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 1, 2000
Commission file number 0-22192
PERFORMANCE FOOD GROUP COMPANY
(Exact name of Registrant as specified in its charter)
Tennessee 54-0402940
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
6800 Paragon Place, Ste. 500
Richmond, Virginia 23230
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,including area code:
(804) 285-7340
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Rights to Purchase Preferred Stock
(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 28, 2000 was approximately $300,050,000.
The market value calculation was determined using
the closing sale price of the Registrant's common
stock on March 28, 2000, as reported on The Nasdaq
Stock Market.
Shares of common stock, $.01 par value per share,
outstanding on March 28, 2000 were 13,890,108.
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 3,
2000 are incorporated by reference
into Items 10, 11, 12 and 13.
PERFORMANCE FOOD GROUP COMPANY
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Part I
Item 1. Business. 3
The Company and its Business Strategy 3
Customers and Marketing 3
Products and Services 5
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 23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 23
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 24
Item 13. Certain Relationships and Related Transactions 24
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 24
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. The Company services these customers
through three operating segments: broadline
foodservice distribution ("Broadline"); customized
foodservice distribution ("Customized"); and fresh-
cut produce processing ("Fresh-Cut"). Broadline
distributes approximately 25,000 food and food-
related products to a combination of approximately
25,000 traditional and multi-unit chain customers.
Broadline consists of eleven operating locations
that independently design their own product mix,
distribution routes and delivery schedules to
accommodate the varying needs of their customers.
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
customers can be more efficiently served through
centralized information systems, dedicated
distribution routes and relatively large and
consistent orders per delivery. The Customized
distribution network covers 50 states and several
foreign countries from five distribution
facilities. Fresh-Cut processes and distributes a
variety of fresh produce primarily for quick-
service restaurants mainly in the Southeastern and
Southwestern United States.
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 to further penetrate existing markets
and 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 1, 2000, January 2,
1999 and December 27, 1997, referred to herein as
1999, 1998 and 1997, respectively, were 52, 53 and
52 week years. As a result of the merger with
NorthCenter Foodservice Corporation ("NCF") on
February 26, 1999, the consolidated financial
statements for years prior to the combination have
been restated to include the accounts and results
of operations of NCF.
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. Value-
added services include assistance in managing
inventories, planning menus and controlling costs
through increased computer communications and more
efficient deliveries. In addition, certain of the
Company's larger, multi-unit chain customers gain
operational efficiency 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
attempts 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 630 sales and marketing
representatives and product specialists. Sales
representatives service customers in person or by
telephone, accepting and processing orders,
reviewing account balances, disseminating new
product information and providing business
assistance and advice where appropriate. The
Company educates the sales representatives about
the Company's products and gives 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
several 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 1999.
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 2,900 Wendy's, Subway, Kentucky
Fried Chicken, Dairy Queen, Popeye's and Church's
quick-service restaurants. The Company's sales
programs to multi-unit customers tend to be
tailored to the individual customer and include a
more specialized product offering than the sales
programs for the Company's traditional foodservice
customers. Sales to multi-unit customers are
typically high volume, low gross margin sales
which require fewer, but larger deliveries than
those to traditional foodservice customers. These
programs offer operational and cost efficiencies
for both the customer and the Company and result
in reduced operating expenses as a percentage 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 17%, 18% and 21% of
consolidated net sales for 1999, 1998 and 1997,
respectively. Net sales to Outback accounted for
16%, 15% and 15% of consolidated net sales for
1999, 1998 and 1997, respectively. No other multi-
unit customer accounted for more than 7% of the
Company's consolidated net sales in 1999.
The Company's fresh-cut produce business
provides processed produce, including salads,
sandwich lettuce and cut tomatoes, for quick-
service restaurants and other institutional
accounts. The Company develops innovative
products and processing techniques to reduce
costs, improve product quality and reduce price.
The Company's customers for its fresh-cut produce
products include more than 13,000 McDonald's, Taco
Bell, Burger King, Pizza Hut, Subway, Kentucky
Fried Chicken, Popeye's and Church's restaurants.
Products and Services
The Company distributes more than 25,000
national brand and private label food and food-
related products to over 25,000 foodservice
customers. These items include a broad selection
of "center-of-the-plate," canned and dry
groceries, frozen foods, refrigerated and dairy
products, paper products and cleaning supplies,
fresh-cut produce, restaurant equipment and other
supplies. The Company's controlled brands include
items marketed under the Pocahontas, Healthy USA,
Premium Recipe, Colonial Tradition, Raffinato,
Gourmet Table and AFFLAB specialty lines, as well
as fresh-cut produce products purchased and
processed by the Company and marketed under the
Fresh Advantage label.
