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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 January 2, 1999
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 office) (Zip Code)
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
Rights To Purchase Preferred Stock
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(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 30, 1999 was approximately $341,300,000. The market
value calculation was determined using the closing sale price of the
Registrant's common stock on March 30, 1999, as reported on The Nasdaq Stock
Market.
Shares of common stock, $.01 par value per share, outstanding on March 30,
1999, were 13,507,326.
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 May 5, 1999 are
incorporated by reference into Items 10, 11, 12 and
13.
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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...............................................................................................9
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 7A. Quantitative and Qualitative Disclosures About Market Risk.............................................24
Item 8. Financial Statements and Supplementary Data..............................................................24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...............................................................................................24
Part III
Item 10. Directors and Executive Officers of the Registrant......................................................24
Item 11. Executive Compensation..................................................................................24
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................................25
Item 13. Certain Relationships and Related Transactions..........................................................25
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................................25
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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 business strategy 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 January 2, 1999, December 27,
1997 and December 28, 1996 are referred to herein as 1998, 1997 and 1996,
respectively, were 53, 52 and 52 week years.
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 529
sales and marketing representatives and product specialists. Sales
representatives service customers in person or by telephone, accepting and
processing
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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 1998.
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 2,700
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 8,600 McDonald's, Taco Bell, Burger
King, Pizza Hut, Subway, Kentucky Fried Chicken, Hardee's, 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 19%, 22% and 30% of consolidated net sales for
1998, 1997 and 1996, respectively. Net sales to Outback accounted for 16%, 16%
and 19% of consolidated net sales for 1998, 1997 and 1996, respectively. No
other multi-unit customer accounted for more than 8% of the Company's
consolidated net sales in 1998.
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 Raffinato specialty lines,
as well as fresh-cut produce products purchased and processed by the Company
and marketed under the Fresh Advantage label.
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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
foodservice distributors and 300 independent paper 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 1998:
PERCENTAGE OF NET
SALES FOR 1998
--------------
Center-of-the-plate.............................................. 29%
Canned and dry groceries......................................... 23
Frozen foods..................................................... 17
Refrigerated and dairy products.................................. 12
Paper products and cleaning supplies............................. 7
Fresh-cut produce................................................ 4
Other produce.................................................... 3
Vending.......................................................... 2
Procurement, merchandising and other services.................... 2
Equipment and supplies........................................... 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"). Pocahontas 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 4% 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
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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, Virginia,
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.
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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 Barrel,
COMPANY, INC. Southwest, distribution Outback, Don
Lebanon, TN Midwest Pablo's, Harrigans
and and other
Northeast restaurants,
healthcare
facilities and
schools
CARO FOODS, South and Foodservice 3 3,000 McDonald's, Taco
INC. AND SUBSIDIARIES Southeast distribution, Bell, Hardee's,
Houma, LA fresh-cut Popeye's, Church's
produce and other
restaurants,
healthcare
facilities and
schools
MILTON'S FOODSERVICE, South and Foodservice 1 4,000 Subway and other
INC. Southeast distribution restaurants,
Atlanta, GA healthcare
facilities and
schools
B&R FOODS DIVISION Florida Foodservice 1 2,000 Restaurants,
Tampa, FL distribution healthcare
facilities and
schools
HALE BROTHERS/SUMMIT, INC. Tennessee, Foodservice 1 1,800 Restaurants,
Morristown, TN Virginia distribution healthcare
and facilities and
Kentucky schools
PERFORMANCE FOOD GROUP OF South and Foodservice 2 3,500 Popeye's, Church's,
TEXAS, LP (FORMERLY MCLANE Southwest distribution Subway, Kentucky
FOODSERVICE) Fried Chicken, Dairy
Temple, TX Queen, and other
restaurants,
healthcare
facilities and
schools
W. J. POWELL COMPANY, INC. Georgia, Foodservice 1 2,000 Restaurants,
Thomasville, GA Florida distribution healthcare
and facilities and
Alabama schools
AFI FOOD SERVICE New Foodservice 1 1,400 Restaurants,
DISTRIBUTORS, INC. Jersey distribution healthcare
Elizabeth, NJ and metro facilities and
New York schools
area
POCAHONTAS FOODS, Nationwide Procurement 1 150 Independent
USA, INC. and foodservice
Richmond, VA merchandising distributors and
vendors
AFFILIATED PAPER COMPANIES, Nationwide Procurement 1 300 Independent paper
INC. and distributors
Tuscaloosa, AL merchandising
VIRGINIA FOODSERVICE GROUP, Virginia Foodservice 1 1,000 Restaurants,
INC. distribution healthcare
Richmond, VA facilities
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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.
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EMPLOYEES
As of January 2, 1999, the Company had approximately 3,200 full-time
employees, including approximately 1,000 in management, marketing and sales and
the remainder in operations. Approximately 80 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 19% and 22% of the Company's consolidated net sales in
1998 and 1997, respectively. Sales to Outback accounted for 16% of the
Company's consolidated net sales in both 1998 and 1997. 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
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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.
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EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
executive officers of the Company as of January 2, 1999.
NAME AGE POSITION
---- --- --------
Robert C. Sledd 46 Chairman, Chief Executive Officer and Director
C. Michael Gray 49 President, Chief Operating Officer and Director
Roger L. Boeve 60 Executive Vice President and Chief Financial Officer
Thomas Hoffman 59 Senior Vice President
David W. Sober 66 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 and Eskimo Pie 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.
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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, VA 6,000 Corporate offices Leased (2000)
Tampa, FL (B&R FOODS DIVISION) 96,000 Administrative offices, Owned
product inventory and
distribution
KENNETH O. LESTER COMPANY, INC.
Lebanon, TN 20,000 Administrative offices Owned
Lebanon, TN 167,000 Product inventory and Leased (2002)
distribution
Lebanon, TN 216,000 Product inventory and Owned
distribution
Gainesville, FL 158,000 Product inventory and Owned
distribution
Dallas, TX 156,000 Product inventory and Owned
distribution
Belcamp, MD 75,000 Product inventory and Leased (2001)
distribution
CARO FOODS, INC. 162,000 Administrative offices, Owned
Houma, LA produce processing, product
inventory and distribution.
Dallas, TX 66,000 Product inventory and Leased (1999)
distribution,
produce processing
HALE BROTHERS/SUMMIT, INC.
Morristown, TN 74,000 Administrative offices, Owned
product inventory and
distribution
POCAHONTAS FOODS, USA, INC.
Richmond, VA 131,000 Administrative offices, Leased (2004)
product inventory and
distribution
MILTON'S FOODSERVICE, INC.
Atlanta, GA 166,000 Administrative offices, Owned
product inventory and
distribution
PERFORMANCE FOOD GROUP OF TEXAS, LP
Temple, TX 250,000 Administrative offices, Leased (2002)
product inventory and
distribution
Victoria, TX 250,000 Owned
Product inventory and
distribution
W. J. POWELL COMPANY, INC.
Thomasville, GA 63,000 Administrative offices, Owned
product inventory and
distribution
AFI FOOD SERVICE DISTRIBUTORS, INC.
