's
and Church's restaurants. The Company's sales programs to multi-unit
customers tend to be tailored to the individual customer and include a more
tailored product offering than for the Company's traditional foodservice
customers. Sales to these customers are typically higher-volume, lower gross
margin sales which require fewer, larger deliveries than traditional
foodservice customers. These programs offer operational and cost
efficiencies for both the customer and the Company and therefore result in
reduced operating expenses as a percent of sales which compensate for the
lower gross margins. The Company's multi-unit customers are supported
primarily by dedicated account representatives who are responsible for
ensuring that customers' orders are properly entered and filled. In
addition, higher levels of management assist in identifying new potential
multi-unit customers and managing long-term account relationships. Two of
the Company's multi-unit customers, Cracker Barrel and Outback, account
for a significant portion of the Company's consolidated net sales. Net
sales to Cracker Barrel accounted for 22%, 30% and 29% of consolidated net
sales for 1997, 1996 and 1995, respectively. Net sales to Outback accounted
for 16%, 19% and 15% of consolidated net sales for 1997, 1996 and 1995,
respectively. No other multi-unit customer accounted for more than 10% of
the Company's consolidated net sales in 1997.
Products and Services
The Company distributes more than 25,000 national brand and
private label food and food-related products to over 20,000 foodservice
customers. These items include a broad selection of "center-of-the-plate" or
entree items (such as meats, seafood and poultry), canned and dry groceries,
frozen foods, fresh produce, fresh-cut vegetables, refrigerated and dairy
products, paper products and cleaning supplies, restaurant equipment and other
supplies. The Company's private label products include items marketed under
the Pocahontas, Healthy USA, Premium Recipe, Colonial Tradition and Flora
specialty lines, as well as fresh-cut produce products purchased and processed
by the Company and marketed under the Fresh Advantage label.
The Company provides customers with other value-added services in
the form of assistance in managing inventories, menu planning and improving
their efficiency and profitability. As described below, the Company also
provides procurement and merchandising services to approximately 150
independent distributors, as well as the Company's own distribution network.
These procurement and merchandising services include negotiating vendor
supply agreements and quality assurance related to the Company's private label
and national branded products.
The following table sets forth the percentage of the Company's
consolidated net sales by product and service category in 1997:
Percentage of Net
Sales for 1997
Center-of-the-plate 30%
Canned and dry groceries 24
Frozen foods 17
Refrigerated and dairy products 10
Paper products and cleaning supplies 7
Fresh-cut produce 3
Other produce 3
Vending 3
Equipment and supplies 2
Procurement, merchandising and other services 1
Total 100%
Suppliers and Purchasing
The Company procures its products from independent suppliers, food
brokers and merchandisers, including its wholly-owned subsidiary, Pocahontas
Foods, USA, Inc. ("Pocahontas"). The Company purchases both nationally
branded items as well as private label specialty items under the Company's
controlled labels. Independent suppliers include large national and regional
food manufacturers and consumer products companies, meatpackers and produce
shippers. The Company constantly seeks to maximize its purchasing power
through volume purchasing. Although each operating subsidiary is responsible
for placing its own orders and can select the products that appeal most to its
customers, each subsidiary is encouraged to participate in Company-wide
purchasing programs, which enable it to take advantage of the Company's
consolidated purchasing power. Subsidiaries are also encouraged to consolidate
their product offerings to take advantage of volume purchasing. The Company is
not dependent on a single source for any significant item and no third-party
supplier represents more than 2% of the Company's total product purchases.
Pocahontas selects foodservice products for its "Pocahontas,"
"Healthy USA," "Premium Recipe" and "Colonial Tradition" labels and
markets these private label products, as well as nationally branded foodservice
products, to the Company's own distribution operations and approximately 150
independent foodservice distributors nationwide. For its services, the Company
receives marketing fees paid by vendors. Approximately 17,000 of the products
sold through Pocahontas are sold under the Company's labels. Approximately
400 vendors, located in all areas of the country, supply products through the
Pocahontas distribution network. Because Pocahontas negotiates supply
agreements on behalf of its independent distributors as a group,the distributors
that utilize the Pocahontas procurement and merchandising group enhance their
purchasing power.
Operations
Each of the Company's subsidiaries has substantial autonomy in its
operations, subject to overall corporate management controls and guidance. The
Company's corporate management provides centralized direction in the areas of
strategic planning, general and financial management, sales and merchandising.
Individual marketing efforts are undertaken at the subsidiary level and most of
the Company's name recognition in the foodservice business is based on the
tradenames of its individual subsidiaries. Purchasing is also conducted by each
subsidiary separately, in response to the individual needs of customers,although
subsidiaries are encouraged to participate in Company-wide purchasing
programs. Each subsidiary has primary responsibility for its own human
resources, governmental compliance programs, principal accounting, billing and
collection. Financial information reported by the Company's subsidiaries is
consolidated and reviewed by the Company's corporate management.
Distribution operations are conducted out of sixteen distribution
centers located in Tennessee, New Jersey, Maryland, Georgia, Florida,
Alabama, Louisiana and Texas. Customer orders are assembled in the
Company's distribution facilities and then sorted, placed on pallets and loaded
onto trucks and trailers in delivery sequence. Deliveries covering long
distances are made in large tractor-trailers that are generally leased by
the Company. Deliveries within shorter distances are made in trucks, which
are either leased or owned by the Company. Certain of the Company's larger
multi-unit chain customers are serviced using dedicated trucks due to the
relatively large and consistent delivery size and geographic distribution of
these rapidly growing customers. As a result, deliveries to these customers
are generally more efficient and result in decreased operating expenses as
a percentage of sales which compensate for the lower gross margins on this
type of account. The trucks and delivery trailers used by the Company have
separate temperature-controlled compartments. The Company utilizes a computer
system to design the least costly route sequence for the delivery of its
products.
The following table summarizes certain information with respect to the
Company's principal operations:
Approx
Number of
Customer
Principal Number Locations
Principal Types of of Currently
Region(s) Business Facilities Served Major Customers
Kenneth O. Lester South Foodservice 5 3,800 Cracker Barrell,
Company, Inc. Southwest, distribution Outback, Don Pablo's,
Lebanon, TN Midwest Harrigans and others
and restaurants, healthcare
Northeast facilities and schools
Caro Foods, South and Foodservice 3 3,000 McDonald's, Taco
Inc., and subsid- Southeast distribution, Bell, Hardee's,
iaries fresh-cut Popeye's, Church's
Houma, LA produce and other restaurants,
healthcare facilities
and schools
Milton's Food- South and Foodservice 1 4,000 Subway and other
service, Inc. Southeast distribution restaurants, healthcare
Atlanta, GA facilities and schools
B & R Foods Div. Florida Foodservice 1 2,000 Restaurants, healthcare
Tampa, FL distribution facilities and schools
Hale Brothers/ Tennessee, Foodservice 1 1,800 Restaurants, healthcare
Summit, Inc. Virginia distribution facilities and schools
Morristown, TN and
Kentucky
Performance Food South and Foodservice 2 3,500 Popeye's, Church's,
Group of Texas, Southwest distribution Subway, Kentucky
LP(formerly Mclane Fried Chicken, Dairy
Foodservice) Queen, and other
Temple, TX restaurants, healthcare
facilities and schools
W. J. Powell Co., Georgia, Foodservice 2 2,000 Restaurants, healthcare
Inc. Florida and distribution facilities and schools
Thomasville, GA Alabama
AFI Food Service New Jersey Foodservice 1 1,400 Restaurants, healthcare
Distributors, and metro distribution facilities and schools
Inc. New York
Elizabeth, NJ area
Pocahontas Nationwide Procurement 1 150 Independent
Foods, USA, and foodservice
Inc. merchandising distributors and
Richmond, VA vendors
Competition
The foodservice distribution industry is highly competitive. The
Company competes with numerous smaller distributors on a local level, as well
as with a few national or regional foodservice distributors. Some of these
distributors have substantially greater financial and other resources than the
Company. Although large multi-unit chain customers usually remain with one or
more distributors over a long period of time, bidding for long-term contracts
or arrangements is highly competitive and distributors may market their
services to a particular chain of restaurants over a long period of time
before they are invited to bid. In the fresh-cut produce area of the business,
competition comes mainly from smaller processors, although the Company
encounters intense competition from larger national and regional processors
when selling produce to chain restaurants and supermarkets. Management
believes that most purchasing decisions in the foodservice business are based
on the quality of the product, the distributor's ability to completely and
accurately fill orders, provide timely deliveries and on price.
Regulation
The Company's operations are subject to regulation by state and local
health departments, the U.S. Department of Agriculture and the Food and Drug
Administration, which generally impose standards for product quality and
sanitation. The Company's facilities are generally inspected at least annually
by state and/or federal authorities. In addition, the Company is subject to
regulation by the Environmental Protection Agency with respect to the disposal
of waste water and the handling of chemicals used in cleaning.
The Company's relationship with its fresh food suppliers with respect
to the grading and commercial acceptance of product shipments is governed by
the Federal Produce and Agricultural Commodities Act, which specifies
standards for sale, shipment, inspection and rejection of agricultural
products. The Company is also subject to regulation by state authorities
for accuracy of its weighing and measuring devices.
Certain of the Company's distribution facilities have underground and
above-ground storage tanks for diesel fuel and other petroleum products which
are subject to laws regulating such storage tanks. Such laws have not had a
material adverse effect on the capital expenditures, earnings or competitive
position of the Company.
Management believes that the Company is in substantial compliance
with all applicable government regulations.
Tradenames
Except for the Pocahontas and Fresh Advantage tradenames, the
Company does not own or have the right to use any patent, trademark,
tradename, license, franchise or concession, the loss of which would have a
material adverse effect on the operations or earnings of the Company.
Employees
As of December 27, 1997, the Company had approximately 2,800
full-time employees, including approximately 800 in management, marketing and
sales and the remainder in operations. Approximately 130 of the Company's
employees are represented by a union or a collective bargaining unit. The
Company considers its employee relations to be satisfactory.
Risk Factors
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is including the
following cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward looking statements of the Company made by, or on behalf of, the Company.
Low Margin Business; Economic Sensitivity. The foodservice
distribution industry generally is characterized by relatively high volume with
relatively low profit margins. A significant portion of the Company's sales
are at prices that are based on product cost plus a percentage markup. As
a result, the Company's profit levels may be negatively impacted during
periods of food price deflation even though the Company's gross profit
percentage may remain constant. The foodservice industry is also sensitive
to national and regional economic conditions, and the demand for foodservice
products supplied by the Company has been adversely affected from time to
time by economic downturns. In addition, the Company's operating results
are particularly sensitive to, and may be materially adversely impacted by,
difficulties with the collectibility of accounts receivable, inventory
control, competitive price pressures and unexpected increases in fuel or
other transportation-related costs. There can be no assurance that one or
more of such factors will not adversely affect future operating results.