The Company provides customers with other
value-added services in the form of assistance in
managing inventories, menu planning and improving
efficiency and profitability. As described below,
the Company also provides procurement and
merchandising services to approximately 150
independent foodservice distributors, a number of
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 1999:
Percentage of Net
Sales for 1999
Center-of-the-plate 29%
Canned and dry groceries 22
Frozen foods 17
Refrigerated and dairy products 13
Paper products and cleaning supplies 7
Fresh-cut produce 6
Other produce 2
Equipment and supplies 2
Vending 1
Procurement, merchandising and other services 1
Total 100%
Suppliers and Purchasing
The Company procures its products from
independent suppliers, food brokers and
merchandisers, including its wholly owned
subsidiary, Pocahontas Foods, USA, Inc.
("Pocahontas"). Pocahontas procures 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 own
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,
Colonial Tradition, Raffinato, Gourmet Table and
AFFLAB brands and markets these brands, 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.
More than 17,000 of the products sold through
Pocahontas are sold under the Company's controlled
brands. Approximately 550 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. In
addition, the Company has begun to associate these
local identities with the Performance Food Group
name. 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 twenty-three distribution centers located in
Tennessee, New Jersey, Maryland, Georgia, Florida,
Virginia, Louisiana, Texas, California, Kansas,
North Carolina and Maine. 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 deliveries and the
geographic distribution of these rapidly growing
customers. Some trucks and delivery trailers used
by the Company have separate temperature-
controlled compartments. The Company utilizes a
computer system to design the least costly route
sequence for the delivery of its products.
The following table summarizes certain information
regarding 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 Nationwide Foodsevice 5 1,500 Cracker Barrel, Outback, Don Pablo's,
Company, Inc. distribution Hops, Carraba's, Copeland's, Wendy's,
Lebanon, TN Harrigans and other restaurants, healthcare
facilities and schools
Caro Foods, Inc. South Foodservice 1 2,100 Wendy's, Popeye's, Church's and other
Houma, LA distribution restaurants, healthcare facilities and schools
Milton's South Foodservice 1 5,000 Subway, Zaxby's and other restaurants,
Foodservice, Inc. and distribution healthcare facilities and schools
Atlanta, GA Southeast
PFG Florida Florida Foodservice 1 2,300 Restaurants, healthcare facilities and schools
Division distribution
(formerly B&R
Foods Division)
Tampa, FL
Hale Brothers/ Tennessee, Foodservice 1 1,100 Healthcare facilities, restaurants and schools
Summit, Inc. Virginia distribution
Morristown, TN and
Kentucky
PFG - Lester South Foodservice 1 2,000 Wendy's and other restaurants, healthcare
Broadline, Inc. distribution facilities and schools
Lebanon, TN
Performance South Foodservice 2 4,800 Popeye's, Church's, Subway, Kentucky Fried
Food Group of and distribution Chicken, Dairy Queen and other restaurants,
Texas, LP Southwest healthcare facilities and schools
Temple, TX
W. J. Powell Georgia, Foodservice 1 2,500 Restaurants, healthcare facilities and schools
Company, Inc. Florida distribution
Thomasville, GA and
Alabama
AFI Food Service New Foodservice 2 2,800 Restaurants, healthcare facilities and schools
Distributors, Jersey distribution
Inc. and metro
Elizabeth, NJ New York
area
Pocahontas Nationwide Procurement 1 150 Independent foodservice distributors and vendors
Foods, USA, and
Inc. merchandising
Richmond, VA
Affiliated Nationwide Procurement 1 300 Independent paper distributors
Paper Companies, and
Inc. merchandising
Tuscaloosa, AL
Virginia Virginia Foodservice 2 1,000 Restaurants and healthcare facilities
Foodservice distribution
Group, Inc.
Richmond, VA
NorthCenter Maine Foodservice 1 2,000 Restaurants, healthcare facilities and schools
Foodservice distribution
Corporation
Augusta, ME
Fresh Advantage, Southeast Fresh-cut 5 13,000 Distributors for several multi-unit chain
Inc. and produce restaurants including Burger King, Kentucky
Dallas, TX Southwest Fried Chicken, McDonald's, Pizza Hut, Taco Bell,
Subway and other restaurants, healthcare facilities
and schools.
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. Management believes that most
purchasing decisions in the foodservice business
are based on the quality of the product, on the
distributor's ability to completely and accurately
fill orders, on providing 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 the competitive position of the
Company.
Management believes that the Company is in
substantial compliance with all applicable
government regulations.
Tradenames
Except for the Pocahontas and Fresh
Advantage tradenames, the Company does not own or
have the right to use any patent, trademark,
tradename, license, franchise or concession, the
loss of which would have a material adverse effect
on the operations or earnings of the Company.