Elizabeth, NJ 170,000 Administrative offices, product Leased (2023)
Inventory and distribution
AFFILIATED PAPER COMPANIES, INC. (1)
Tuscaloosa, AL 12,000 Administrative offices Leased (2003)
VIRGINIA FOODSERVICE GROUP, INC. (2)
Richmond, VA 100,000 Administrative offices, Leased (2013)
product inventory and
distribution
- ---------------
(1) Affiliated Paper Companies, Inc. was acquired by the Company on June
1, 1998.
(2) Virginia Foodservice Group, Inc. was acquired by the Company on July
27, 1998.
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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 January 2, 1999.
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. As of
March 30, 1999, the Company had 1,538 shareholders of record and approximately
7,300 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.
1998
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High Low
- ------------------------------------------------------------------------------------
First Quarter $24.00 $15.63
Second Quarter $21.50 $18.38
Third Quarter $22.25 $17.63
Fourth Quarter $29.13 $19.88
For the Year $29.13 $15.63
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
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Year Ended
------------------------------------------------------------------------------
Jan. 2, Dec. 27, Dec. 28, Dec. 30, Dec. 31,
(In thousands, except per share data) 1999 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA:
Net sales $ 1,622,870 $ 1,230,078 $ 784,219 $ 664,123 $ 473,414
Cost of goods sold 1,409,755 1,074,154 673,407 568,097 405,104
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 213,115 155,924 110,812 96,026 68,310
Operating expenses 183,670 132,494 92,227 80,302 60,125
- ----------------------------------------------------------------------------------------------------------------------------------
Operating profit 29,445 23,430 18,585 15,724 8,185
- ----------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (3,500) (1,991) (627) (2,727) (388)
Other, net 188 105 176 14 (278)
- ----------------------------------------------------------------------------------------------------------------------------------
Other expense, net (3,312) (1,886) (451) (2,713) (666)
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 26,133 21,544 18,134 13,011 7,519
Income tax expense 9,965 8,297 7,145 5,088 2,985
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 16,168 $ 13,247 $ 10,989 $ 7,923 $ 4,534
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Weighted average common
shares outstanding 12,548 11,960 11,209 9,190 9,107
Basic net earnings per common share 1.29 1.11 0.98 0.86 0.50
Weighted average common shares and
dilutive potential shares outstanding 13,075 12,491 11,686 9,631 9,600
Diluted net earnings per common share 1.24 1.06 0.94 0.82 0.47
Book value per share 12.09 10.73 8.67 6.00 5.07
Closing price per share 28.13 21.00 15.25 15.83 8.33
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET AND OTHER DATA:
Working capital $ 55,778 $ 52,784 $ 42,967 $ 30,299 $ 16,386
Property, plant and equipment, net 87,413 71,810 55,697 51,640 35,352
Depreciation and amortization 10,837 7,843 5,484 5,319 3,481
Capital expenditures 26,176 8,284 9,074 13,921 12,436
Total assets 366,422 288,883 182,897 155,134 99,075
Short-term debt (including current
installments of long-term debt) 608 689 650 3,210 3,211
Long-term debt 64,928 44,577 7,225 37,009 4,966
Shareholders' equity 152,416 133,973 101,135 55,791 46,263
Total market value 354,691 262,143 177,861 147,219 76,061
Total capital 217,952 179,239 109,010 96,010 54,440
Debt-to-capital ratio 30.1% 25.3% 7.2% 41.9% 15.0%
Return on equity 11.3% 9.9% 14.0% 15.5% 10.4%
P/E ratio 22.7 19.8 16.2 19.3 17.7
- ----------------------------------------------------------------------------------------------------------------------------------
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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 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; o the December 1992 purchase of certain net 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 net 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 net assets by Hale of Tenneva
Foodservice, Inc. ("Tenneva"), a broadline distributor based in
Bristol, Virginia;
- - the May 1997 acquisition of certain net 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;
- - the October 1997 acquisition of AFI Food Service Distributors, Inc.
("AFI"), a broadline distributor based in Elizabeth, New Jersey;
- - the June 1998 acquisition of certain net assets of Affiliated Paper
Companies, Inc. ("APC"), a foodservice procurement and merchandising
group based in Tuscaloosa, Alabama; and
- - the July 1998 acquisition of certain net assets of Virginia
Foodservice Group, Inc. ("VFG"), a broadline distributor based in
Richmond, Virginia.
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
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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 uses a 52/53 week fiscal year ending on the Saturday
closest to December 31. Consequently, the Company will periodically have a
53-week fiscal year. The Company's fiscal years ended January 2, 1999, December
27, 1997 and December 28, 1996, herein referred to as 1998, 1997 and 1996,
respectively, were 53, 52 and 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.
1998 1997 1996
- ----------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 86.9 87.3 85.9
- ----------------------------------------------------------------------------------------
Gross profit 13.1 12.7 14.1
Operating expenses 11.3 10.8 11.7
- ----------------------------------------------------------------------------------------
Operating profit 1.8 1.9 2.4
Other expense, net 0.2 0.1 0.1
- ----------------------------------------------------------------------------------------
Earnings before income taxes 1.6 1.8 2.3
Income tax expense 0.6 0.7 0.9
- ----------------------------------------------------------------------------------------
Net earnings 1.0% 1.1% 1.4%
- ----------------------------------------------------------------------------------------
COMPARISON OF 1998 TO 1997
Net sales increased 31.9% to $1.62 billion for 1998 compared with $1.23
billion for 1997. Net sales in the Company's existing operations increased 19%
over 1997, while acquisitions contributed an additional 13% to the Company's
sales growth. The 19% internal sales growth also included approximately 2% from
the 53rd week in the Company's fiscal year. Inflation during 1998 accounted for
approximately 1% of the sales growth.
Gross profit increased 36.7% to $213.1 million in 1998 compared with
$155.9 million in 1997. Gross profit margin increased to 13.1% in 1998 compared
to 12.7% in 1997. The increase in gross profit margin was due to a number of
factors. During the second half of 1997 and during 1998, the Company acquired a
number of broadline distribution and merchandising companies that have higher
gross margins than the Company's customized distribution operations. The
improvement in gross profit margin as a result of these acquisitions was offset
by internal sales growth during 1998 of certain of the Company's large
multi-unit chain accounts serviced by the customized distribution operations,
which
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grew approximately 26% in 1998. These large multi-unit chain customers are
generally higher volume, lower gross margin accounts. Sales also grew internally
in the Company's produce processing operations by approximately 51% during 1998
which operations currently have higher margins than the Company's foodservice
distribution operations.
Operating expenses increased 38.6% to $183.7 million in 1998 from
$132.5 million in 1997. As a percentage of net sales, operating expenses
increased to 11.3% in 1998 compared with 10.8% in 1997. The increase in
operating expenses as a percent of net sales primarily reflects 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. These increased labor costs may continue depending upon
economic and labor conditions in the Company's various markets in which it
operates. Operating expenses as a percentage of net sales were also impacted by
the acquisition of APC which has a higher expense ratio than many of the
Company's other subsidiaries. Operating expenses were also impacted by the
start-up of two new distribution centers, which are replacing older, less
efficient facilities, that became operational at the end of 1998 and early 1999.