The Company has experienced losses due to the uncollectibility of accounts
receivable in the past and could experience such losses in the future.
Reliance on Major Customers. The Company derives a substantial
portion of its net sales from customers within the restaurant industry,
particularly certain rapidly growing multi-unit chain customers. Sales to units
of Cracker Barrel accounted for 22% and 30% of the Company's consolidated net
sales in 1997 and 1996, respectively. Sales to Outback accounted for 16% and
19% of the Company's consolidated net sales in 1997 and 1996, respectively.
The Company has no written assurance from any of its customers as to the
level of future sales. A material decrease in sales to any of the largest
customers of the Company would have a material adverse impact on the
Company's operating results. The Company has been the primary supplier of
food and food-related products to Cracker Barrel since 1975. See "Business -
Customers and Marketing."
Acquisitions. A significant portion of the Company's historical
growth has been achieved through acquisitions of other foodservice
distributors, and the Company's growth strategy includes additional
acquisitions. There can be no assurance that the Company will be able to
make successful acquisitions in the future. Furthermore, there can be no
assurance that future acquisitions will not have an adverse effect upon the
Company's operating results, particularly in quarters immediately following
the consummation of such transactions, while the operations of the acquired
business are being integrated into the Company's operations. Following the
acquisition of other businesses in the future, the Company may decide to
consolidate the operations of any acquired business with existing operations,
which may result in the establishment of provisions for consolidation. To
the extent the Company's expansion is dependent upon its ability to obtain
additional financing for acquisitions, there can be no assurance that the
Company will be able to obtain financing on acceptable terms. See "Business
- - Operations."
Management of Growth. The Company has rapidly expanded its
operations since inception. This growth has placed significant demands on its
administrative, operational and financial resources. The planned continued
growth of the Company's customer base and its services can be expected to
continue to place a significant demand on its administrative, operational and
financial resources. The Company's future performance and profitability will
depend in part on its ability to successfully implement enhancements to its
business management systems and to adapt to those systems as necessary to
respond to changes in its business. Similarly, the Company's continued growth
creates a need for expansion of its facilities from time to time. As the
Company nears maximum utilization of a given facility, operations may be
constrained and inefficiencies may be created which could adversely affect
operating results until such time as either that facility is expanded or volume
is shifted to another facility. Conversely, as the Company adds additional
facilities or expands existing facilities, excess capacity may be created until
the Company is able to expand its operations to utilize the additional capacity.
Such excess capacity may also create certain inefficiencies and adversely affect
operating results.
Competition. The Company operates in highly competitive markets,
and its future success will be largely dependent on its ability to provide
quality products and services at competitive prices. The Company's competition
comes primarily from other foodservice distributors and produce processors.
Some of the Company's competitors have substantially greater financial and
other resources than the Company and may be better established in their
markets. Management believes that competition for sales is largely based on
the quality and reliability of products and services and, to a lesser extent,
price. See "Business - Competition."
Dependence on Senior Management and Key Employees. The
Company's success is largely dependent on the skills, experience and efforts of
its senior management. The loss of services of one or more of the Company's
senior management could have a material adverse effect upon the Company's
business and development. In addition, the Company depends to a substantial
degree on the services of certain key employees. The ability to attract and
retain qualified employees in the future will be a key factor in the success of
the Company.
Volatility of Market Price for Common Stock. From time to time
there may be significant volatility in the market price for the Company's
common stock. Quarterly operating results of the Company or other distributors
of food and related goods, changes in general conditions in the economy, the
financial markets or the food distribution or food services industries, natural
disasters or other developments affecting the Company or its competitors could
cause the market price of the Common Stock to fluctuate substantially. In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations. This volatility has had a significant effect on the
market prices of securities issued by many companies for reasons unrelated
to their operating performance.
Executive Officers
The following table sets forth certain information concerning the
executive officers of the Company as of December 27, 1997.
Name Age Position
Robert C. Sledd 45 Chairman, Chief Executive Officer and Director
C. Michael Gray 48 President, Chief Operating Officer and Director
Roger L. Boeve 59 Executive Vice President and Chief Financial Officer
Thomas Hoffman 58 Senior Vice President
David W. Sober 65 Vice President of Human Resources and Secretary
Robert C. Sledd has served as Chairman of the Board of Directors
since February 1995 and has served as Chief Executive Officer and a director of
the Company since 1987. Mr. Sledd served as President of the Company from
1987 to February 1995. Mr. Sledd has served as a director of Taylor & Sledd
Industries, Inc., a predecessor of the Company, since 1974, and served as
President and Chief Executive Officer of that Company from 1984 to 1987. Mr.
Sledd also serves as a director of SCP Pool Corporation.
C. Michael Gray has served as President and Chief Operating
Officer of the Company since February 1995 and has served as a director of the
Company since 1992. Mr. Gray served as President of Pocahontas, from 1981
to 1995. Mr. Gray had been employed by Pocahontas since 1975, serving as
Marketing Manager and Vice President of Marketing. Prior to joining
Pocahontas, Mr. Gray was employed by the Kroger Company as a produce
buyer.
Roger L. Boeve has served as Executive Vice President and Chief
Financial Officer of the Company since 1988. Prior to that date, Mr. Boeve
served as Executive Vice President and Chief Financial Officer for The Murray
Ohio Manufacturing Company and as Corporate Vice President and Treasurer
for Bausch and Lomb. Mr. Boeve is a certified public accountant.
Thomas Hoffman has served as Senior Vice President of the
Company since February 1995. Mr. Hoffman has also served as President of
Kenneth O. Lester Company, Inc., a wholly-owned subsidiary of the Company,
since 1989. Prior to joining the Company in 1989, Mr. Hoffman had served in
executive capacities at Booth Fisheries Corporation, a subsidiary of Sara Lee
Corporation, as well as C.F.S. Continental, Miami and International
Foodservice, Miami, two foodservice distributors.
David W. Sober has served as Vice President for Human Resources
since 1987 and as Secretary of the Company since March 1991. Mr. Sober
served as Vice President for Purchasing of the Company from March 1991 to
July 1994. Mr. Sober served as Corporate Vice President and Secretary for
Taylor & Sledd Industries, Inc., a predecessor of the Company, during 1986 and
1987. Mr. Sober held various positions in other companies in the wholesale
and retail food industries, including approximately 30 years with the A&P
grocery store chain.
Item 2. Properties.
The following table presents information as to the primary real
properties and facilities of the Company and its operating subsidiaries and
division:
Approx. Owned/Leased
Area (Expiration Date
Location in Sq. Ft Principal Uses if Leased)
Performance Food Group
Company
Richmond, Virginia 5,000 Corporate offices Leased (2000)
Tampa, Florida (B&R 96,000 Administrative offices, Owned
Foods Division) product inventory and
distribution
Kenneth O. Lester Company,
Inc.
Lebanon, Tennessee 140,000 Administrative offices, Leased (1998)
product inventory and
distribution
Lebanon, Tennessee 176,000 Product inventory and
distribution Owned
Gainesville, Florida 70,000 Product inventory and Owned
distribution
Dallas, Texas 75,000 Product inventory and
distribution Owned
Belcamp, Maryland 75,000 Product inventory and
distribution Leased (2001)
Caro Foods, Inc. 162,000 Administrative offices, Owned
Houma, Louisiana produce processing,
product inventory and
distribution
Dallas, Texas 66,000 Product inventory and Leased (1999)
distribution, produce
processing
Hale Brothers/Summit, 74,000 Administrative offices, Owned
Inc. product inventory and
Morristown, Tennessee distribution
Pocahontas Foods, USA, 131,000 Administrative offices, Leased (2004)
Inc. product inventory and
Richmond, Virginia distribution
Milton's Foodservice, 166,000 Administrative offices, Owned
Inc. product inventory and
Atlanta, Georgia distribution
Performance Food Group 135,000 Administrative offices, Owned
of Texas, LP (1) product inventory and
Temple, Texas distribution
Victoria, Texas 250,000 Product inventory and Owned
distribution
W. J. Powell Company, 63,000 Administrative offices, Owned
Inc. (2) product inventory and
Thomasville, GA distribution
Dothan, AL 49,000 Administrative offices, Owned
product inventory and
distribution
AFI Food Service 170,000 Administrative offices, Leased (2023)
Distributors, Inc.(3) product inventory and
Elizabeth, NJ distribution
(1) Performance Food Group of Texas, LP was acquired by the Company on
December 30, 1996
(2) The W. J. Powell Company, Inc. was acquired by the Company on June 30,
1997
(3) AFI Food Service Distributors, Inc. was acquired by the Company on
October 31, 1997
_______________
Item 3. Legal Proceedings.
From time to time the Company is involved in routine litigation and
proceedings in the ordinary course of business. The Company does not have
pending any litigation or proceeding that management believes will have a
material adverse effect upon the Company.
Item 4. Submission of Matters to a Vote of Shareholders.
No matters were submitted to a vote of the shareholders during the
fourth quarter ended December 27, 1997.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.
The prices in the table below represent the high and low sales price for
the Company's common stock as reported by the Nasdaq National Market. The
prices have been adjusted to reflect a 3-for-2 stock split, effected as a stock
dividend, in July 1996. As of March 16, 1998, Performance Food Group had
approximately 1,348 shareholders of record and approximately 4,900 beneficial
owners. No cash dividends have been declared, and the present policy of the
Board of Directors is to retain all earnings to support operations and to
finance expansion.
1997
High Low
First Quarter $18.25 $14.50
Second Quarter $21.75 $16.00
Third Quarter $26.25 $19.75
Fourth Quarter $26.25 $17.50
For the Year $26.25 $14.50
1996
High Low
First Quarter $16.83 $14.17
Second Quarter $21.50 $15.71
Third Quarter $17.00 $13.50
Fourth Quarter $17.25 $11.25
For the Year $21.50 $11.25
Item 6. Selected Consolidated Financial Data.