Employees
As of January 1, 2000, the Company had
approximately 4,200 full-time employees, including
approximately 1,200 in management, marketing and
sales and the remainder in operations.
Approximately 100 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 volumes 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. Net sales to units of Cracker
Barrel accounted for 17%, 18% and 21% of the
Company's consolidated net sales in 1999, 1998 and
1997, respectively. Sales to Outback accounted
for 16%, 15% and 15% of the Company's consolidated
net sales in 1999, 1998 and 1997, respectively.
The Company has no written assurance from any of
its customers as to the level of future sales. A
material decrease in sales to any of the largest
customers of the Company would have a material
adverse impact on the Company's operating results.
The Company has been the primary supplier of food
and food-related products to Cracker Barrel since
1975. See "Business - Customers and Marketing."
Acquisitions. A significant portion of the
Company's historical growth has been achieved
through acquisitions of other foodservice
distributors, and the Company's growth strategy
includes additional acquisitions. There can be no
assurance that the Company will be able to make
successful acquisitions in the future.
Furthermore, there can be no assurance that future
acquisitions will not have an adverse effect upon
the Company's operating results, particularly in
quarters immediately following the consummation of
such transactions while the operations of the
acquired business are being integrated into the
Company's operations. Following the acquisition
of other businesses in the future, the Company may
decide to consolidate the operations of any
acquired business with existing operations, which
may result in the establishment of provisions for
consolidation. To the extent the Company's
expansion is dependent upon its ability to obtain
additional financing for acquisitions, there can
be no assurance that the Company will be able to
obtain financing on acceptable terms.
Management of Growth. The Company has
rapidly expanded its operations since inception.
This growth has placed significant demands on its
administrative, operational and financial
resources. The planned continued growth of the
Company's customer base and its services can be
expected to continue to place a significant demand
on its administrative, operational and financial
resources. The Company's future performance and
profitability will depend in part on its ability
to successfully implement enhancements to its
business management systems and to adapt to those
systems as necessary to respond to changes in its
business. Similarly, the Company's continued
growth creates a need for expansion of its
facilities from time to time. As the Company
nears maximum utilization of a given facility,
operations may be constrained and inefficiencies
may be created which could adversely affect
operating results until such time as either that
facility is expanded or volume is shifted to
another facility. Conversely, as the Company adds
additional facilities or expands existing
facilities, excess capacity may be created until
the Company is able to expand its operations to
utilize the additional capacity. Such excess
capacity may also create certain inefficiencies
and adversely affect operating results.
Competition. The Company operates in
highly competitive markets, and its future success
will be largely dependent on its ability to
provide quality products and services at
competitive prices. The Company's competition
comes primarily from other foodservice
distributors and produce processors. Some of the
Company's competitors have substantially greater
financial and other resources than the Company and
may be better established in their markets.
Management believes that competition for sales is
largely based on the quality and reliability of
products and services and, to a lesser extent,
price. See "Business - Competition."
Dependence on Senior Management and Key
Employees. The Company's success is largely
dependent on the skills, experience and efforts of
its senior management. The loss of services of
one or more of the Company's senior management
could have a material adverse effect upon the
Company's business and development. In addition,
the Company depends to a substantial degree on the
services of certain key employees. The ability to
attract and retain qualified employees in the
future will be a key factor in the success of the
Company.
Volatility of Market Price for Common
Stock. From time to time there may be significant
volatility in the market price for the Company's
common stock. Quarterly operating results of the
Company or other distributors of food and related
goods, changes in general conditions in the
economy, the financial markets or the food
distribution or food services industries, natural
disasters or other developments affecting the
Company or its competitors could cause the market
price of the common stock to fluctuate
substantially. In addition, in recent years the
stock market has experienced extreme price and
volume fluctuations. This volatility has had a
significant effect on the market prices of
securities issued by many companies for reasons
unrelated to their operating performance.
Executive Officers
The following table sets forth certain
information concerning the executive officers of
the Company as of January 1, 2000:
Name Age Position
Robert C. Sledd 47 Chairman, Chief Executive Officer
and Director
C. Michael Gray 50 President, Chief Operating Officer
and Director
Roger L. Boeve 61 Executive Vice President and Chief
Financial Officer
Thomas Hoffman 60 Senior Vice President
David W. Sober 67 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 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. Mr. Sober retired from the Company
effective March 4, 2000.
Item 2. Properties.
The following table presents information
regarding the primary real properties and
facilities of the Company and its operating
subsidiaries and division:
Approx. Owned/Leased
Area in (Expiration
Location Sq. Ft. Principal Uses Date if Leased)
Performance Food Group
Company
Richmond, VA 9,000 Corporate offices Leased (2000)
Tampa, FL (PFG Florida 135,000 Administrative offices,product Owned
Division) inventory and distribution
Kenneth O. Lester
Company, Inc.