The Company also incurred certain start-up expenses as a result of leasing a new
distribution facility to service the continued growth of certain of the
Company's multi-unit chain customers, which became operational in early 1997.
Operating profit increased 25.7% to $29.4 million in 1998 from $23.4
million in 1997. Operating profit margin decreased to 1.8% for 1998 from 1.9%
for 1997.
Other expense increased to $3.3 million in 1998 from $1.9 million in
1997. Other expense includes interest expense, which increased to $3.5 million
in 1998 from $2.0 million in 1997. The increase in interest expense was due
primarily to higher debt levels as a result of the Company's various
acquisitions and working capital requirements.
Income tax expense increased 20.1% to $10.0 million in 1998 from $8.3
million in 1997 as a result of higher pre-tax earnings. As a percentage of
earnings before income taxes, income tax expense was 38.1% for 1998 versus 38.5%
in 1997.
Net earnings increased 22.0% to $16.2 million in 1998 from $13.2
million in 1997. As a percentage of net sales, net earnings decreased to 1.0% in
1998 from 1.1% in 1997.
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% 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 multi-unit chain
customers serviced by the Company's customized distribution operations, 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
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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 lower than those in
many of the Company's other broadline 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. 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 customized
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 customized
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.
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 offsets 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.
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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 $21.9 million and $24.2
million for 1998 and 1997, respectively. The decrease in cash provided by
operating activities resulted primarily from higher net earnings and increased
payables levels offset by an increase in accounts receivables and inventories.
Cash used by investing activities was $46.6 million and $59.2 million
for 1998 and 1997, respectively. Investing activities include additions to and
disposal of property, plant and equipment and the acquisition of businesses.
During 1998, the Company paid $23.9 million for the acquisition of businesses,
net of cash on hand at the acquired companies. The Company's total capital
expenditures for 1998 were $26.2 million. Investing activities in 1998 also
included $3.6 million from the sale of property and equipment.
Cash provided by financing activities was $28.5 million and $33.0
million in 1998 and 1997, respectively. Financing activities included net
repayments in 1998 of $26.6 million and net borrowings in 1997 of $27.2 million
on the Company's revolving credit facility ("Credit Facility"). Financing
activities in 1998 also included net proceeds of $50.0 million from the
Company's issuance of unsecured 6.77% Senior Notes due May 8, 2010 in a private
placement. Proceeds of the issue were used to repay amounts outstanding under
the Credit Facility and for general corporate purposes.
The Company has $30.0 million of borrowing capacity under its Credit
Facility with a commercial bank that expires in February 2001. Approximately
$12.5 million was outstanding under the Credit Facility at January 2, 1999. The
Company was also contingently liable for $6.0 million of outstanding letters of
credit that reduce amounts available under the Credit Facility. At January 2,
1999, the Company had $11.5 million 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 January 2, 1999, the
Credit Facility bore interest at 5.72%. 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 entered into an agreement with
a group of banks to provide an $85.0 million credit facility that replaces the
existing credit facility.
On September 12, 1997, the Company completed a $42.0 million master
operating lease agreement to construct new distribution centers, two of which
were substantially complete at the end of 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
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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 January 2, 1999, total
expenditures to date were approximately $18.6 million under this facility, which
costs have been borne by the lessor.
In May 1998, the Company issued $50.0 million of unsecured 6.77% Senior
Notes due May 8, 2010 in a private placement. Interest is payable semi-annually.
The Senior Notes require the maintenance of certain financial ratios, as
defined, regarding debt to capital, fixed charge coverage and minimum net worth.
Proceeds of the issue were used to repay amounts outstanding under the Credit
Facility and for general corporate purposes.
The Company believes that cash flow from operations and borrowings
under the Company's credit facilities will be sufficient to finance its
operations and anticipated growth for the foreseeable future.
BUSINESS COMBINATIONS
On June 1, 1998, the Company acquired certain net assets related to the
group and chemicals business of Affiliated Paper Companies, Inc. ("APC"), a
privately owned marketing organization based in Tuscaloosa, Alabama. APC
provides procurement and merchandising services for a variety of paper,
disposable and sanitation supplies to more than 300 independent distributors. On
July 27, 1998, the Company acquired certain net assets of the Virginia
Foodservice Group ("VFG") based in Richmond, Virginia, a division of a privately
owned foodservice distributor in which a member of the Company's management has
a minor ownership interest. VFG is a foodservice distributor primarily servicing
traditional foodservice customers in the central Virginia market. Collectively,
these companies had 1997 net sales of approximately $69 million. The aggregate
purchase price of approximately $24 million was financed with proceeds from an
existing credit facility. The aggregate consideration payable to the former
shareholders of APC and VFG is subject to increase in certain circumstances.
In early 1997, 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 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
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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 paid on January 2, 1998 and the
remainder with proceeds from an existing credit facility. The aggregate
consideration payable to the former shareholders of 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 $24.0 million in 1998 and $44.2 million in 1997 is being amortized
on a straight-line basis over estimated lives ranging from 5 to 40 years.
Subsequent to year end, the Company completed a merger with NorthCenter
Foodservice Corporation ("NCF"), in which NCF became a wholly-owned subsidiary
of the Company. NCF was a privately-owned foodservice distributor based in
Augusta, Maine and had 1998 net sales of approximately $98 million. The merger
will be accounted for as a pooling-of-interests and resulted in the issuance of
850,000 shares of the Company's common stock in exchange for all of the
outstanding stock of NCF.
YEAR 2000 ISSUE
State of Readiness
In mid 1997, the Company initiated a project to address any potential
business disruptions related to data processing problems as a result of the year
2000 issue. Initially, the project focused primarily on the Company's
information technology ("IT") systems. However, the project was subsequently
expanded to include non-IT systems including transportation and warehouse
refrigeration systems, telecommunications, utilities, etc. The project consists
of a number of phases: awareness, assessment, programming/testing and
implementation. With respect to IT systems, the Company has completed the first
three phases and is approximately 40% complete with the implementation phase.
The Company expects to complete the implementation phase for IT systems during
the third quarter of 1999. With respect to non-IT systems, the Company is in the
assessment phase to identify all critical systems requiring remediation and is
developing a timetable for remediation based upon that assessment. As part of
the year 2000 project, the Company has initiated communications with its
significant merchandise suppliers and major customers to assess their state of
readiness for the year 2000. A significant percentage of suppliers and customers
have provided the Company with written responses regarding their state of year
2000 readiness. The Company is continuing to evaluate key business processes to
identify any additional non-IT systems requiring remediation and to work with
key suppliers and customers in preparing for the year 2000. Despite this
continuing effort, the Company can provide no assurance that the IT and non-IT
systems of third party business partners with whom the Company relies upon will
be year 2000 compliant.
Costs
In addition to the year 2000 project, the Company has underway a
project to standardize the computer systems at nine of its broadline
distribution subsidiaries, which operate in a distributed computing environment.