Fiscal Year Ended
Dec. 27, Dec. 28, Dec. 30, Dec. 31, Jan. 1,
In thousands, except per share data) 1997 1996 1995 1994 1994
Statement of Earnings Data:
Net sales $1,230,078 $784,219 $664,123 $473,414 $379,363
Cost of goods sold 1,074,154 673,407 568,097 405,104 319,986
Gross profit 155,924 110,812 96,026 68,310 59,377
Operating expenses 132,494 92,227 80,302 60,125 50,588
Operating profit 23,430 18,585 15,724 8,185 8,789
Other income (expense):
Interest expense (1,991) (627) (2,727) (388) (1,311)
Other, net 105 176 14 (278) 134
Other expense, net (1,886) (451) (2,713) (666) (1,177)
Earnings before income taxes 21,544 18,134 13,011 7,519 7,612
Income tax expense 8,297 7,145 5,088 2,985 3,092
Net earnings $ 13,247 $ 10,989 $ 7,923 $ 4,534 $ 4,520
Per Share Data:
Weighted average common shares
outstanding 11,960 11,209 9,190 9,107 7,150
Basic net earnings per common share $ 1.11 $ 0.98 $ 0.86 $ 0.50 $ 0.63
Weighted average common shares and
potential dilutive shares
outstanding 12,491 11,686 9,631 9,600 7,501
Diluted net earnings per common
share $ 1.06 $ 0.94 $ 0.82 $ 0.47 $ 0.60
Other Data:
Depreciation and amortization $ 7,843 $ 5,484 $ 5,319 $ 3,481 $ 2,870
Capital expenditures 8,284 9,074 13,921 12,436 9,105
Balance Sheet Data (end of period):
Working capital $ 52,784 $ 42,967 $ 30,299 $16,386 $ 19,183
Property, plant and equipment, net 71,810 55,697 51,640 35,352 26,411
Total assets 288,883 182,897 155,134 99,075 83,488
Short-term debt (including current
installments of long-term debt) 689 650 3,210 3,211 1,893
Long-term debt 44,577 7,225 37,009 4,966 5,700
Shareholders' equity 133,973 101,135 55,791 46,263 40,643
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
GENERAL
The Company was founded in 1987 as a result of the combination of
the businesses of Pocahontas Foods, USA, Inc., a foodservice procurement
and merchandising group in Richmond, Virginia, and Caro Produce &
Institutional Foods, Inc., a distributor of fresh produce and other
foodservice products and services in Louisiana and Texas, and has grown
both internally through increased sales to existing and new customers and
by acquisition of existing foodservice distributors. The Company's
acquisitions include:
the November 1987 acquisition of Pocahontas Foodservice, Inc., a
broadline distributor based in Gainesville, Florida;
the July 1988 acquisition of the Kenneth O. Lester Company, Inc., a
broadline and customized distributor based in Lebanon, Tennessee;
the December 1989 acquisition of Hale Brothers, Inc., a broadline
distributor based in Morristown, Tennessee ("Hale");
the December 1991 acquisition of B&R Foods, Inc., a broadline
distributor based in Tampa, Florida;
the December 1992 purchase of certain assets of Loubat-L.Frank, Inc., a
broadline distributor based in New Orleans, Louisiana;
the May 1993 acquisition by Hale of Summit Distributors, Inc., a
broadline distributor based in Johnson City, Tennessee;
the January 1995 acquisition of Milton's Foodservice, Inc., a broadline
distributor based in Atlanta, Georgia ("Milton's");
the June 1995 acquisition by Milton's of Cannon Foodservice, Inc., a
broadline distributor based in Asheville, North Carolina ("Cannon");
the December 1996 acquisition of certain assets of McLane
Foodservice-Temple, Inc., which business is now conducted as
Performance Food Group of Texas, LP ("PFG of Texas"), a broadline
distributor based in Temple, Texas;
the April 1997 acquisition of certain assets by Hale of Tenneva
Foodservice, Inc. ("Tenneva"), a broadline distributor based in Bristol,
Virginia;
the May 1997 acquisition of certain assets of Central Florida Finer
Foods, Inc. ("CFFF"), a broadline distributor based in Winter Haven,
Florida;
the June 1997 acquisition of W. J. Powell Company, Inc. ("Powell"), a
broadline distributor based in Thomasville, Georgia; and
the October 1997 acquisition of AFI Food Service Distributors, Inc.
("AFI"), a broadline distributor based in Elizabeth, New Jersey
The Company derives its revenue primarily from the sale of food
and food-related products to the foodservice, or "away-from-home eating,"
industry. The foodservice industry consists of two major customer types:
"traditional" foodservice customers, consisting of independent restaurants,
hotels, cafeterias, schools, healthcare facilities and other institutional
customers; and "multi-unit chain" customers, consisting of regional and
national quick-service restaurants and casual dining restaurants. Products
and services provided to the Company's traditional and multi-unit chain
customers are supported by identical physical facilities, vehicles,
equipment and personnel. The principal components of the Company's
expenses include cost of goods sold, which represents the amount paid to
manufacturers and growers for products sold, and operating expenses,
which include primarily labor-related expenses, delivery costs and
occupancy expenses.
The Company's fiscal year ends on the Saturday closest to
December 31. Consequently, the Company will periodically have a 53-
week fiscal year. The Company's fiscal years ended December 27, 1997,
December 28, 1996 and December 30, 1995, herein referred to as 1997,
1996 and 1995, respectively, were all 52-week years.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
components of the consolidated statements of earnings expressed as a
percentage of net sales.
1997 1996 1995
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 87.3 85.9 85.5
Gross profit 12.7 14.1 14.5
Operating expenses 10.8 11.7 12.1
Operating profit 1.9 2.4 2.4
Other expense, net 0.1 0.1 0.4
Earnings before income taxes 1.8 2.3 2.0
Income tax expense 0.7 0.9 0.8
Net earnings 1.1% 1.4% 1.2%
COMPARISON OF 1997 TO 1996
Net sales increased 56.9% to $1.23 billion for 1997 from $784.2
million for 1996. Net sales in the Company's existing operations increased
23% over 1996 while acquisitions contributed an additional 34% to the
Company's total sales growth. Inflation amounted to less than 1.0% for
1997.
Gross profit increased 40.7% to $155.9 million in 1997 from
$110.8 million in 1996. Gross profit margin decreased to 12.7% in 1997
compared to 14.1% in 1996. The decline in gross profit margin was due
primarily to the following factors. Sales increased during 1997 to certain
of the Company's multi-unit chain customers which generally are higher-
volume, lower gross margin accounts but also allow for more efficient
deliveries and use of capital, resulting in lower operating expenses. In
addition, the Company's gross margin was impacted by the renegotiation of
its distribution agreement with its largest multi-unit chain customer in early
1997. Gross profit margins also declined as a result of the acquisition of
PFG of Texas, whose gross margins are currently lower than those in many
of the Company's other subsidiaries, due in part to their customer mix
which includes a greater concentration of multi-unit chain customers. The
decline in gross profit margins was offset in part by improved capacity
utilization in the Company's produce processing operations.
Operating expenses increased 43.7% to $132.5 million in 1997
compared with $92.2 million in 1996. As a percentage of net sales,
operating expenses declined to 10.8% in 1997 from 11.7% in 1996. The
decrease in operating expenses as a percent of net sales primarily reflects
better use of the Company's facilities at the increased level of sales and
continued shift in mix of sales to certain of the Company's rapidly growing
multi-unit chain customers discussed above. These improvements in
utilization were offset in part by increased labor costs including recruiting
and training additional personnel, primarily in the transportation and
warehouse areas, which are an integral part of the Company's distribution
service. The Company expects these increased labor costs to continue for
the next several quarters. In 1997, the Company's operating expenses as a
percentage of net sales was adversely impacted by PFG of Texas as the
Company integrated those acquired operations, while at the same time
expanding those operations. Additionally, 1996 was negatively impacted
by increased costs related to the severe weather experienced in the East and
Midwest during the first quarter of 1996. Additionally, the Company leased
a 75,000 square foot distribution center in Belcamp, Maryland, to service
the continued growth of certain of the Company's multi-unit chain
customers, which became operational in February 1997, and completed
construction of a 75,000 square foot distribution center in Dallas, Texas,
which became operational in February 1996. The Company incurred
certain start-up expenses for these facilities, the impacts of which are
approximately comparable. The Company intends to expand certain of its
distribution centers during 1998.
Operating profit increased 26.1% to $23.4 million in 1997 from
$18.6 million in 1996. Operating profit margin declined to 1.9% for 1997
from 2.4% for 1996.
Other expense increased to $1.9 million in 1997 from $451,000 in
1996. Other expense includes interest expense, which increased to $2.0
million in 1997 from $627,000 in 1996. The increase in interest expense is
due to higher debt levels in 1997 as a result of the Company's various
acquisitions. Other expense during 1997 also includes a $1.3 million gain
from insurance proceeds related to covered losses at one of the Company's
processing and distribution facilities which offset a $1.3 million writedown
of certain leasehold improvements associated with the termination of the
lease on one of the Company's distribution facilities.
Income tax expense increased to $8.3 million in 1997 from $7.1
million in 1996 as a result of higher pre-tax earnings. As a percentage of
earnings before income taxes, the provision for income taxes was 38.5%
and 39.4% for 1997 and 1996, respectively.
Net earnings increased 20.5% to $13.2 million in 1997 compared to
$11.0 million in 1996. As a percentage of net sales, net earnings decreased
to 1.1% in 1997 versus 1.4% in 1996.
COMPARISON OF 1996 TO 1995
Net sales increased 18.1% to $784.2 million for 1996 compared
with $664.1 million for 1995. Substantially all of the increase in net sales
was attributable to internal growth. Inflation during 1996 accounted for
approximately 1% of the sales growth.
Gross profit increased 15.4% to $110.8 million in 1996 compared
with $96.0 million in 1995. Gross profit margin decreased to 14.1% in
1996 compared to 14.5% in 1995. The gross margin percentage declined
primarily due to the continued rapid growth of certain of the Company's
large multi-unit chain customers which generally are higher volume, lower
gross margin accounts but also allow for more efficient deliveries and use
of capital, resulting in lower operating expenses. Gross margins during
1995 were adversely impacted by the Company's produce processing
operations. During the second quarter of 1995, California experienced
adverse weather conditions which created significant fluctuations in the
price and availability of lettuce. Although the Company was generally able
to pass the increased costs on to its customers, the gross profit dollars per
pound remained relatively comparable to normal conditions. Thus,
although produce processing sales increased significantly during the period,
gross margins did not increase proportionately. In addition, margins in the
produce processing business continue to be impacted by the Company's
excess production capacity. The Company was increasing its marketing
efforts to further develop produce sales to utilize this excess capacity.
Operating expenses increased 14.9% to $92.2 million in 1996 from
$80.3 million in 1995. As a percentage of net sales, operating expenses
declined to 11.7% in 1996 compared with 12.1% in 1995, reflecting
improved utilization of the Company's facilities at the increased level of
sales and the continued shift in mix of sales to certain of the Company's
rapidly growing multi-unit chain customers discussed above. These
improvements in utilization were offset in part by increased costs
associated with the severe weather experienced in the East and Midwest
during the first quarter of 1996. In addition, the Company incurred certain
start-up expenses in the first quarter of 1996 for the Dallas distribution
center which became operational in February 1996.
Operating profit increased 18.2% to $18.6 million in 1996 from
$15.7 million in 1995. Operating profit margins remained flat at 2.4% for
1996 and 1995.