Lebanon, TN 20,000 Aministrative offices Owned
Lebanon, TN 222,000 Product inventory and distribution Owned
Gainesville, FL 160,000 Product inventory and distribution Owned
McKinney, TX 163,000 Product inventory and distribution Owned
Belcamp, MD 73,000 Product inventory and distribution Leased (2001)
Bakersfield, CA 900 Administrative offices Leased (2001)
Caro Foods, Inc.
Houma, LA 120,000 Administrative offices, product Owned
inventory and distribution
Hale Brothers/
Summit, Inc.
Morristown, TN 74,000 Administrative offices, product Owned
inventory and distribution
PFG-Lester,
Broadline, Inc.
Lebanon, TN 160,000 Product inventory and Leased (2002)
distribution
Pocahontas Foods,
USA, Inc.
Richmond, VA 116,000 Administrative offices, product Leased (2004)
inventory and distribution
Milton's Foodservice,
Inc. 160,000 Administrative offices, product Owned
Atlanta, GA inventory and distribution
Performance Food Group
of Texas, LP
Temple, TX 290,000 Administrative offices, product Leased (2002)
inventory and distribution
Victoria, TX 250,000 Product inventory and Owned
distribution
W. J. Powell Company,
Inc. 75,000 Administrative offices, product Owned
Thomasville, GA inventory and distribution
AFI Food Service
Distributors, Inc.
Elizabeth, NJ 160,000 Administrative offices, product Leased (2024)
inventory and distribution
Newark, NJ 21,000 Meat processing Leased (2001)
Affiliated Paper
Companies, Inc.
Tuscaloosa, AL 16,000 Administrative offices Leased (2003)
Virginia Foodservice
Group, Inc.
Richmond, VA 100,000 Administrative offices, product Leased (2013)
inventory and distribution
Norfolk, VA 18,000 Meat processing Owned
NorthCenter Foodservice
Corporation
Augusta, ME 123,000 Administrative offices, product Owned
inventory and distribution
Fresh Advantage, Inc.
Forest Park, GA 63,000 Produce processing and repacking Leased (2000)
Kansas City, KS 43,000 Produce processing Owned
Raleigh, NC 36,000 Produce repacking Leased (2001)
Houma, LA 45,000 Produce processing Owned
Grand Prairie, TX 66,000 Produce processing Leased (2000)
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 1, 2000.
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 prices for the Company's common
stock as reported by the Nasdaq National Market.
As of March 28, 2000, the Company had 1,996
shareholders of record and approximately 3,800
additional shareholders based on an estimate of
individual participants represented by security
position listings. 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.
1999
High Low
First Quarter $30.50 $23.63
Second Quarter 28.63 23.25
Third Quarter 28.63 24.38
Fourth Quarter 28.00 20.75
For the Year 30.50 20.75
1998
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
Item 6. Selected Consolidated Financial Data
(Dollar amounts in thousands, except per share amounts) 1999 1998 1997 1996 1995
STATEMENT OF EARNINGS DATA:
Net sales $ 2,055,598 $ 1,721,316 $ 1,331,002 $ 864,219 $ 739,744
Cost of goods sold 1,773,632 1,491,079 1,159,593 740,009 631,249
Gross profit 281,966 230,237 171,409 124,210 108,495
Operating expenses 242,625 198,646 146,344 103,568 91,334
Operating profit 39,341 31,591 25,065 20,642 17,161
Other income (expense):
Interest expense (5,388) (4,411) (2,978) (1,346) (3,411)
Nonrecurring merger expenses (3,812) - - - -
Gain on sale of investment 768 - - - -
Other, net 342 195 111 176 14
Other expense, net (8,090) (4,216) (2,867) (1,170) (3,397)
Earnings before income taxes 31,251 27,375 22,198 19,472 13,764
Income tax expense 12,000 9,965 8,298 7,145 5,293
Net earnings $ 19,251 $ 17,410 $ 13,900 $ 12,327 $ 8,471
PER SHARE DATA:
Weighted average common shares outstanding 13,772 13,398 12,810 12,059 10,040
Basic net earnings per common share $ 1.40 $ 1.30 $ 1.09 $ 1.02 $ 0.84
Pro forma basic net earnings per common share (1)(2) 1.54 1.26 1.07 0.98 0.83
Weighted average common shares and
dilutive potential shares outstanding 14,219 13,925 13,341 12,536 10,481
Diluted net earnings per common share $ 1.35 $ 1.25 $ 1.04 $ 0.98 $ 0.81
Pro forma diluted net earnings per common share (1)(2) 1.49 1.21 1.02 0.94 0.80
Book value per share $ 13.42 $ 11.67 $ 10.35 $ 8.43 $ 5.82
BALANCE SHEET AND OTHER DATA:
Working capital $ 70,879 $ 63,280 $ 60,131 $ 49,397 $ 35,210
Property, plant and equipment, net 113,930 93,402 78,006 61,884 57,624
Depreciation and amortization 14,137 11,501 8,592 6,128 5,873
Capital expenditures 26,006 26,663 9,054 9,703 16,751
Total assets 462,045 387,712 308,945 202,807 170,573
Short-term debt (including current
installments of long-term debt) 703 797 867 814 3,324
Long-term debt 92,404 74,305 54,798 16,134 44,660
Shareholders' equity 189,344 157,085 137,949 105,468 59,083
Total capital $ 282,451 $ 232,187 $ 193,564 $ 122,416 $ 107,067
Debt-to-capital ratio 33.0% 32.3% 28.7% 13.8% 44.8%
Pro forma return on equity (1)(2) 12.3% 11.4% 11.2% 14.3% 15.5%
P/E ratio 18.1 22.5 20.2 15.6 19.5
(1) Pro forma adjustments to net earnings per common share and return on equity add back nonrecurring merger expenses
and adjust income taxes as if NorthCenter Foodservice was taxed as a C-corporation for income tax purposes rather
than as an S-corporation prior to the merger of NorthCenter Foodservice in February 1999.