The decision to standardize the computer system used in these subsidiaries was
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based on the Company's continued growth and need to capture information to
improve operating efficiencies and capitalize on the Company's combined
purchasing power. The plan to standardize these systems was not accelerated by
the year 2000 issue. Additionally, one of the Company's distribution
subsidiaries, which operates four distribution facilities, processes information
in a centralized computing environment. Therefore, the Company's year 2000
remediation efforts have been minimized by focusing its year 2000 programming on
two primary operating systems. The Company anticipates incurring approximately
$600,000 related to remediating its IT systems for year 2000 compliance, of
which the Company has incurred approximately $300,000 to date. The Company has
not completed quantifying the remediation costs regarding non-IT systems. Year
2000 remediation costs are being expensed as incurred over the life of the
project and are not expected to have a material effect on the Company's results
of operations.
Risks and Contingency Plans
The Company is currently assessing the consequences of its IT and
non-IT remediation efforts not being completed timely or its efforts not being
successful. As part of this assessment process, the Company is developing
contingency plans including plans to address interruption of merchandise and
services supplied to customers and supplied by third party business partners.
The Company believes the most reasonably likely worst case scenario related to
the readiness of IT systems is that the implementation of the year 2000
compliant system in all nine subsidiaries may not be completed timely. The
Company's contingency plans in this case include backup plans to process
transactions for non-compliant subsidiaries through one of the Company's year
2000 compliant systems. The Company is still formulating these contingency
plans. With respect to risks associated with third party merchandise suppliers,
the Company believes the most reasonably likely worst case scenario is that some
of the Company's merchandise suppliers may have difficulty filling orders and
shipping products. The Company believes the risk associated with merchandise
suppliers' year 2000 readiness is mitigated by the significant number of Company
relationships with alternative suppliers within various product categories,
which could be substituted in the event of non-compliance. The Company also
believes the number of non-compliant merchandise suppliers will be minimized
through its program of communicating with key suppliers and assessing their
state of year 2000 readiness. The Company has not yet completed its
identification and assessment of all non-IT systems requiring remediation,
including various service providers. As the Company's year 2000 project
continues, the Company will continue to develop contingency plans and identify
alternative business processes and sources of supply for goods and services.
The Company's project and related assessment of costs and risks are
based on current estimates and assumptions, including the outcome of future
events regarding the continued availability of certain resources, the timing and
effectiveness of third party remediation efforts and other factors. There can be
no assurance that the Company's contingency plans or its efforts with respect to
third party business partners will be successful, which could have a material
adverse effect on the Company's financial position or results of operations.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activity, which is effective for periods beginning after
June 15, 1999. The Company is currently evaluating the impact, if any, that SFAS
No. 133 will have on the Company's financial position and results of operations.
During 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, which are effective for
periods beginning after December 15, 1997. The impact of these accounting
pronouncements did not have a material impact on the Company's financial
position or results of operations.
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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.
1998
--------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------
Net sales $ 353,482 $ 388,671 $ 415,288 $ 465,429
Gross profit 44,800 49,443 55,405 63,467
Operating profit 4,913 7,605 8,237 8,690
Earnings before income taxes 4,170 6,823 7,524 7,616
Net earnings 2,565 4,196 4,687 4,720
Basic net earnings per common share 0.21 0.33 0.37 0.37
Diluted net earnings per common share $ 0.20 $ 0.32 $ 0.36 $ 0.36
1997
--------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------
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
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not currently use financial instruments for trading
purposes nor hold derivative financial instruments that could expose the Company
to significant market risk. The Company has no material foreign currency
exposure. The Company's primary exposure to market risk is from changing
interest rates related to the Company's long-term debt. The Company currently
manages this risk through a combination of fixed and floating rates on these
obligations. As of January 2, 1999, the Company's total debt consisted of fixed
and floating rate debt of $50.0 million and $15.5 million, respectively.
Substantially all of the Company's floating rate debt is based on LIBOR.
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
24
25
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 May 5, 1999 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 May 5, 1999 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 May 5, 1999 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 May 5, 1999 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 Financial Statements on
page 24 of this Form 10-K.
2. Financial Statement Schedules. See of page 24 this Form 10-K.
25
26
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 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.
10.2 -- Guaranty Agreement dated July 7, 1988 by and between Pocahontas Food Group, Inc. and Third
National Bank, Nashville, Tennessee.
10.3 -- 1989 Non-Qualified Stock Option Plan.
10.4 -- 1993 Employee Stock Incentive Plan.
10.5 -- 1993 Outside Directors' Stock Option Plan.
10.6 -- Performance Food Group Employee Savings and Stock Ownership Plan.
10.7 -- Trust Agreement for Performance Food Group Employee Savings and Stock Ownership Plan.
10.8 -- Form of Pocahontas Food Group, Inc. Executive Deferred Compensation Plan.
10.9 -- Form of Indemnification Agreement.
10.10 -- 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
- ------- -----------
10.11 -- First Amendment to the Trust Agreement for Pocahontas Food Group, Inc. Employee Savings and
Stock Ownership Plan.
10.12 -- Performance Food Group Employee Stock Purchase Plan.
26
27
C. INCORPORATED BY REFERENCE TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED APRIL 2, 1994:
Exhibit
Number Description
- ------- -----------
10.13 -- 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.
D. INCORPORATED BY REFERENCE TO THE COMPANY'S REPORT ON FORM 8-K DATED JANUARY 3, 1995:
Exhibit
Number Description
- ------- -----------
10.14 -- 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.
E. INCORPORATED BY REFERENCE TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 28, 1996:
Exhibit
Number Description
- ------- -----------
10.15 -- Revolving Credit Agreement dated July 8, 1996 by and between Performance Food Group Company and First Union
National Bank of Virginia.
F. INCORPORATED BY REFERENCE TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996.
Exhibit
Number Description
- ------- -----------
10.16 -- Performance Food Group Company Employee Savings and Stock Ownership Plan Savings Trust.
G. INCORPORATED BY REFERENCE TO THE COMPANY'S REPORT ON FORM 8-K DATED MAY 20, 1997:
Exhibit
Number Description
- ------- -----------
10.17 -- Rights Agreement dated as of May 16, 1997 between Performance Food Group Company and First Union National Bank of
North Carolina, as Rights Agent.
H. INCORPORATED BY REFERENCE TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 27, 1997:
Exhibit
Number Description
- ------- -----------
10.18 -- Amendment No. 1 to Revolving Credit Agreement dated as of July 8, 1996 by and among Performance Food Group
Company and First Union National Bank.
10.19 -- 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).
27
28
10.20 -- Lease Agreement dated as of August 29, 1997 between First Security Bank, National Association
and Performance Food Group Company.
I. INCORPORATED BY REFERENCE TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997:
Exhibit
Number Description
- ------- -----------
10.21 -- Second Amendment to Revolving Credit Agreement dated July 8, 1996 by and among Performance
Food Group Company and First Union National Bank.
10.22 -- Form of Change in Control Agreement dated October 29, 1997 with Blake P. Auchmoody, John D.
Austin, Roger L. Boeve, John R. Crown, Charles M. Gray, Thomas Hoffman, Mark H. Johnson, Kenneth
Peters, Robert C. Sledd and David W. Sober.