Other expense decreased to $451,000 in 1996 from $2.7 million in
1995. Other expense includes interest expense, which decreased to
$627,000 in 1996 from $2.7 million in 1995. The decrease in interest
expense was due primarily to reduced debt levels after the Company's
stock offering completed in March 1996. The Company used the proceeds
of this offering to repay approximately $33.3 million of debt.
Income tax expense increased 40.4% to $7.1 million in 1996 from
$5.1 million in 1995 as a result of higher pre-tax earnings. As a percentage
of earnings before income taxes, income tax expense was 39.4% for 1996
versus 39.1% in 1995.
Net earnings increased 38.7% to $11.0 million in 1996 from $7.9
million in 1995. As a percentage of net sales, net earnings increased to
1.4% in 1996 from 1.2% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and growth primarily with
cash flow from operations, borrowings under its revolving credit facility,
operating leases, normal trade credit terms and from the sale of the
Company's common stock. Despite the Company's large sales volume,
working capital needs are minimized because the Company's investment in
inventory is financed primarily with accounts payable.
Cash provided by operating activities was $24.2 million and $9.9
million for 1997 and 1996, respectively. The increase in cash provided by
operating activities resulted primarily from higher net earnings and by
increased levels of trade payables, net of an increase of receivables and
inventories, due to the continued growth of the Company's business.
Cash used by investing activities was $59.2 million and $9.3
million for 1997 and 1996, respectively. Investing activities include
additions to and disposal of property, plant and equipment and the
acquisition of businesses. During 1997, the Company paid $54.6 million
for the acquisition of businesses, net of cash on hand at the acquired
companies. The Company's total capital expenditures for 1997 were $8.3
million, including approximately $1.2 million to complete the distribution
center in Houma, Louisiana. Investing activities in 1997 also included $4.2
million from insurance proceeds related to covered losses associated with
one of the Company's processing and distribution facilities.
Cash provided by financing activities was $33.0 million and
$695,000 in 1997 and 1996, respectively. Financing activities included net
borrowings in 1997 of $27.2 million and net repayments in 1996 of $1.6
million on the Company's revolving credit facility. The borrowings in
1997 were used to fund the acquisition of businesses discussed above.
Financing activities in 1996 also included net proceeds of $33.3 million
from the Company's offering of common stock completed in March 1996.
The proceeds were used to repay the $30.0 million term loan used to
finance the acquisition of Milton's and the remainder to repay a portion of
amounts outstanding under a revolving credit facility.
In July 1996, the Company entered into a three-year $50.0 million
revolving credit agreement (the "Credit Facility") with a commercial bank
which expires in February 2001. Approximately $34.3 million was
outstanding under the Credit Facility at December 27, 1997. The Credit
Facility also supports up to $5.0 million of letters of credit. At December
27, 1997, the Company was contingently liable for outstanding letters of
credit of $4.1 million, which reduce amounts available under the Credit
Facility. At December 27, 1997, $11.6 million was available under the
Credit Facility. The facility bears interest at LIBOR plus a spread over
LIBOR (6.14% at December 27, 1997), which varies based on the ratio of
funded debt to total capital. Additionally, the Credit Facility requires the
maintenance of certain financial ratios, as defined, regarding debt to
tangible net worth, cash flow coverage and current assets to current
liabilities. Subsequent to year end, the Company amended the Credit
Facility to increase amounts available under the facility to $60.0 million. In
addition to the Credit Facility, the Company obtained an additional $7.3
million of letters of credit to secure amounts owed under promissory notes
to the former AFI shareholders related to the purchase of AFI.
On September 12, 1997, the Company completed a $42.0 million
master operating lease agreement to construct new distribution centers
planned to become operational in 1998. Under this agreement, the lessor
owns the distribution centers, incurs the related debt to construct the
facilities and thereafter leases each facility to the Company. The Company
has entered into a commitment to lease each facility for a period beginning
upon completion of each property and ending on September 12, 2002,
including extensions. Upon the expiration of each lease, the Company has
the option to renegotiate the lease, sell the facility to a third party or to
purchase the facility at its original cost. If the Company does not exercise
its purchase options, the Company has significant residual value guarantees
of each property. The Company expects the fair value of the properties
included in this agreement to eliminate or substantially reduce the
Company's exposure under the residual value guarantee. At December 27,
1997, construction has commenced on one facility with expenditures to date
of approximately $1.1 million, which costs have been borne by the lessor.
Total expenditures for this facility are anticipated to be approximately $13
million.
The Company believes that cash flow from operations and
borrowings under the Credit Facility will be sufficient to finance its
operations and anticipated growth for the foreseeable future.
BUSINESS COMBINATIONS
On December 30, 1996, the Company acquired certain net assets of
McLane Foodservice-Temple, Inc., which was a wholly-owned subsidiary
of McLane Company, Inc., based in Temple, Texas. McLane Foodservice
had 1996 net sales of approximately $180 million. The former business of
McLane Foodservice now operates as PFG of Texas, an indirect wholly-
owned subsidiary of the Company, through distribution centers in Temple
and Victoria, Texas and provides food and food-related products to
traditional foodservice customers as well as multi-unit chain restaurants
and vending customers. The purchase price of approximately $30.5 million
was financed with proceeds from an existing credit facility. Simultaneous
with the closing, the Company also purchased the distribution center located
in Victoria, Texas from an independent third party for approximately $1.5
million.
During 1997, the Company completed the acquisitions of a number
of foodservice distributors, including the acquisition of Tenneva on April
11, 1997, CFFF on May 12, 1997, Powell on June 28, 1997 and AFI on
October 31, 1997. The operations of Tenneva and CFFF have been
combined with the operations of certain of the Company's existing
subsidiaries. Collectively, these companies had 1996 net sales of
approximately $130 million. The aggregate purchase price of the
acquisitions was approximately $39 million, plus the assumption of
approximately $12 million of debt. The aggregate purchase price for the
acquisitions was financed by issuing 660,827 shares of the Company's
common stock, $7 million of promissory notes due January 2, 1998 and the
remainder with proceeds from the Credit Facility. The aggregate
consideration payable to the former shareholders of Powell and AFI is
subject to increase in certain circumstances.
The consolidated statements of earnings and of cash flows reflect
the results of these acquired companies from the dates of acquisition
through December 27, 1997. These acquisitions have been accounted for
using the purchase method and, accordingly, the acquired assets and
liabilities have been recorded at their estimated fair values at the date of
acquisition. The excess of the purchase price over the fair value of tangible
net assets acquired was approximately $44.2 million and is being amortized
on a straight-line basis over estimated lives ranging from 5 to 40 years.
YEAR 2000 ISSUE
The Company is dependent upon computer-based systems to conduct
its business with both customers and suppliers. In late 1997, the Company
developed a plan to upgrade its computer systems and to deal with Year
2000 issue. The plan calls for conversion efforts to be completed by mid
1999. The Company estimates that costs to remediate the Year 2000 issue
will be less than $500,000 which will be funded through operating cash
flows. The company is expensing all costs associated with the Year 2000
issue as incurred.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards ("SFAS") No. 130,
Reporting Comprehensive Income, and No. 131, Disclosures About
Segments of an Enterprise and Related Information." These
pronouncements may require additional disclosure, however the Company
does not expect these pronouncements to have an affect on the Company's
financial position or results of operations.
QUARTERLY RESULTS AND SEASONALITY
Set forth below is certain summary information with respect to the
Company's operations for the most recent eight fiscal quarters.
Historically, the restaurant and foodservice business is seasonal with lower
sales in the first quarter. Consequently, the Company may experience lower
net sales during the first quarter, depending on the timing of any
acquisitions. Management believes the Company's quarterly net sales will
continue to be impacted by the seasonality of the restaurant business.
1997
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
Net sales $268,537 $292,765 $336,349 $332,427
Gross profit 34,777 36,218 42,015 42,914
Operating profit 4,158 6,372 6,529 6,371
Earnings before income taxes 3,725 6,118 6,099 5,602
Net earnings 2,271 3,772 3,746 3,458
Basic net earnings per common share 0.19 0.32 0.31 0.28
Diluted net earnings per common share $ 0.19 $ 0.31 $ 0.30 $ 0.27
1996
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
Net sales $173,059 $192,451 $202,401 $216,308
Gross profit 25,087 26,927 28,505 30,293
Operating profit 3,130 5,258 5,239 4,958
Earnings before income taxes 2,829 5,192 5,216 4,897
Net earnings 1,712 3,139 3,159 2,979
Basic net earnings per common share 0.17 0.27 0.27 0.26
Diluted net earnings per common share $ 0.16 $ 0.26 $ 0.26 $ 0.25
Item 8. Financial Statements and Supplementary Data.
Page of Form 10-K
Financial Statements:
Report of Independent Auditors............. F-1
Consolidated Balance Sheets................ F-2
Consolidated Statements of Earnings........ F-3
Consolidated Statements of Shareholders'
Equity.................................. F-4
Consolidated Statements of Cash Flows...... F-5
Notes to Consolidated Financial Statements. F-6
Financial Statement Schedules:
Independent Auditors' Report on Financial Statement
Schedule............................... S-1
Schedule II - Valuation and Qualifying
Accounts............................... S-2
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Proxy Statement issued in connection with the Shareholders'
meeting to be held on April 29, 1998 contains under the caption "Proposal
1: Election of Directors" information required by Item 10 of Form 10-K
and is incorporated herein by reference. Pursuant to General Instruction
G(3), certain information concerning executive officers of the Company is
included in Part I of this Form 10-K, under the caption "Executive
Officers."
Item 11. Executive Compensation.
The Proxy Statement issued in connection with the Shareholders'
meeting to be held on April 29, 1998 contains under the caption "Executive
Compensation" information required by Item 11 of Form 10-K and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The Proxy Statement issued in connection with the Shareholders'
meeting to be held on April 29, 1998 contains under the captions "Security
Ownership of Certain Beneficial Owners" and "Proposal 1: Election of
Directors" information required by Item 12 of Form 10-K and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The Proxy Statement issued in connection with the Shareholders'
meeting to be held on April 29, 1998 contains under the caption "Certain
Transactions" information required by Item 13 of Form 10-K and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a). 1. Financial Statements. See index to Consolidated Financial
Statements on page 22 of this Form 10-K.
2. Financial Statement Schedules. See of page 22 this Form
10-K.
3. Exhibits:
A. Incorporated by reference to the Company's Registration
Statement on Form S-1 (No. 33-64930):
Exhibit
Number Description
3.1 -- Restated Charter of Registrant.
3.2 -- Restated Bylaws of Registrant.
4.1 -- Specimen Common Stock certificate.
4.2 -- Article 5 of the Registrant's Restated Charter (included in
Exhibit 3.1).
4.3 -- Article 6 of the Registrant's Restated Bylaws (included in
Exhibit 3.2).
10.1 -- Loan Agreement dated May 17, 1984 by and between the
Industrial Development Board of Wilson County, Tennessee
and Kenneth O. Lester Company, Inc.