(2) 1999 excludes a nonrecurring gain of $768 on the sale of an investment.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
Performance Food Group Company and subsidiaries (the "Company")
was founded in 1987 as a result of the combination of various
foodservice businesses, and has grown both internally through
increased sales to existing and new customers and through acquisitions
of existing foodservice distributors. The Company derives its revenue
primarily from the sale of food and food-related products to the
foodservice, or "away-from-home eating," industry. The foodservice
industry consists of two major customer types: "traditional"
foodservice customers, consisting of independent restaurants, hotels,
cafeterias, schools, healthcare facilities and other institutional
customers; and "multi-unit chain" customers, consisting of regional
and national quick-service restaurants and casual dining restaurants.
The Company services these customers through three operating segments:
broadline foodservice distribution ("Broadline"); customized
foodservice distribution ("Customized"); and fresh-cut produce
processing ("Fresh-Cut"). Broadline distributes approximately 25,000
food and food-related products to a combination of approximately
25,000 traditional and multi-unit chain customers. Broadline consists
of eleven operating locations that independently design their own
product mix, distribution routes and delivery schedules to accommodate
the varying needs of their customers. 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 customers can be more efficiently served
through centralized information systems, dedicated distribution routes
and relatively large and consistent orders per delivery. The
Customized distribution network covers 50 states and several foreign
countries from five distribution facilities. Fresh-Cut processes and
distributes a variety of fresh produce primarily for quick-service
restaurants mainly in the Southeastern and Southwestern United States.
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
1, 2000, January 2, 1999 and December 27, 1997, herein referred to as
1999, 1998 and 1997, respectively, were 52, 53 and 52-week years. As
a result of the merger with NorthCenter Foodservice Corporation
("NCF") on February 26, 1999, discussed in Note 4, the consolidated
financial statements for years prior to the combination have been
restated to include the accounts and results of operations of NCF.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the
components of the consolidated statements of earnings expressed as a
percentage of net sales:
1999 1998 1997
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 86.3 86.6 87.1
Gross profit 13.7 13.4 12.9
Operating expenses 11.8 11.6 11.0
Operating profit 1.9 1.8 1.9
Other expense, net 0.4 0.2 0.2
Earnings before income taxes 1.5 1.6 1.7
Income tax expense 0.6 0.6 0.7
Net earnings 0.9% 1.0% 1.0%
COMPARISON OF 1999 TO 1998
Net sales increased 19.4% to $2.06 billion for 1999 compared with
$1.72 billion for 1998. Net sales in the Company's existing operations
increased 14.7% over 1998, while acquisitions contributed an
additional 4.7% to the Company's sales growth. Excluding the effect
of the 53rd week in 1998, net sales increased by 21.3% over 1998, and
net sales in the Company's existing operations increased by 16.5% over
1998. Inflation was insignificant during 1999.
Gross profit increased 22.5% to $282.0 million in 1999 compared
with $230.2 million in 1998. Gross profit margin increased to 13.7% in
1999 compared to 13.4% in 1998. The increase in gross profit margin
was due primarily to improved profit margins at many of the Company's
broadline locations.
Operating expenses increased 22.1% to $242.6 million in 1999 from
$198.6 million in 1998. As a percentage of net sales, operating
expenses increased to 11.8% in 1999 compared with 11.6% in 1998. The
increase in operating expenses as a percentage of net sales primarily
reflects increased labor costs, including recruiting and training
additional personnel, mainly 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 were also impacted by the start-
up of a new Customized distribution facility to service the continued
growth of certain of the Company's multi-unit chain customers, which
became operational in mid-1999.