10.23 -- Form of Change in Control Agreement dated October 29, 1997 with certain key executives.
J. INCORPORATED BY REFERENCE TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED MARCH 28, 1998:
Exhibit
Number
- -------
10.24 -- Third Amendment to Revolving Credit Agreement dated as of July 8, 1996 by and among Performance
Food Group Company and First Union National Bank.
K. INCORPORATED BY REFERENCE TO THE COMPANY'S QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTER ENDED JUNE 27, 1998:
Exhibit
Number
- -------
10.25 -- Fourth Amendment to Revolving Credit Agreement dated as of July 8, 1996 by and among
Performance Food Group Company and First Union National Bank.
10.26 -- Form of Note Purchase Agreement dated as of May 8, 1998 for 6.77% Senior Notes due May 8, 2010.
L. INCORPORATED BY REFERENCE TO THE COMPANY'S QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 26, 1998:
Exhibit
Number
- -------
10.27 -- Fifth Amendment to Revolving Credit Agreement dated as of July 8, 1996 by and among Performance
Food Group Company and First Union National Bank.
28
29
M. FILED HEREWITH:
Exhibit
Number Description
- ------- -----------
10.28 -- Performance Food Group Company Executive Deferred Compensation Plan
21 -- List of Subsidiaries
23.1 -- Consent of Independent Auditors
27.1 -- Financial Data Schedule (SEC purposes only)
27.2 -- Restated Financial Data Schedule for Year Ended December 27, 1997 (SEC purposes only).
27.3 -- Restated Financial Data Schedule for Year Ended December 28, 1996 (SEC purposes only).
(b) During the fourth quarter ended January 2, 1999, the Company filed no reports on Form 8-K.
29
30
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 31, 1999.
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 and March 31, 1999
- ------------------------------------- Director [PRINCIPAL EXECUTIVE OFFICER]
Robert C. Sledd
/s/ C. Michael Gray President, Chief Operating Officer and March 31, 1999
- ------------------------------------- Director
C. Michael Gray
/s/ Roger L. Boeve Executive Vice President and Chief March 31, 1999
- -------------------------------------
Roger L. Boeve Financial Officer [PRINCIPAL FINANCIAL
OFFICER AND PRINCIPAL ACCOUNTING OFFICER]
/s/ David W. Sober Vice President and Secretary March 31, 1999
- -------------------------------------
David W. Sober
/s/ Charles E. Adair Director March 31, 1999
- -------------------------------------
Charles E. Adair
/s/ Fred C. Goad, Jr. Director March 31, 1999
- -------------------------------------
Fred C. Goad, Jr.
/s/ Timothy M. Graven Director March 31, 1999
- -------------------------------------
Timothy M. Graven
/s/ John E. Stokely Director March 31, 1999
- -------------------------------------
John E. Stokely
30
31
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 (the "Company") as of January 2, 1999 and
December 27, 1997, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the fiscal years in the
three-year period ended January 2, 1999. 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 includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits 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 January 2, 1999 and December 27, 1997, and
the results of their operations and their cash flows for each of these fiscal
years in the three-year period ended January 2, 1999, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Richmond, Virginia
February 7, 1999
F-1
32
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------
January 2, December 27,
(Dollar amounts in thousands, except per share amounts) 1999 1997
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 7,415 $ 3,653
Trade accounts and notes receivable, less allowance for doubtful
accounts of $3,617 and $2,680 101,874 80,054
Inventories 84,784 72,951
Prepaid expenses and other current assets 4,652 2,548
Deferred income taxes 808 388
- ------------------------------------------------------------------------------------------------------------
Total current assets 199,533 159,594
Property, plant and equipment, net 87,413 71,810
Goodwill, net of accumulated amortization of $3,552 and $1,866 72,316 52,189
Other intangible assets, net of accumulated amortization of $1,660 and $1,068 5,152 3,508
Other assets 2,008 1,782
- ------------------------------------------------------------------------------------------------------------
Total assets $ 366,422 $ 288,883
============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Outstanding checks in excess of deposits $ 31,768 $ 19,859
Current installments of long-term debt 608 689
Trade accounts payable 89,100 67,455
Accrued expenses 22,279 16,896
Income taxes payable -- 1,911
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 143,755 106,810
Long-term debt, excluding current installments 64,928 44,577
Deferred income taxes 5,323 3,523
- ------------------------------------------------------------------------------------------------------------
Total liabilities 214,006 154,910
- ------------------------------------------------------------------------------------------------------------
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;
12,608,597 shares and 12,483,110 shares issued and outstanding 126 125
Additional paid-in capital 88,974 87,198
Retained earnings 66,185 50,017
- ------------------------------------------------------------------------------------------------------------
155,285 137,340
Loan to leveraged employee stock ownership plan (2,869) (3,367)
- ------------------------------------------------------------------------------------------------------------
Total shareholders' equity 152,416 133,973
Commitments and contingencies (notes 4, 7, 8, 10, 11, 12 and 14)
- ------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 366,422 $ 288,883
============================================================================================================
See accompanying notes to consolidated financial statements.
F-2
33
CONSOLIDATED STATEMENTS OF EARNINGS
- -----------------------------------------------------------------------------------------------------------
Fiscal Year Ended
------------------------------------------------
January 2, December 27, December 28,
(Dollar amounts in thousands, except per share amounts) 1999 1997 1996
- -----------------------------------------------------------------------------------------------------------
Net sales $ 1,622,870 $ 1,230,078 $ 784,219
Cost of goods sold 1,409,755 1,074,154 673,407
- ---------------------------------------------------------------------------------------------------------
Gross profit 213,115 155,924 110,812
Operating expenses 183,670 132,494 92,227
- ---------------------------------------------------------------------------------------------------------
Operating profit 29,445 23,430 18,585
Other income (expense):
Interest expense (3,500) (1,991) (627)
Other, net 188 105 176
- ---------------------------------------------------------------------------------------------------------
Other expense, net (3,312) (1,886) (451)
- ---------------------------------------------------------------------------------------------------------
Earnings before income taxes 26,133 21,544 18,134
Income tax expense 9,965 8,297 7,145
- ---------------------------------------------------------------------------------------------------------
Net earnings $ 16,168 $ 13,247 $ 10,989
=========================================================================================================
Weighted average common shares outstanding 12,548 11,960 11,209
Basic net earnings per common share $ 1.29 $ 1.11 $ 0.98
=========================================================================================================
Weighted average common shares and dilutive
potential common shares outstanding 13,075 12,491 11,686
Diluted net earnings per common share $ 1.24 $ 1.06 $ 0.94
=========================================================================================================
See accompanying notes to consolidated financial statements.
F-3
34
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock Loan to Total
---------------------- Additional Retained leveraged shareholders'
(Dollar amounts in thousands) Shares Amount paid-in capital earnings ESOP equity
- ---------------------------------------------------------------------------------------------------------------------------------
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
Employee stock option, incentive
and purchase plans and related
income tax benefits 125,487 1 1,776 -- -- 1,777
Principal payments on loan to
leveraged ESOP -- -- -- -- 498 498
Net earnings -- -- -- 16,168 -- 16,168
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 2, 1999 12,608,597 $126 $ 88,974 $66,185 $ (2,869) $ 152,416
=================================================================================================================================
See accompanying notes to consolidate financial statements.