10.2 -- Promissory Note executed May 17, 1984 in favor of the
Industrial Development Board of Wilson County, Tennessee.
10.3 -- Industrial Development Revenue Bond Series A due 1999.
10.4 -- Assignment from the Industrial Development Board of
Wilson County to Wachovia Bank and Trust Company, N.A.
dated May 17, 1984.
10.5 -- Guaranty Agreement dated May 17, 1984 from Kenneth O.
Lester Company, Inc. to Wachovia Bank and Trust Company, N.A.
10.6 -- Loan Agreement dated July 7, 1988, as amended by various
amendments thereto, by and between the Pocahontas Food
Group, Inc. Employee Savings and Stock Ownership Trust,
Sovran Bank/Central South, Trustee, Pocahontas Food
Group, Inc., and Third National Bank, Nashville, Tennessee.
10.7 -- Guaranty Agreement dated July 7, 1988 by and between
Pocahontas Food Group, Inc. and Third National Bank,
Nashville, Tennessee.
10.8 -- Loan Agreement dated March 1, 1993, by and between
Loubat-L.Frank, Inc. and Performance Food Group
Company.
10.9 -- Promissory Note dated March 1, 1992 in favor of
Performance Food Group Company.
10.10 -- Lease Agreement by and between the Kenneth O. Lester
Company and K&F Development Company dated July 1,
1988, with an amendment thereto.
10.11 -- Commercial Lease Agreement between Alexander &
Baldwin, Inc. and KMB Produce, Inc., a division of Caro
Produce & Institutional Foods, Inc., dated November 20,
1991, as amended by Lease Amendment No. 1 thereto.
10.12 -- Lease Agreement by and between the Martin-Brower
Company and KMB Produce, Inc. dated August 18, 1987.
10.13 -- 1989 Non-Qualified Stock Option Plan.
10.14 -- 1993 Employee Stock Incentive Plan.
10.15 -- 1993 Outside Directors' Stock Option Plan.
10.16 -- Performance Food Group Employee Savings and Stock
Ownership Plan.
10.17 -- Trust Agreement for Performance Food Group Employee
Savings and Stock Ownership Plan.
10.18 -- Form of Pocahontas Food Group, Inc. Executive Deferred
Compensation Plan.
10.19 -- Form of Indemnification Agreement.
10.20 -- Pledge Agreement dated March 31, 1993 by and between
Hunter C. Sledd, Jr. and Pocahontas Foods, USA, Inc.
B. Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended January 1, 1994:
Exhibit
Number Description
10.21 -- First Amendment to the Trust Agreement for Pocahontas
Food Group, Inc. Employee Savings and Stock Ownership
Plan.
10.22 -- Performance Food Group Employee Stock Purchase Plan.
C. Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended April 2, 1994:
Exhibit
Number Description
10.23 -- Lease Agreement by and between C. O. Hurt and Hale
Brothers/Summit, Inc. dated January 27, 1994.
10.24 -- Amendment to Loan Agreement dated March 4, 1994 by and
among Performance Food Group Company Employee
Savings and Stock Ownership Plan, First Tennessee Bank,
N.A., Performance Food Group Company and Third
National Bank, Nashville, Tennessee.
10.25 -- Corporate Guaranty dated March 16, 1994 by Performance
Food Group Company in favor of Third National Bank,
Nashville, Tennessee, for the account of Employers Self
Insurers Fund.
D. Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 1, 1994:
Exhibit
Number Description
10.26 -- Amended and Restated Lease Agreement by and between
Pocahontas Foods USA, Inc. and Taylor & Sledd, Inc. dated
August 1, 1994.
10.27 -- Purchase Agreement by and between Performance Food
Group Company and the Shareholder of Milton's Institutional
Foods, Inc. dated November 3, 1994.
E. Incorporated by Reference to the Company's Report on Form 8-K
dated January 3, 1995:
Exhibit
Number Description
10.28 -- Second Amendment to Loan Agreement dated January 3,
1995 between Performance Food Group Company,
Employee Savings and Stock Ownership Trust, First
Tennessee Bank, N.A. as trustee, Performance Food Group
Company and Third National Bank, Nashville, Tennessee.
F. Incorporated by Reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended July 1, 1995:
Exhibit
Number Description
10.29 -- Employment agreement dated May 17, 1995 by and between
Performance Food Group Company and Jerry J. Caro.
G. Incorporated by Reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 28, 1996:
Exhibit
Number Description
10.30 -- Revolving Credit Agreement dated July 8, 1996 by and
between Performance Food Group Company and First Union National
Bank of Virginia.
H. Incorporated by Reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 28, 1996.
Exhibit
Number Description
10.31 -- Performance Food Group Company Employee Savings and
Stock Ownership Plan Savings Trust.
I. Incorporated by Reference to the Company's Report on Form 8-K
dated January 13, 1997 (as amended by a Form
8-K/A dated March 13, 1997):
Exhibit
Number Description
10.32 -- Asset Purchase Agreement, dated October 22, 1996
by and among Performance Food Group Company,
McLane Foodservice - Temple, Inc. and McLane Company,
Inc. and an amendment thereto.
J. Incorporated by Reference to the Company's Report on Form 8-K
dated May 20, 1997:
Exhibit
Number Description
10.33 -- Rights Agreement dated as of May 16, 1997 between
Performance Food Group Company and First Union
National Bank of North Carolina, as Rights Agent.
K. Incorporated by Reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 27, 1997:
Exhibit
Number Description
10.34 -- Amendment No. 1 to Revolving Credit Agreement dated as
of August 28, 1997 by and among Performance
Food Group Company and First Union National Bank.
10.35 -- Participation Agreement dated as of August 29, 1997 among
Performance Food Group Company, First
Security Bank, National Association and First Union
National Bank (as agent for the Lenders and Holders).
10.36 -- Lease Agreement dated as of August 29, 1997 between First
Security Bank, National Association and
Performance Food Group Company.
L. Filed herewith:
Exhibit
Number Description
10.37 -- Second Amendment to Revolving Credit Agreement dated
December 15, 1997 by and among Performance
Food Group Company and First Union National Bank.
Exhibit
Number Description
10.38 -- Form of Change in Control Agreement dated October 29, 1997
with Blake P. Auchmoody, John Austin, Roger L. Boeve,
John R. Crown, Charles M. Gray, Thomas Hoffman, Mark
Johnson, Ken Peters, Robert C. Sledd and David W. Sober.
10.39 -- Form of Change in Control Agreement dated October 29, 1997
with certain key executives.
21 -- List of Subsidiaries.
23.1 -- Consent of Independent Auditors.
27 -- Financial Data Schedule (SEC purposes only).
(b) During the fourth quarter ended December 27, 1997, the
Company filed no reports on Form 8-K.
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, in the
City of Richmond, State of Virginia, on March 24, 1998.
PERFORMANCE FOOD GROUP COMPANY
By: /s/ Robert C. Sledd
Robert C. Sledd, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/Robert C. Sledd Chairman, Chief Executive Officer March 24, 1998
Robert C. Sledd and Director [Principal Executive
Officer
/s/ C. Michael Gray President, Chief Operating Officer March 24, 1998
C. Michael Gray and Director
/s/ Roger L. Boeve Executive Vice President and Chief March 24, 1998
Roger L. Boeve Financial Officer [Principal
Financial Officer and Principal
Accounting Officer]
/s/ David W. Sober Vice President and Secretary March 24, 1998
David W. Sober
/s/ Charles E. Adair Director March 24, 1998
Charles E. Adair
/s/ Jerry J. Caro Director March 24, 1998
Jerry J. Caro
/s/ Fred C. Goad, Jr. Director March 24, 1998
Fred C. Goad, Jr.
/s/ Timothy M. Graven Director March 24, 1998
Timothy M. Graven
Report of Independent Auditors
The Board of Directors
Performance Food Group Company:
We have audited the accompanying consolidated balance sheets of
Performance Food Group Company and subsidiaries as of December 27,
1997 and December 28, 1996, and the related consolidated statements of
earnings, shareholders' equity and cash flows for each of the fiscal years in
the three-year period ended December 27, 1997. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We 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 include assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Performance
Food Group Company and subsidiaries as of December 27, 1997 and
December 28, 1996, and the results of their operations and their cash flows
for each of the fiscal years in the three-year period ended December 27,
1997, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Richmond, Virginia
February 9, 1998
F-1
CONSOLIDATED BALANCE SHEETS
December 27, December 28,
(Dollar amounts in thousands, except per share amounts) 1997 1996
ASSETS
Current assets:
Cash $ 3,653 $ 5,557
Trade accounts and notes receivable, less
allowance for doubtful accounts of $2,680
and $2,300 80,054 55,689
Inventories 72,951 48,005
Prepaid expenses and other current assets 2,548 1,405
Deferred income taxes 388 2,771
Total current assets 159,594 113,427
Property, plant and equipment, net 71,810 55,697
Goodwill, net of accumulated amortization of
$1,866 and $1,089 52,189 11,760
Other intangible assets, net of accumulated
amortization of $1,068 and $928 3,508 991
Other assets 1,782 1,022
Total assets $ 288,883 $ 182,897
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Outstanding checks in excess of deposits $ 19,859 $ 12,895
Current installments of long-term debt 689 650
Trade accounts payable 67,455 44,494
Accrued expenses 16,896 10,984
Income taxes payable 1,911 1,437
Total current liabilities 106,810 70,460
Long-term debt, excluding current installments 44,577 7,225
Deferred income taxes 3,523 4,077
Total liabilities 154,910 81,762
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized;no shares issued,
preferences to be defined when issued - -
Common stock, $.01 par value; 50,000,000 shares
authorized;12,483,110 shares and 11,663,015
shares issued and outstanding 125 117
Additional paid-in capital 87,198 68,083
Retained earnings 50,017 36,770
137,340 104,970
Loan to leveraged employee stock ownership plan (3,367) (3,835)
Total shareholders' equity 133,973 101,135
Commitments and contingencies (notes 4, 7, 8, 10,
11, 12 and 14)
Total liabilities and shareholders' equity $ 288,883 $ 182,897
See accompanying notes to consolidated financial statements.