Operating profit increased 24.5% to $39.3 million in 1999 from
$31.6 million in 1998. Operating profit margin also increased to 1.9%
for 1999 from 1.8% for 1998.
Other expense increased to $8.1 million in 1999 from $4.2 million
in 1998. In 1999, other expense included $3.8 million of nonrecurring
expenses related to the merger with NCF. Other expense included
interest expense, which increased to $5.4 million in 1999 from $4.4
million in 1998. 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. Partially offsetting these expenses
in 1999 was a $768,000 gain on the sale of an investment.
Income tax expense increased 20.4% to $12.0 million in 1999 from
$10.0 million in 1998 as a result of higher pre-tax earnings. As a
percentage of earnings before income taxes, income tax expense was
38.4% in 1999 versus 36.4% in 1998. The increase in the effective tax
rate was due primarily to the merger with NCF, which was treated as an
S-corporation for income tax purposes prior to the merger with the
Company.
Net earnings increased 10.6% to $19.3 million in 1999 from $17.4
million in 1998. As a percentage of net sales, net earnings decreased
to 0.9% in 1999 from 1.0% in 1998.
COMPARISON OF 1998 TO 1997
Net sales increased 29.3% to $1.72 billion for 1998 from $1.33
billion for 1997. Net sales in the Company's existing operations
increased 18.0% over 1997, while acquisitions contributed an
additional 11.3% to the Company's total sales growth. The 18%
internal sales growth included approximately 2% from the 53rd week in
the Company's fiscal year. Inflation amounted to approximately 1.0%
for 1998.
Gross profit increased 34.3% to $230.2 million in 1998 from
$171.4 million in 1997. Gross profit margin also increased to 13.4% in
1998 compared to 12.9% in 1997. The increase in gross profit margin
was due to a number of factors. During 1998 and the second half of
1997, the Company acquired a number of broadline distribution and
merchandising companies with higher gross margins than the Company's
customized distribution operations. The improvement in gross profit
margin as a result of these acquisitions was diluted by internal sales
growth during 1998 at certain of the Company's large multi-unit chain
accounts serviced by the customized distribution operations, which
grew approximately 26% in 1998. These large multi-unit chain
customers are generally high volume, low gross margin accounts. Sales
also grew internally in the Company's fresh cut operations by
approximately 46% during 1998. The Company's fresh-cut operations
have higher margins than the Company's foodservice distribution
operations.
Operating expenses increased 35.7% to $198.6 million in 1998
compared with $146.3 million in 1997. As a percentage of net sales,
operating expenses increased to 11.6% in 1998 from 11.0% in 1997. The
increase in operating expenses as a percentage of net sales primarily
reflects increased labor costs including recruiting and training
additional personnel, mainly in the transportation and warehouse
areas, which are an integral part of the Company's distribution
service. Operating expenses as a percentage of net sales was also
impacted by the acquisition of Affiliated Paper Companies, Inc.
("APC"), which had a higher expense ratio than many of the Company's
other subsidiaries. Operating expenses were also affected by the
start-up of two new Broadline distribution centers, replacing older,
less efficient facilities, that became operational at the end of 1998
and early 1999. The Company also incurred certain start-up expenses
for a new Customized 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 26.0% to $31.6 million in 1998 from
$25.1 million in 1997. Operating profit margin declined to 1.8% for
1998 from 1.9% for 1997.
Other expense increased to $4.2 million in 1998 from $2.9 million
in 1997. Other expense includes interest expense, which increased to
$4.4 million in 1998 from $3.0 million in 1997. The increase in
interest expense is due to higher debt levels as a result of the
Company's various acquisitions. Other expense during 1997 also
included a $1.3 million gain from insurance proceeds related to
covered losses at one of the Company's processing and distribution
facilities, offset by 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 $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, the provision for income
taxes was 36.4% and 37.4% for 1998 and 1997, respectively.
Net earnings increased 25.3% to $17.4 million in 1998 compared to
$13.9 million in 1997. As a percentage of net sales, net earnings
remained constant at 1.0% in 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and growth primarily with
cash flow from operations, borrowings under its revolving credit
facility, issuance of long-term debt, operating leases, normal trade
credit terms from suppliers and proceeds 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 $47.0 million and $24.3
million for 1999 and 1998, respectively. In 1999, the primary sources
of cash for operating activities were net earnings and increased
levels of trade payables and accrued expenses, partially offset by
increased levels of inventories. In 1998, the primary sources of cash
for operating activities were net earnings and increased levels of
payables and accrued expenses, partially offset by increased levels of
trade receivables.