F-4
35
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended
---------------------------------------
January 2, December 27, December 28,
(Dollar amounts in thousands) 1999 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 16,168 $ 13,247 $ 10,989
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 10,837 7,843 5,484
ESOP contributions applied to principal of ESOP debt 498 468 420
Gain on disposal of property, plant and equipment (27) (58) (53)
Deferred income taxes 1,380 1,241 53
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 (16,837) (3,347) (11,425)
Increase in inventories (9,178) (6,904) (10,161)
Increase in prepaid expenses and other
current assets (1,972) (799) (74)
Increase in trade accounts payable 19,486 11,196 12,551
Increase in accrued expenses 3,460 933 898
Increase (decrease) in income taxes payable (1,911) 432 1,239
- ---------------------------------------------------------------------------------------------------------------------------------
Total adjustments 5,736 10,992 (1,068)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 21,904 24,239 9,921
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities, net of effects of companies acquired:
Purchases of property, plant and equipment (26,176) (8,284) (9,074)
Proceeds from sale of property, plant and equipment 3,600 160 196
Net cash paid for acquisitions (23,857) (54,631) --
Net proceeds from insurance settlement -- 4,200 --
Increase in intangibles and other assets (187) (635) (416)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (46,620) (59,190) (9,294)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in outstanding checks in excess
of deposits 11,317 3,929 (896)
Net proceeds from (payments on) revolving credit facility (26,560) 27,183 (1,622)
Repayment of promissory notes (7,278) -- --
Proceeds from issuance of senior notes 50,000 -- --
Principal payments on long-term debt (778) (673) (30,722)
Net proceeds from stock offering -- -- 33,329
Employee stock option, incentive and purchase plans
and related income tax benefit 1,777 2,608 606
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 28,478 33,047 695
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 3,762 (1,904) 1,322
Cash at beginning of year 3,653 5,557 4,235
- ---------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 7,415 $ 3,653 $ 5,557
=================================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
January 2, 1999 and December 27, 1997
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");
Virginia Foodservice Group, Inc.; Affiliated Paper Companies, Inc.;
and 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 January 2, 1999,
December 27, 1997 and December 28, 1996 (53, 52 and 52 week years,
respectively) are referred to herein as 1998, 1997 and 1996,
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.
F-6
37
(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 9% 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.
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
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
dilutive potential common shares, calculated using the treasury stock
method, outstanding during the period. Dilutive potential common
shares consist of options issued under various stock plans described
in note 12.
F-7
38
(H) STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation. This 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.
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
At January 2, 1999 and December 27, 1997, 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
Long-lived assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. For purposes
of evaluating the recoverability of long-lived assets, the
recoverability test is performed using undiscounted net cash flows
generated by the individual operating location.
(L) RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 consolidated financial statements
have been reclassified to conform with the 1998 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 19%, 22% and 30% of
consolidated net sales for 1998, 1997 and 1996, respectively. Net
sales to Outback accounted for
F-8
39
16%, 16% and 19% of consolidated net sales for 1998, 1997 and 1996,
respectively. At January 2, 1999, amounts receivable from these two
customers represented 17% 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'
creditworthiness.
4. BUSINESS COMBINATIONS
On June 1, 1998, the Company acquired certain net assets related to
the group and chemicals business of Affiliated Paper Companies, Inc.
("APC"), a privately owned marketing organization based in Tuscaloosa,
Alabama. APC provides procurement and merchandising services for a
variety of paper, disposable and sanitation supplies to more than 300
independent distributors. On July 27, 1998, the Company acquired
certain net assets of the Virginia Foodservice Group ("VFG") based in
Richmond, Virginia, a division of a privately owned foodservice
distributor in which a member of the Company's management has a minor
ownership interest. VFG is a foodservice distributor primarily
servicing traditional foodservice customers in the central Virginia
market. Collectively, these companies had 1997 net sales of
approximately $69 million. The aggregate purchase price of
approximately $24 million was financed with proceeds from an existing
credit facility. The aggregate consideration payable to the former
shareholders of APC and VFG is subject to increase in certain
circumstances.
In early 1997, 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
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 approximately 661,000 shares
of the Company's common stock, $7 million of promissory notes paid on
January 2, 1998
F-9
40
and the remainder with proceeds from an existing credit facility. The
aggregate consideration payable to the former shareholders of 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 $24.0 million in 1998 and $44.2
million in 1997 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 January 2, 1999. The unaudited consolidated results of
operations on a pro forma basis as though these acquisitions had been
consummated as of the beginning of 1997 are as follows (in thousands,
except per share amounts):
1998 1997
--------------------------
Net sales $ 1,660,495 $ 1,382,878
Gross profit 223,222 189,874
Net earnings 16,091 13,636
Basic net earnings per common share 1.28 1.10
Diluted net earnings per common share $ 1.23 $ 1.05
The pro forma results are presented for information only and are not
necessarily indicative of the operating results that would have
occurred had these acquisitions been consummated as of the above date.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of January 2, 1999 and December 27,
1997 consist of the following (in thousands):
1998 1997
--------------------
Land $ 3,718 $ 3,638
Buildings and building improvements 64,790 53,815
Transportation equipment 15,329 14,408
Warehouse and plant equipment 22,493 22,690
Office equipment, furniture and fixtures 16,526 10,957
Leasehold improvements 1,939 1,089
Construction-in-process 2,402 1,770
-------------------------------------------------------------------------------------------------
127,197 108,367
Less accumulated depreciation and amortization 39,784 36,557
-------------------------------------------------------------------------------------------------
Property, plant and equipment, net $ 87,413 $ 71,810
=================================================================================================
F-10
41
6. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
1998 1997 1996
-------------------------------------
Cash paid during the year for:
Interest $ 2,989 $ 1,816 $ 816
===============================================================================================
Income taxes $ 12,262 $ 6,583 $ 5,853
===============================================================================================
Effects of companies acquired:
Fair value of assets acquired $ 33,417 $ 101,536 $ --
Fair value of liabilities assumed (9,560) (30,390) --
Stock issued for acquisitions -- (16,515) --
-----------------------------------------------------------------------------------------------
Net cash paid for acquisitions $ 23,857 $ 54,631 $ --
===============================================================================================
7. LONG-TERM DEBT
Long-term debt as of January 2, 1999 and December 27, 1997 consists of
the following (in thousands):
1998 1997
----------------------
Revolving credit facility $ 12,453 $ 34,284
Senior Notes 50,000 -
Promissory notes payable - 7,278
ESOP loan 2,869 3,367
Other notes payable 214 337
---------------------------------------------------------------------------------
65,536 45,266
Less current maturities 608 689
=================================================================================
Long-term debt, excluding current installments $ 64,928 $ 44,577
=================================================================================
Revolving Credit Facility
The Company has $30.0 million of borrowing capacity under its Credit
Facility with a commercial bank that expires in February 2001.