F-2
CONSOLIDATED STATEMENTS OF EARNINGS
Fiscal Year Ended
December 27, December 28, December 30,
(Dollar amounts in thousands, except per
share amounts) 1997 1996 1995
Net sales $ 1,230,078 $ 784,219 $ 664,123
Cost of goods sold 1,074,154 673,407 568,097
Gross profit 155,924 110,812 96,026
Operating expenses 132,494 92,227 80,302
Operating profit 23,430 18,585 15,724
Other income (expense):
Interest expense (1,991) (627) (2,727)
Other, net 105 176 14
Other expense, net (1,886) (451) (2,713)
Earnings before income taxes 21,544 18,134 13,011
Income tax expense 8,297 7,145 5,088
Net earnings $ 13,247 $ 10,989 $ 7,923
Weighted average common shares
outstanding 11,960 11,209 9,190
Basic net earnings per common share $ 1.11 $ 0.98 $ 0.86
Weighted average common shares and
potential dilutive common shares
outstanding 12,491 11,686 9,631
Diluted net earnings per common share $ 1.06 $ 0.94 $ 0.82
See accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Loan to Total
Common stock Additional Retained leveraged shareholders'
(Dollar amounts in thousands) Shares Amount paid-in capital earnings ESOP equity
Balance at December 31, 1994 9,130,593 $ 91 $ 32,626 $ 18,163 $ (4,617) $ 46,263
Employee stock option,
incentive and purchase plans
and related income tax
benefit 190,278 2 1,572 - - 1,574
Retirement of common stock
received from exercise of
employee stock options (20,865) - (26) (305) - (331)
Principal payments on loan to
leveraged ESOP - - - - 362 362
Net earnings - - - 7,923 - 7,923
Balance at December 30, 1995 9,300,006 93 34,172 25,781 (4,255) 55,791
Proceeds from offering of
common stock 2,255,455 23 33,306 - - 33,329
Employee stock option,
incentive and purchase plans
and related income tax
benefits 107,691 1 607 - - 608
Principal payments on loan to
leveraged ESOP - - - - 420 420
Payment for fractional shares
resulting from 3-for-2 stock
split (137) - (2) - - (2)
Net earnings - - - 10,989 - 10,989
Balance at December 28, 1996 11,663,015 117 68,083 36,770 (3,835) 101,135
Issuance of shares for
acquisitions 660,827 6 16,509 - - 16,515
Employee stock option,
incentive and purchase plans
and related income tax
benefits 159,268 2 2,606 - - 2,608
Principal payments on loan
to leveraged ESOP - - - - 468 468
Net earnings - - - 13,247 - 13,247
Balance at December 27,1997 12,483,110 $ 125 $ 87,198 $ 50,017 $ (3,367) $ 133,973
See accompanying notes to consolidate financial statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
December 27, December 28, December 30,
(Dollar amounts in thousands) 1997 1996 1995
Cash flows from operating activities:
Net earnings $ 13,247 $ 10,989 $ 7,923
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 7,843 5,484 5,319
ESOP contributions applied to principal
of ESOP debt 468 420 362
Gain on disposal of property, plant and
equipment (58) (53) (97)
Deferred income taxes 1,241 53 (276)
Gain on insurance settlement (1,300) - -
Loss on write-off of leasehold improvements 1,287 - -
Changes in operating assets and liabilities,
net of effects of companies acquired:
Increase in trade accounts and notes
receivable (3,347) (11,425) (6,165)
Increase in inventories (6,904) (10,161) (6,363)
(Increase) decrease in prepaid expenses
and other current assets (799) (74) 546
Increase in trade accounts payable 11,196 12,551 3,920
Increase in accrued expenses 933 898 2,089
Increase in income taxes payable 432 1,239 76
Total adjustments 10,992 (1,068) (589)
Net cash provided by operating
activities 24,239 9,921 7,334
Cash flows from investing activities, net
of effects of companies acquired:
Purchases of property, plant and equipment (8,284) (9,074) (13,921)
Proceeds from sale of property, plant and
equipment 160 196 463
Net cash paid for acquisitions (54,631) - (22,542)
Net proceeds from insurance settlement 4,200 - -
Increase in intangibles and other assets (635) (416) -
Net cash used by investing activities (59,190) (9,294) (36,000)
Cash flows from financing activities:
Increase (decrease) in outstanding checks
in excess of deposits 3,929 (896) 5,263
Net proceeds from (payments on) revolving
credit facility 27,183 (1,622) 2,798
Proceeds from issuance of long-term debt - - 22,715
Principal payments on long-term debt (673) (30,722) (756)
Net proceeds from stock offering - 33,329 -
Employee stock option, incentive and purchase
plans and related income tax benefit 2,608 606 1,243
Net cash provided by financing activities 33,047 695 31,263
Net increase (decrease) in cash (1,904) 1,322 2,597
Cash at beginning of year 5,557 4,235 1,638
Cash at end of year $ 3,653 $ 5,557 $ 4,235
See accompanying notes to consolidated financial statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________________________________________________________
December 27, 1997 and December 28, 1996
1. Description of Business
Performance Food Group Company and subsidiaries (the
"Company") is engaged in the marketing, processing and sale of
food and food-related products to the foodservice, or "away-from-
home eating," industry. The foodservice industry consists of two
major customer types: "traditional" foodservice customers
consisting of independent restaurants, hotels, cafeterias, schools,
healthcare facilities and other institutions; and "multi-unit chain"
customers consisting of regional and national quick-service
restaurants and casual dining restaurants. Products and services
provided to the Company's traditional and multi-unit chain
customers are supported by identical physical facilities, vehicles,
equipment, systems and personnel. Most of the Company's
customers are located in the Southern, Southwestern, Midwestern
and Northeastern United States.
The Company operates through the following subsidiaries and
division: Pocahontas Foods, USA, Inc.; Caro Foods, Inc. and
subsidiaries ("Caro"); Kenneth O. Lester Company, Inc. ("KOL");
Hale Brothers/Summit, Inc.; Milton's Foodservice, Inc.
("Milton's"); Performance Food Group of Texas, LP ("PFG of
Texas"); W.J. Powell Company, Inc. ("Powell"); AFI Food Service
Distributors, Inc. ("AFI"); and the B&R Foods division.
The Company uses a 52/53 week fiscal year ending on the Saturday
closest to December 31. The fiscal years ended December 27,
1997, December 28, 1996 and December 30, 1995 (all 52 week
years) are referred to herein as 1997, 1996 and 1995, respectively.
2. Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of
Performance Food Group Company and its wholly-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated.
(b) Revenue Recognition and Receivables
Sales are recognized upon the shipment of goods to the customer.
Trade accounts and notes receivable represent receivables from
customers in the ordinary course of business. Such amounts are
recorded net of the allowance for doubtful accounts in the
accompanying consolidated balance sheets. The provision for
doubtful accounts recorded by the Company was approximately
$331,000, $1,150,000 and $1,762,000 in 1997, 1996 and 1995,
respectively.
(c) Inventories
The Company values inventory at the lower of cost or market using
both the first-in, first-out (FIFO) and last-in, first-out (LIFO)
methods. Approximately 8% of the Company's inventories are
accounted for using the LIFO method. Inventories consist primarily
of food and food-related products.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of
property, plant and equipment is calculated primarily using the
straight-line method over the estimated useful lives of the assets.
F-6
When assets are retired or otherwise disposed of, the costs and
related accumulated depreciation are removed from the accounts.
The difference between the net book value of the asset and proceeds
from disposition is recognized as a gain or loss. Routine
maintenance and repairs are charged to expense as incurred, while
costs of betterments and renewals are capitalized.
(e) Income Taxes
The Company accounts for income taxes under Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes, which requires the use of the asset and liability
method of accounting for deferred income taxes. Deferred tax assets
and liabilities are recognized for the expected future tax
consequences of temporary differences between the tax basis of
assets and liabilities and their reported amounts. Future tax
benefits, including net operating loss carryforwards, are recognized
to the extent that realization of such benefits is more likely than not.
(f) Intangible Assets
Intangible assets consist primarily of the excess of the purchase
price over the fair value of tangible net assets acquired (goodwill)
related to purchase business combinations, costs allocated to
customer lists, non-competition agreements and deferred loan costs.
These intangible assets are being amortized on a straight-line basis
over their estimated useful lives, which range from 5 to 40 years.
Amortization expense on these assets is combined with depreciation
expense in these consolidated financial statements.
(g) Net Earnings Per Common Share
During 1997, the Financial Accounting Standards Board issued
SFAS No. 128, Earnings Per Share, which requires the
presentation of both basic and diluted earnings per share. Basic
earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings
per share is calculated using the weighted average common shares
and potential dilutive common shares, calculated using the treasury
stock method, outstanding during the period. Potential dilutive
common shares consist of options issued under various stock plans
described in note 12, which represent dilutive shares in accordance
with SFAS No. 128.
(h) Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, Accounting for Stock-Based Compensation. This
new accounting standard encourages, but does not require,
companies to record compensation costs for stock-based
compensation plans using a fair-value based method of accounting
for employee stock options and similar equity instruments. The
Company has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at
the date of grant over the amount an employee must pay to acquire
the stock (see note 12).
(i) Accounting Estimates
The preparation of the consolidated financial statements, in
conformity with generally accepted accounting principles, requires
management to make estimates that affect the reported amounts of
assets, liabilities, sales and expenses. Actual results could differ
from those estimates.
F-7
(j) Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, requires the disclosure of fair value information
regarding financial instruments whether or not recognized on the
balance sheet, for which it is practical to estimate that value. At
December 27, 1997 and December 28, 1996, the carrying value of
cash, trade accounts and notes receivable, outstanding checks in
excess of deposits, trade accounts payable and accrued expenses
approximate their fair value due to the relatively short maturity of
those instruments. The carrying value of the Company's long-term
debt approximates fair value due to the variable nature of the
interest rate charged on such borrowings.
(k) Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, in 1996. This accounting standard
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the asset exceeds the fair value of the asset. Adoption of SFAS
No. 121 did not have a material impact on the Company's financial
position, results of operations or liquidity.
(l) Reclassifications
Certain amounts in the 1996 and 1995 consolidated financial
statements have been reclassified to conform with the 1997
presentation.
3. Concentration of Sales and Credit Risk
Two of the Company's customers, Cracker Barrel Old Country
Stores, Inc. ("Cracker Barrel") and Outback Steakhouse, Inc.
("Outback"), account for a significant portion of the Company's
consolidated net sales. Net sales to Cracker Barrel accounted for
22%, 30% and 29% of consolidated net sales for 1997, 1996 and
1995, respectively. Net sales to Outback accounted for 16%, 19%
and 15% of consolidated net sales for 1997, 1996 and 1995,
respectively. At December 27, 1997, amounts receivable from
these two customers represented 16% of total trade receivables.
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. As discussed above, a significant portion of the
Company's sales and related receivables are generated from two
customers. The remainder of the Company's customer base includes
a large number of individual restaurants, national and regional chain
restaurants and franchises, and other institutional customers. The
credit risk associated with trade receivables is minimized by the
Company's large customer base and ongoing control procedures
which monitor customers' credit worthiness.