Cash used by investing activities was $41.8 million and $47.1
million for 1999 and 1998, respectively. Investing activities include
additions to and disposals of property, plant and equipment and the
acquisition of businesses. During 1999 and 1998, the Company paid
$18.1 million and $23.9 million, respectively, for the acquisition of
businesses, net of cash on hand at the acquired companies. The
Company's total capital expenditures for 1999 and 1998 were $26.0
million and $26.7 million, respectively. In 1999 and 1998, proceeds
from the sale of property, plant and equipment totaled $1.1 million
and $3.6 million, respectively. Investing activities in 1999 also
included $1.6 million from the sale of an investment.
Cash used by financing activities was $7.4 million in 1999, and
cash provided by financing activities was $26.7 million in 1998.
Financing activities included net borrowings in 1999 of $13.3 million
and net repayments in 1998 of $26.6 million on the Company's revolving
credit facility. Financing activities in 1999 also included a decrease
in outstanding checks in excess of deposits of $20.1 million,
principal payments on long-term debt of $9.2 million, and $1.0 million
distributed to the former shareholders of NCF prior to the merger.
Finally, in 1999, the Company received cash flows of $5.0 million from
the exercise of stock options and proceeds of $4.6 million from the
issuance of Industrial Revenue Bonds to finance the construction of a
new produce-processing facility. Cash flows from financing activities
in 1998 included an increase in outstanding checks in excess of
deposits of $10.8 million and $1.8 million from the exercise of stock
options. Financing activities in 1998 also included repayment of
promissory notes totaling $7.3 million, payments on long-term debt of
$1.6 million, and $451,000 distributed to the former shareholders of
NCF. Lastly, the Company received proceeds of $50.0 million from the
issuance of 6.77% Senior Notes in May 1998.
On March 5, 1999, the Company entered into an $85.0 million
revolving credit facility with a group of commercial banks which
replaced the Company's existing $30.0 million credit facility. In
addition, the Company entered into a $5.0 million working capital line
of credit with the lead bank of the group. Collectively, these two
facilities are referred to as the "Credit Facility." The Credit
Facility expires in March 2002. Approximately $35.0 million was
outstanding under the Credit Facility at January 1, 2000. The Credit
Facility also supports up to $10.0 million of letters of credit. At
January 1, 2000, the Company was contingently liable for $6.3 million
of outstanding letters of credit that reduce amounts available under
the Credit Facility. At January 1, 2000, the Company had $48.7
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 1, 2000, the
Credit Facility bore interest at 6.65%. Additionally, the Credit
Facility requires the maintenance of certain financial ratios as
defined in the credit agreement.
On March 19, 1999, $9.0 million of Industrial Revenue Bonds were
issued on behalf of a subsidiary of the Company to finance the
construction of a produce-processing facility. Approximately $4.6
million of the proceeds from these bonds have been used and are
reflected on the Company's consolidated balance sheet as of January 1,
2000. Interest varies as determined by the remarketing agent for the
bonds and was 5.55% at January 1, 2000. The bonds are secured by a
letter of credit issued by a commercial bank and are due in March
2019.
During the third quarter of 1999, the Company increased its
master operating lease facility from $42.0 million to $47.0 million.
This facility is used to construct or purchase four distribution
centers. Two of these distribution centers became operational in
early 1999, and two are planned to become operational during 2000.
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 the
completion of each facility 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 maximum
residual value guarantees of 88% of the aggregate property cost. The
Company expects the fair value of the properties included in this
facility to eliminate or substantially reduce the Company's exposure
under the residual value guarantees. Through January 1, 2000,
construction expenditures by the lessor were approximately $32.1
million.
In May 1998, the Company issued $50.0 million of unsecured 6.77%
Senior Notes in a private placement. These notes are due May 8, 2010.
Interest is payable semi-annually. The Senior Notes require the
maintenance of certain financial ratios as defined in the note
agreement. Proceeds of the issue were used to repay amounts
outstanding under the Company's credit facilities and for general
corporate purposes.
The Company believes that cash flows 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 February 26, 1999, the Company completed a merger with 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 was
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. Accordingly, the
consolidated financial statements for periods prior to the combination
have been restated to include the accounts and results of operations
of NCF.