Approximately $12.5 million was outstanding under the Credit Facility
at January 2, 1999. At January 2, 1999, the Company was contingently
liable for $6.0 million of outstanding letters of credit that reduce
amounts available under the Credit Facility. At January 2, 1999, the
Company had $11.5 million 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
January 2, 1999, the Credit Facility bore interest at 5.72%.
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.
F-11
42
Senior Notes
On May 8, 1998, the Company issued $50.0 million of unsecured 6.77%
Senior Notes due May 8, 2010 in a private placement. Interest is
payable semi-annually. The Notes require the maintenance of certain
financial ratios, as defined, regarding debt to capital, fixed charge
coverage and minimum net worth. Proceeds of the issue were used to
repay amounts outstanding under an existing credit facility and for
general corporate purposes.
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 (5.23% at January 2, 1999). The loan matures in
2003.
Maturities of long-term debt are as follows (in thousands):
1999 $ 608
2000 622
2001 13,110
2002 665
2003 531
Thereafter 50,000
=============================================================
Total maturities of long-term debt $ 65,536
=============================================================
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 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 reflected 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.
In May 1997, the Company's Board of Directors declared a dividend of
one Stock Purchase Right (a "Right") per share on 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.
F-12
43
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 January 2, 1999, the Company is obligated under
operating lease agreements to make future minimum lease payments as
follows (in thousands):
1999 $ 11,565
2000 10,402
2001 8,867
2002 7,570
2003 5,016
Thereafter 27,659
---------------------------------------------------------------
Total minimum lease payments $ 71,079
===============================================================
Total rental expenses for operating leases in 1998, 1997 and 1996 was
approximately $11,894,000, $9,075,000 and $7,900,000, respectively.
In 1997, the Company completed a $42.0 million master operating lease
agreement to construct new distribution centers, two of which were
substantially complete at the end of 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 January 2,
1999, total expenditures to date were approximately $18.6 million
under this facility, which costs have been borne by the lessor.
F-13
44
10. INCOME TAXES
Income tax expense consists of the following (in thousands):
1998 1997 1996
-------------------------------
Current:
Federal $ 8,048 $ 6,800 $ 6,530
State 537 256 562
------------------------------------------------------------------------------------------------------
8,585 7,056 7,092
------------------------------------------------------------------------------------------------------
Deferred:
Federal 1,208 1,174 41
State 172 67 12
------------------------------------------------------------------------------------------------------
1,380 1,241 53
------------------------------------------------------------------------------------------------------
Total income tax expense $ 9,965 $ 8,297 $ 7,145
------------------------------------------------------------------------------------------------------
The effective income tax rates for 1998, 1997 and 1996 were 38.1%,
38.5% and 39.4%, 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):
1998 1997 1996
--------------------------------
Federal income taxes computed at statutory rate $ 9,046 $ 7,441 $ 6,247
Increase in income taxes resulting from:
State income taxes, net of Federal income tax benefit 464 210 372
Non-deductible expenses 126 135 107
Amortization of goodwill 288 164 139
Other, net 41 347 280
------------------------------------------------------------------------------------------------------
Total income tax expense $ 9,965 $ 8,297 $ 7,145
------------------------------------------------------------------------------------------------------
F-14
45
Deferred income taxes are recorded based upon the tax effects of
differences between the financial statement and tax bases 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 January 2, 1999 and December
27, 1997 are as follows (in thousands):
1998 1997
------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 1,103 $ 945
Inventories, principally due to costs capitalized for tax purposes
in excess of those capitalized for financial statement purposes 981 814
Reserves for incurred but not reported self-insurance claims 1,429 1,114
State operating loss carryforwards 228 551
Other 275 372
- ---------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 4,016 3,796
Less valuation allowance (194) (258)
- ---------------------------------------------------------------------------------------------------------------
Net deferred tax assets 3,822 3,538
- ---------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment (4,646) (3,513)
Inventories, due to basis differences resulting from acquisition (1,120) (1,111)
Deferred gain (1,516) (1,599)
Basis difference in intangible assets (880) (370)
Other (175) (80)
- ---------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (8,337) (6,673)
- ---------------------------------------------------------------------------------------------------------------
Net deferred tax liability $(4,515) $(3,135)
- ---------------------------------------------------------------------------------------------------------------
The net deferred income tax liability is presented in the January 2,
1999 and December 27, 1997 consolidated balance sheets as follows (in
thousands):
1998 1997
------------------------
Current deferred tax asset $ 808 $ 388
Noncurrent deferred tax liability (5,323) (3,523)
- ---------------------------------------------------------------------------------------------------------------
Net deferred tax liability $(4,515) $(3,135)
- ---------------------------------------------------------------------------------------------------------------
F-15
46
The net change in the valuation allowance was a decrease of $64,000
and $369,000 in 1998 and 1997, respectively. 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.
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 1998, 1997 and 1996 to the ESOP. These amounts
include interest expense on the ESOP loan of approximately $182,000,
$212,000 and $260,000 in 1998, 1997 and 1996, respectively. At January
2, 1999, 935,087 shares had been allocated to participant accounts and
447,870 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 were
$684,000 and $549,000 for 1998 and 1997, respectively. 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
1998, 1997 or 1996.
(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.
F-16
47
12. STOCK PLANS
(A) STOCK OPTION AND INCENTIVE PLAN
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 January 2, 1999, 414,383 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 12,750 in 1998, 7,500 in 1997
and 4,500 in 1996. These options vest one year from the date of grant.
At January 2, 1999, 49,500 options were outstanding, of which 36,750
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 1998, 1997 or 1996. Stock
options granted under the 1993 Plan totaled 405,280, 122,100 and
295,771 for 1998, 1997 and 1996, respectively. Options granted vest
four years from the date of the grant. At January 2, 1999, 874,164
options were outstanding, of which 79,190 were exercisable.
The following table summarizes the transactions pursuant to the
Company's stock options plans for the three-year period ended January
2, 1999:
Number of Option Price
Shares Per Share
- -------------------------------------------------------------------------------------
Outstanding at December 31, 1995 804,204 $ 3.67 to 10.00
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 31, 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 31, 1997 1,050,639 $ 3.67 to 21.00
Granted 418,030 18.50 to 20.93
Exercised (73,095) 3.67 to 14.50
Canceled (57,527) 6.05 to 21.00
- -------------------------------------------------------------------------------------
Outstanding at January 2, 1999 1,338,047 $ 3.67 to 21.00
- -------------------------------------------------------------------------------------
F-17
48
The following table summarizes information about stock options
outstanding at January 2, 1999:
Weighted
Options Average Weighted Options Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at Jan. 2, Contractual Life Exercise At Jan. 2, Exercise
Price 1999 Price 1999 Price
------------------------------------------------------------------------------------------
$ 3.67 - $ 6.05 414,383 1.69 $ 4.80 414,383 $ 4.80
$ 7.83 - $14.50 385,714 6.71 13.03 101,690 10.14
$ 15.56 - $21.00 537,950 9.00 18.43 14,250 18.00
------------------------------------------------------------------------------------------
1,338,047 530,323
------------------------------------------------------------------------------------------
(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
362,500 shares have been authorized for the Stock Purchase Plan. At
January 2, 1999, subscriptions under the Stock Purchase Plan were
outstanding for approximately 31,000 shares at $20.24 per share.