4. Business Combinations
On December 30, 1996, the Company acquired certain net assets of
McLane Foodservice-Temple, Inc. ("McLane Foodservice"), which
was a wholly-owned subsidiary of McLane Company, Inc., based in
Temple, Texas. McLane Foodservice had 1996 net sales of
approximately $180 million. The Company operates the former
business of McLane Foodservice as PFG of Texas through
distribution centers in Temple and Victoria, Texas that provide food
and food-related products to traditional foodservice customers as
well as multi-unit chain restaurants and vending customers. The
purchase price of approximately $30.5 million was financed with
proceeds from an existing credit
F-8
facility. Simultaneous with the closing, the Company also
purchased the distribution center located in Victoria, Texas from an
independent third party for approximately $1.5 million.
During 1997, the Company completed the acquisitions of a number
of foodservice distributors, including the acquisition of Tenneva
Foodservice, Inc. ("Tenneva") on April 11, 1997, Central Florida
Finer Foods, Inc. ("CFFF") on May 12, 1997, Powell on June 28,
1997 and AFI on October 31, 1997. The operations of Tenneva and
CFFF have been combined with the operations of certain of the
Company's existing subsidiaries. Collectively, these companies
had 1996 net sales of approximately $130 million. The aggregate
purchase price of the acquisitions was approximately $39 million,
plus the assumption of approximately $12 million of debt. The
aggregate purchase price for the acquisitions was financed by
issuing 660,827 shares of the Company's commons stock, $7 million
of promissory notes due January 2, 1998 and the remainder with
proceeds from the Credit Facility. The aggregate consideration
payable to the former shareholders of Powell and AFI is subject to
increase in certain circumstances.
These acquisitions have been accounted for using the purchase
method and, accordingly, the acquired assets and liabilities have
been recorded at their estimated fair values at the date of
acquisition. The excess of the purchase price over the fair value of
tangible net assets acquired was approximately $44.2 million and is
being amortized on a straight-line basis over estimated lives ranging
from 5 to 40 years.
The consolidated statements of earnings and cash flows reflect the
results of these acquired companies from the date of acquisition
through December 27, 1997. The unaudited consolidated results of
operations on a pro forma basis as though these acquisitions had
been consumated as of the beginning of 1996 are as follows (in
thousands, except per share amounts):
1997 1996
Net sales $ 1,314,211 $ 1,074,914
Gross profit 171,176 155,339
Net earnings 13,172 11,721
Basic net earnings per common
share 1.06 0.99
Diluted net earnings per common
share $ 1.02 $ 0.95
The pro forma results are presented for information only and are not
necessarily indicative of the operating results that would have
occurred had the these acquisitions been consummated as of the
above date.
5. Property, Plant and Equipment
Property, plant and equipment as of December 27, 1997 and
December 28, 1996 consist of the following (in thousands):
1997 1996
Land $ 3,638 $ 3,136
Buildings and building improvements 53,815 41,833
Transportation equipment 14,408 9,911
Warehouse and plant equipment 22,690 20,398
Office equipment, furniture and fixtures 10,957 8,000
Leasehold improvements 1,089 3,095
Construction-in-process 1,770 2,160
108,367 88,533
Less accumulated depreciation and
amortization 36,557 32,836
Property, plant and equipment, net $ 71,810 $55,697
F-9
6. Supplemental Cash Flow Information (in thousands)
1997 1996 1995
Cash paid during the year for:
Interest $ 1,816 $ 816 $ 2,540
Income taxes $ 6,583 $ 5,853 $ 5,011
Effects of companies acquired:
Fair value of assets acquired $101,536 $ - $ 32,544
Fair value of liabilities assumed (30,390) - (10,002)
Stock issued for acquisitions (16,515) - -
Net cash paid for acquisitions $ 54,631 $ - $ 22,542
Non-cash financing activities:
Retirement of common stock in
connection with exercise of
employee stock options $ - $ - $ 331
7. Long-term Debt
Long-term debt as of December 27, 1997 and December 28, 1996
consists of the following (in thousands):
1997 1996
Revolving credit facility $ 34,284 $ 3,621
Promissory notes payable 7,278 -
ESOP loan 3,367 3,835
Other notes payable 337 419
45,266 7,875
Less current maturities 689 650
Long-term debt, excluding current installments $ 44,577 $ 7,225
Revolving Credit Facility
The Company has a $50.0 million revolving credit facility (the "Credit
Facility") with a commercial bank which expires in February 2001.
The Credit Facility supports up to $5.0 million letters of credit. At
December 27, 1997, the Company was contingently liable for
outstanding letters of credit of $4.1 million, which reduced amounts
available under the Credit Facility. The Credit Facility bears interest at
LIBOR plus a spread over LIBOR, which varies based on the ratio of
funded debt to total capital. At December 27, 1997, the interest rate on
the Credit Facility was 6.14%. The weighted average interest rate for
1997 was 5.71%. The Credit Facility requires the maintenance of
certain financial ratios, as defined, regarding debt to tangible net worth,
cash flow coverage and current assets to current liabilities. Subsequent
to year end, the Company amended the Credit Facility to increase
amounts available under the facility to $60.0 million.
Promissory Notes Payable
On October 31, 1997, the Company issued promissory notes to former
shareholders of AFI in connection with that purchase business
combination (see note 4), which are payable on January 2, 1998. The
notes bear interest at the same rate as the Company's Credit Facility.
The promissory notes are secured by $7.3 million of letters of credit
obtained from a commercial bank. Subsequent to year end, the
promissory notes were paid with proceeds from the Credit Facility and,
accordingly, are classified as non-current.
F-10
ESOP Loan
The Company sponsors a leveraged employee stock ownership plan that
was financed with proceeds of a note payable to a commercial bank (the
"ESOP loan"). The ESOP loan is secured by the common stock of the
Company acquired by the employee stock ownership plan and is
guaranteed by the Company. The loan is payable in quarterly
installments of $170,000 which includes interest based on LIBOR plus
a spread over LIBOR (5.74% at December 27, 1997). The loan
matures in 2003.
Maturities of long-term debt are as follows (in thousands):
1998 $ 689
1999 7,894
2000 578
2001 34,898
2002 637
Thereafter 570
Total maturities of long-term debt $ 45,266
8. Shareholders' Equity
In March 1996, the Company completed an offering of 2,916,824 shares
of common stock, of which the Company sold 2,255,455 shares with the
remaining shares sold by selling shareholders. Net proceeds of the
offering were approximately $33.3 million, which were used to repay a
$30.0 million long term loan and approximately $3.3 million
outstanding under a revolving credit facility.
In June 1996, the Company's Board of Directors declared a three-for-
two stock split effected in the form of a 50% stock dividend paid on
July 15, 1996 to shareholders of record on July 1, 1996. The split
resulted in the issuance of 3,874,807 shares of common stock. All
references in these consolidated financial statements to shares, share
prices, net earnings per share and stock plans have been restated to
reflect the split.
In May 1997, the Company's Board of Directors declared a dividend of
one Stock Purchase Right (a "Right") per share of the Company's
common stock outstanding on May 30, 1997. A Right will also
accompany each share of common stock issued subsequent to that date.
Each Right, when it first becomes exercisable, entitles the holder to
purchase from the Company one-hundredth of one share of Preferred
Stock, at an initial exercise price of $100 per one-hundredth of one
share.
9. Leases
The Company leases various warehouse and office facilities and certain
equipment under long-term operating lease agreements that expire at
various dates. At December 27, 1997, the Company is obligated under
operating lease agreements to make future minimum lease payments as
follows (in thousands):
1998 $ 8,102
1999 7,796
2000 6,775
2001 5,275
2002 4,479
Thereafter 25,821
Total minimum lease payments $ 58,248
F-11
Total rental expenses for operating leases in 1997, 1996 and 1995 was
approximately $9,075,000, $7,900,000 and $6,177,000, respectively.
On September 12, 1997, the Company completed a $42.0 million master
operating lease agreement to construct new distribution centers planned
to become operational in 1998. Under this agreement, the lessor owns
the distribution centers, incurs the related debt to construct the facilities
and thereafter leases each facility to the Company. The Company has
entered into a commitment to lease each facility for a period beginning
upon completion of each property and ending on September 12, 2002,
including extensions. Upon the expiration of each lease, the Company
has the option to renegotiate the lease, sell the facility to a third party or
purchase the facility at its original cost. If the Company does not
exercise its purchase options, the Company has significant residual
value guarantees of each property. The Company expects the fair value
of the properties included in this agreement to eliminate or substantially
reduce the Company's exposure under the residual value guarantee. At
December 27, 1997, construction has commenced on one facility with
expenditures to date of approximately $1.1 million, which costs have
been borne by the lessor. Total expenditures for this facility are
anticipated to be approximately $13 million.
10. Income Taxes
Income tax expense (benefit) consists of the following (in thousands):
1997 1996 1995
Current:
Federal $ 6,800 $ 6,530 $ 4,874
State 256 562 490
7,056 7,092 5,364
Deferred:
Federal 1,174 41 (235)
State 67 12 (41)
1,241 53 (276)
Total income tax expense $ 8,297 $ 7,145 $ 5,088
The effective income tax rates for 1997, 1996 and 1995 were 38.5%,
39.4% and 39.1%, respectively. Actual income tax expense differs
from the amount computed by applying the applicable U.S. Federal
corporate income tax rate to earnings before income taxes as follows (in
thousands):
1997 1996 1995
Federal income taxes computed at statutory rate $ 7,441 $ 6,247 $ 4,454
Increase in income taxes resulting from:
State income taxes, net of Federal income tax
benefit 210 372 292
Non-deductible expenses 135 107 88
Amortization of goodwill 164 139 194
Other, net 347 280 60
Total income tax expense $ 8,297 $ 7,145 $ 5,088
F-12
Deferred taxes are recorded based upon the tax effects of differences
between the financial statement and tax basis of assets and liabilities
and available tax loss carryforwards. Temporary differences and
carryforwards which give rise to a significant portion of deferred tax
assets and liabilities at December 27, 1997 and December 28, 1996 are
as follows (in thousands):
1997 1996
Deferred tax assets:
Allowance for doubtful accounts $ 945 $ 906
Inventories, principally due to costs
capitalized for tax purposes in excess
of those capitalized for financial
statement purposes 814 588
Reserves for incurred but not reported
self-insurance claims 1,114 1,343
State operating loss carryforwards 551 924
Other 372 120
Total gross deferred tax assets 3,796 3,881
Less valuation allowance (258) (627)
Net deferred tax assets 3,538 3,254
Deferred tax liabilities:
Property, plant and equipment (3,513) (4,337)
Inventories, due to basis differences
resulting from acquisitions (1,111) -
Deferred gain (1,599) -
Other (450) (223)
Total gross deferred tax liabilities (6,673) (4,560)
Net deferred tax liability $ (3,135) $ (1,306)
The net deferred tax liability is presented in the December 27,
1997 and December 28, 1996 consolidated balance sheets as follows
(in thousands):
1997 1996
Current deferred tax asset $ 388 $ 2,771
Noncurrent deferred tax Liability (3,523) (4,077)
Net deferred tax liability $ (3,135) $ (1,306)
The net change in the valuation allowance was a decrease of
$369,000 and $131,000 in 1997 and 1996, respectively, and an
increase of $84,000 in 1995. The valuation allowance primarily
relates to state net operating loss carryforwards of certain of the
Company's subsidiaries. The Company believes the deferred tax
assets, net of the valuation allowance, will more likely than not be
realized.