The Company sponsors a number of stock-based compensation plans which
are described above. 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 the Company's stock option plans and its stock purchase
plan. The per share weighted-average value of stock options granted in
1998, 1997 and 1996 was $9.83, $10.58 and $11.38, respectively, on the
date of grant using the Black-Scholes option pricing model with the
following assumptions: 1998-expected dividend yield of 0%, risk free
interest rate of 5.56%, volatility 45.8% and expected life of 6.4
years; 1997 - expected dividend yield of 0%, risk free interest rate
of 6.14%, volatility 46.5% and 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. 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 1998, 1997 and 1996 would have been as follows (in
thousands, except per share amounts):
1998 1997 1996
-----------------------------
Net earnings as reported $ 16,168 $ 13,247 $ 10,989
Net earnings pro forma 14,484 12,377 10,383
Basic net earnings per common share as reported $ 1.29 $ 1.11 $ 0.98
Basic net earnings per common share pro forma 1.15 1.03 0.93
Diluted net earnings per common share as reported $ 1.24 $ 1.06 $ 0.94
Diluted net earnings per common share pro forma 1.11 0.99 0.89
F-18
49
Pro forma net earnings only reflects options granted in 1998, 1997 and
1996. Therefore, the full impact of calculating compensation cost of
stock options under SFAS No. 123 is not reflected in the amounts above
since compensation cost is recognized over the options' vesting
periods. Compensation costs for options granted prior to 1995 have not
been considered in accordance with SFAS No. 123.
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 $673,000, $604,000 and $933,000 in 1998, 1997 and 1996,
respectively. The Company believes the terms of these leases are no
less favorable than those that would have been obtained from
unaffiliated parties.
In addition, the Company paid approximately $294,000 and $1,261,000 in
1997 and 1996, respectively, to a company that is owned by a
shareholder of the Company and a member of his family, for
transportation services. No such payments were made in 1998.
In July 1998, the Company acquired certain net assets of VFG, a
division of a privately owned foodservice distributor in which a
member of the Company's management has a minor ownership interest. The
Company believes the terms of this transaction were no less favorable
than those that would have been obtained from unaffiliated parties.
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.
15. INDUSTRY SEGMENT INFORMATION
During the fourth quarter of 1998, the Company adopted SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information.
The adoption of SFAS No. 131 requires the presentation of descriptive
information about reportable segments which is consistent with that
made available to the management of the Company to assess performance
of various operating units.
Under SFAS No. 131, the Company has two reportable segments: broadline
foodservice distribution ("Broadline") and customized foodservice
distribution ("Customized"). Broadline distributes approximately
25,000 food and food-related products to a combination of
approximately 21,000 traditional and multi-unit chain customers.
Broadline consists of eleven operating locations that independently
design their product mix, distribution routes and delivery schedules
to accommodate the varying needs of these customers. Generally,
Broadline customers are located within 250 miles of the distribution
center servicing that customer. Customized focuses on serving certain
of the Company's multi-unit chain customers whose sales volume,
growth, product mix, service requirements and geographic locations are
such that these
F-19
50
customers can be more efficiently served through centralized
information systems, dedicated distribution routes and relatively
large and consistent orders per delivery. Customized currently
distributes product in approximately 40 states through four
distribution facilities. Other consists primarily of the Company's
fresh-cut produce operations.
CORPORATE &
BROADLINE CUSTOMIZED OTHER INTERSEGMENT CONSOLIDATED
- ------------------------------------------------------------------------------------------
1998
Net external sales $886,760 $676,794 $59,316 $ -- $1,622,870
Intersegment sales 3,401 -- 12,886 (16,287) --
Operating profit 21,909 8,271 3,614 (4,349) 29,445
Total assets 258,181 80,866 15,167 12,208 366,422
Interest expense
(income) 7,464 1,122 (537) (4,549) 3,500
Depreciation and
Amortization 8,038 1,455 1,219 125 10,837
Capital
Expenditures 8,821 15,738 1,500 117 26,176
1997
Net external sales $654,907 $535,004 $40,127 $ -- $1,230,078
Intersegment sales 2,811 -- 12,907 (15,718) --
Operating profit 18,955 5,123 2,133 (2,781) 23,430
Total assets 205,611 61,701 14,198 7,373 288,883
Interest expense (4,223)
(income) 5,229 1,274 (289) 1,991
Depreciation and
amortization 5,345 1,350 1,045 103 7,843
Capital
expenditures 6,152 1,048 997 87 8,284
1996
Net external sales $355,033 $394,294 $34,892 $ -- $ 784,219
Intersegment sales 1,906 -- 12,615 (14,521) --
Operating profit 13,289 7,718 (62) (2,360) 18,585
Total assets 96,482 62,804 14,541 9,070 182,897
Interest expense
(income) 2,396 1,224 774 (3,767) 627
Depreciation and
amortization 3,374 1,008 1,021 81 5,484
Capital
expenditures 6,000 2,412 509 153 9,074
F-20
51
16. SUBSEQUENT EVENTS
Subsequent to year end, the Company completed a merger with
NorthCenter Foodservice Corporation ("NCF"), in which NCF became a
wholly-owned subsidiary of the Company. NCF was a privately-owned
foodservice distributor based in Augusta, Maine and had 1998 net sales
of approximately $98 million. The merger will be accounted for as a
pooling-of-interests and resulted in the issuance of approximately
850,000 shares of the Company's common stock in exchange for all of
the outstanding stock of NCF.
In addition, the Company entered into an agreement subsequent to year
end with a number of banks to provide an $85 million credit facility
which replaces the Company's existing Revolving Credit Facility.
F-21
52
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Performance Food Group Company:
Under date of February 7, 1999, we reported on the consolidated balance sheets
of Performance Food Group Company and subsidiaries (the "Company") as of
January 2, 1999 and December 27, 1997, and the related consolidated statements
of earnings, shareholders' equity and cash flows for each of the fiscal years
in the three-year period ended January 2, 1999, as contained in the 1998 annual
report to shareholders. These consolidated financial statements and our report
thereon are included in the 1998 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 LLP
Richmond, Virginia
February 7, 1999
S-1
53
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 28, 1996 $1,769 $1,150 -- $ 619 $2,300
December 27, 1997 $2,300 $ 331 $648 $ 599 $2,680
January 2, 1999 $2,680 $1,854 $498 $1,415 $3,617
S-2
54
Exhibit Index
Exhibit
Number Description
- -------- -----------
10.28 -- Performance Food Group Company Executive Deferred Compensation Plan
21 -- List of Subsidiaries.
23.1 -- Consent of Independent Auditors.
27.1 -- Financial Data Schedule (SEC purposes only).
27.2 -- Restated Financial Data Schedule for Year Ended December 27, 1997 (SEC purposes only).
27.3 -- Restated Financial Data Schedule for Year Ended December 28, 1996 (SEC purposes only).