F-13
11. Employee Benefits
(a) Employee Savings and Stock Ownership Plan
The Company sponsors the Performance Food Group Company
Employee Savings and Stock Ownership Plan (the "ESOP"). The
ESOP consists of two components: a leveraged employee stock
ownership plan and a defined contribution plan covering
substantially all full-time employees.
In 1988, the ESOP acquired 1,821,398 shares of the Company's
common stock from existing shareholders, which were financed
with assets transferred from predecessor plans and the proceeds of
the ESOP loan. The Company is required to make contributions to
the ESOP equal to the principal and interest amounts due on the
ESOP loan. Accordingly, the outstanding balance of the ESOP loan
is included in the Company's consolidated balance sheets as a
liability with an offsetting amount included as a reduction of
shareholders' equity.
The ESOP expense recognized by the Company is equal to the
principal portion of the required payments. Interest on the ESOP
loan is recorded as interest expense. The Company contributed
approximately $680,000 in each of 1997, 1996 and 1995 to the
ESOP. These amounts include interest expense on the ESOP loan of
approximately $212,000, $260,000 and $318,000 in 1997, 1996 and
1995, respectively. At December 31, 1997, 902,249 shares had
been allocated to participant accounts and 541,284 shares were held
as collateral for the ESOP loan.
Employees participating in the defined contribution component of
the ESOP may elect to contribute from 1% to 10% of their qualified
salary under the provisions of Internal Revenue Code Section
401(k). Beginning in 1997, the Company matched one half of the
first 3% of employee deferrals under the plan. Total matching
contributions in 1997 were $549,000. The Company, at the
discretion of its board of directors, may make additional
contributions to the ESOP. The Company made no discretionary
contributions under the defined contribution portion of the ESOP in
1997, 1996 or 1995.
The Company has also adopted a deferred compensation plan
covering certain employee-shareholders who are not eligible to
participate in the ESOP. The cost of this plan was approximately
$28,000, $37,000 and $38,000 in 1997, 1996 and 1995,
respectively.
(b) Employee Health Benefit Plans
The Performance Food Group Company Health Care Plan is a self-
insured, comprehensive health benefit plan designed to provide
insurance coverage to all full-time employees and their dependents.
The Company provides an accrual for its estimated liability for
these self-insured benefits, including an estimate for incurred but not
reported claims. This accrual is included in accrued expenses in the
consolidated balance sheets. The Company provides no post-
retirement benefits to former employees.
12. Stock Plans
The Company sponsors a number of stock-based compensation
plans which are described below. As discussed in note 2 to the
consolidated financial statements, the Company applies APB
Opinion No. 25 in accounting for these plans. Accordingly, no
compensation cost has been recognized for its stock option plans
and its stock purchase plan. The per share weighted-average fair
value of stock options granted in 1997, 1996 and 1995 was $ 10.58,
$11.38 and $9.79, respectively, on the date of grant using the Black-
Scholes option pricing model with the following assumptions: 1997
- - expected dividend yield of 0%, risk free interest rate of 6.14%,
volatility 46.5% and
an expected life of 7.6 years; 1996 - expected dividend yield of 0%,
risk free interest rate of 5.46%, volatility of 47.5% and an expected
life of 6.1 years; 1995 - expected dividend yield of 0%, risk free
interest rate of 7.45%,
F-14
volatility of 58.4% and an expected life of 6.6 years. Had the
Company recognized compensation cost in accordance with the
provisions of SFAS No. 123, the Company's pro forma net earnings
and net earnings per share for 1997, 1996 and 1995 would have
been as follows (in thousands, except per share amounts):
1997 1996 1995
Net earnings as reported $ 13,247 $ 10,989 $ 7,923
Net earnings pro forma 12,377 10,383 7,759
Basic net earnings per common share as
reported $ 1.11 $ 0.98 $ 0.86
Basic net earnings per common share pro
forma 1.03 0.93 0.84
Diluted net earnings per common share as
reported $ 1.06 $ 0.94 $ 0.82
Diluted net earnings per common share pro
forma 0.99 0.89 0.81
Pro forma net earnings only reflects options granted in 1997, 1996
and 1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the
amounts above since compensation cost is recognized over the
options' vesting period. Compensation costs for options granted
prior to 1995 have not been considered in accordance with SFAS
No. 123.
(a) Stock Option and Incentive Plans
The Company sponsors the 1989 Nonqualified Stock Option Plan
(the "1989 Plan"). The options vest ratably per year over a four
year period from date of grant. At December 27, 1997, 480,641
options were outstanding, all of which were exercisable. No grants
have been made under the 1989 Plan after July 21, 1993.
The Company sponsors the 1993 Outside Directors Stock Option
Plan (the "Directors Plan"). A total of 105,000 shares have been
authorized in the Directors Plan. The Directors Plan provides for
an initial option grant to each director of the Company who is not
also an employee of the Company to purchase 5,250 shares and an
annual option grant to purchase 2,500 shares at the then current
market price. Options granted under the Directors Plan totaled
7,500 in 1997 and 4,500 in 1996 and 1995. These options vest one
year from the date of grant. At December 27, 1997, 36,750 options
were outstanding, of which 29,250 were exercisable.
The Company also sponsors the 1993 Employee Stock Incentive
Plan (the "1993 Plan") that provides for the award of up to
1,125,000 shares of common stock to officers, key employees and
consultants of the Company. Awards under the 1993 Plan may be
in the form of stock options, stock appreciation rights, restricted
stock, deferred stock, stock purchase rights or other stock-based
awards. The terms of grants under the 1993 Plan are established at
the date of grant. No grants of common stock or related rights were
made in 1997, 1996 or 1995. Stock options granted under the 1993
Plan totaled 122,100, 295,771 and 141,000 for 1997, 1996 and
1995, respectively. Options granted in 1997 and 1996 vest four
years from the date of the grant. Options granted in 1995 vest
ratably over a four year period from the date of the grant. At
December 27, 1997, 533,248 options were outstanding, of which
59,557 were exercisable.
F-15
The following table summarizes the transactions pursuant to the
Company's stock option plans for the three-year period ended
December 27, 1997:
Number of Option Price
Shares Per Share
Outstanding at December 31, 1994 818,187 $ 3.67 to $14.17
Granted 145,500 10.00 to 16.00
Exercised (137,764) 3.67 to 13.17
Canceled (21,719) 3.67 to 13.17
Outstanding at December 30, 1995 804,204 $ 3.67 to $16.00
Granted 300,271 14.50 to 18.33
Exercised (66,579) 3.67 to 10.00
Canceled (21,734) 6.05 to 14.50
Outstanding at December 28, 1996 1,016,162 $ 3.67 to $18.33
Granted 129,600 15.56 to 21.00
Exercised (86,972) 3.67 to 14.50
Canceled (8,151) 6.05 to 16.50
Outstanding at December 27, 1997 1,050,639 $ 3.67 to $21.00
The following table summarizes information about stock option
outstanding at December 27, 1997:
Weighted
Options Average Weighted Options Weighted
Outstanding Remaining Average Exercisable Average
Range of at Dec. 27, Contractual Exercise at Dec. 27, Exercise
Exercise Price 1997 Life Price 1997 Price
$ 3.67 - $ 6.05 480,641 2.87 $ 4.83 480,641 $ 4.83
$ 7.83 - $14.50 428,698 7.75 12.99 82,807 10.21
$15.56 - $21.00 141,300 9.50 17.86 6,000 17.75
1,050,639 569,448
(b) Employee Stock Purchase Plan
The Company maintains the Performance Food Group Employee
Stock Purchase Plan (the "Stock Purchase Plan"), which permits
eligible employees to invest by means of periodic payroll
deductions in the Company's common stock at 85% of the lesser of
the market price or the average market price as defined in the plan
document. A total of 262,500 shares have been authorized for the
Stock Purchase Plan. At December 27, 1997, subscriptions were
outstanding for approximately 26,000 shares at $18.94 per share
under the Stock Purchase Plan.
13. Related Party Transactions
The Company leases land and buildings from certain shareholders
and members of their families. The Company made lease payments
of approximately $604,000, $933,000 and $819,000 in 1997, 1996
and 1995, respectively. The Company believes the terms of these
leases are no less favorable than those which would have been
obtained from unaffiliated parties.
In addition, the Company paid approximately $294,000, $1,261,000
and $1,322,000 in 1997, 1996 and 1995, respectively, to a company
which is owned by a shareholder of the Company and a member of
his family, for transportation services.
F-16
14. Contingencies
The Company is engaged in various legal proceedings which have
arisen in the normal course of business, but have not been fully
adjudicated. In the opinion of management, the outcome of these
proceedings will not have a material adverse effect on the
Company's consolidated financial condition or results of
operations.
F-17
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Performance Food Group Company:
Under date of February 9, 1998, we reported on the consolidated balance
sheets of Performance Food Group Company and subsidiaries as of
December 27, 1997 and December 28, 1996, and the related consolidated
statements of earnings, shareholders' equity and cash flows for each of the
fiscal years in the three-year period ended December 27, 1997, as
contained in the 1997 annual report to shareholders. These consolidated
financial statements and our report thereon are included in the 1997 annual
report on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule as listed in the accompanying index. This financial
statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement
schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basiC consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
Richmond, Virginia
February 9, 1998
S-1
SCHEDULE II
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Beginning Ending
Balance Additions Deductions Balance
_______________________________________________________
Charged to Charged to
Expense Other Accounts
Allowance for Doubtful
Accounts
December 30, 1995 $887 $1,762 $349 $1,229 $1,769
December 28, 1996 $1,769 $1,150 - $619 $2,300
December 27, 1997 $2,300 $331 $648 $599 $2,680
S-2
Exhibit Index
Exhibit
Number Description
10.37 - - Second Amendment to Revolving Credit Agreement dated
December 15, 1997 by and among
Performance Food Group Company and First Union National
Bank.
10.38 -- Form of Change in Control Agreement dated October 29, 1997
with Blake P. Auchmoody, John Austin, Roger L. Boeve,
John R. Crown, Charles M. Gray, Thomas Hoffman, Mark
Johnson, Ken Peters, Robert C. Sledd and David W. Sober.
10.39 -- Form of Change in Control Agreement dated October 29, 1997
with certain key executives.
21 - - List of Subsidiaries
23.1 - - Consent of Independent Auditors.
27 - - Financial Data Schedule (SEC use only)