On August 28, 1999, the Company acquired the common stock of
Dixon Tom-A-Toe Companies, Inc. ("Dixon"), an Atlanta-based privately
owned processor of fresh-cut produce. Dixon has operations in the
Southeastern and Midwestern United States. Its operations have been
combined with Fresh Advantage, Inc. On August 31, 1999, AFI
Foodservice Distributors, Inc. ("AFI") acquired certain net assets of
State Hotel Supply Company, Inc. ("State Hotel"), a privately owned
meat processor based in Newark, New Jersey. State Hotel provides
Certified Angus Beef and other meats to many of the leading
restaurants and food retailers in New York City and the surrounding
region. The financial results of State Hotel have been combined with
the operations of AFI. On December 13, 1999, Virginia Foodservice
Group, Inc. ("VFG") acquired certain net assets of Nesson Meat Sales
("Nesson"), a privately owned meat processor based in Norfolk,
Virginia. Nesson supplies Certified Angus Beef and other meats to
many leading restaurants and other foodservice operations in the
Tidewater Virginia area. The financial results of Nesson have been
combined with the operations of VFG. Together, Nesson, Dixon and
State Hotel had 1998 sales, which will contribute to the Company's
ongoing operations, of approximately $100 million. The aggregate
purchase price for the common stock of Dixon and the net assets of
Nesson and State Hotel was $20.4 million. To fund these acquisitions,
the Company issued approximately 304,000 shares of its common stock
and financed $11.9 million with proceeds from the Credit Facility.
The aggregate consideration payable to the former shareholders of
Dixon and State Hotel is subject to increase in certain circumstances.
The acquisitions of Nesson, Dixon and State Hotel have been
accounted for using the purchase method; therefore, the acquired
assets and liabilities have been recorded at their estimated fair
values at the dates of acquisition. The excess of the purchase price
over the fair value of tangible net assets acquired for these
acquisitions was approximately $19.8 million and is being amortized on
a straight-line basis over estimated lives ranging from 5 to 40 years.
On June 1, 1998, the Company acquired certain net assets related
to the group and chemicals business of 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 a number of independent
distributors. On July 27, 1998, the Company acquired certain net
assets of 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
for the assets of APC and VFG was approximately $29.4 million, which
includes an additional $4.4 million paid in the first quarter of 1999
to the former shareholders of VFG, and an additional $1.1 million paid
in the second quarter of 1999 to the former shareholders of APC as a
result of meeting certain performance criteria under the purchase
agreements. These purchases were financed with proceeds from an
existing credit facility. The aggregate consideration payable to the
former shareholders of APC and VFG is subject to further increase in
certain circumstances.
The acquisitions of APC and VFG have been accounted for using the
purchase method. Therefore, the acquired assets and liabilities have
been recorded at their estimated fair values at the dates of
acquisition. The excess of the purchase price over the fair value of
tangible net assets acquired was approximately $29.4 million and is
being amortized on a straight-line basis over estimated lives ranging
from 5 to 40 years.
YEAR 2000 ISSUE
The Year 2000 issue affected virtually all companies and
organizations. Many companies had existing computer applications that
used only two digits to identify a year in the date field. Some of
these applications were designed and developed without considering the
impact of the century change. If not corrected, these computer
applications were expected to fail or create erroneous results when
processing data in the year 2000.
In mid-1997, the Company initiated a project to address any
potential 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
and utilities. The project consisted of a number of phases:
awareness, assessment, programming/testing and implementation.
In addition to the Year 2000 project, the Company standardized
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 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. Additionally, one of the
Company's distribution subsidiaries, which operates five distribution
facilities, processes information in a centralized computing
environment. Therefore, the Company's Year 2000 remediation efforts
were minimized by focusing its programming on two primary operating
systems. The Company completed the Year 2000 project in late 1999 at a
total project cost of approximately $800,000. Since January 1, 2000,
the Company has not experienced any significant Year 2000-related
problems in any of its IT or non-IT systems. Also, the Company has
not experienced any disruptions as a result of noncompliance by its
significant business partners. The Company will continue to monitor
both its IT and non-IT systems and its business partners for the next
several months.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board ("FASB")
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. In May 1999, the
FASB issued SFAS No. 137, Deferral of the Effective Date of SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 137 delayed the effective date of SFAS No. 133 by one year. The
Company will be required to adopt the provisions of this standard with
the fiscal year beginning on December 31, 2000. Management believes
the effect of the adoption of this standard will be limited to
financial statement presentation and disclosure and will not have a
material effect on the Company's financial condition or results of
operations.
QUARTERLY RESULTS AND SEASONALITY
Set forth below is certain summary information with respect to
the Company's operations for the most recent eight fiscal quarters.
Historically, the restaurant and foodservice business is seasonal with
lower sales in the first quarter. Consequently, the Company may
experience lower net sales during the first quarter, depending on the
timing of any acquisitions. Management believes the Company's
quarterly net sales will continue to be impacted by the seasonality of
the restaurant business.
1999
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
Net sales $ 466,378 $ 501,960 $ 534,583 $ 552,677
Gross profit 62,993 67,855 74,375 76,743
Operating profit 6,280 10,076 12,109 10,876
Earnings before income taxes 1,176 8,829 11,672 9,574
Net earnings 651 5,430 7,236 5,934
Basic net earnings per common share 0.05 0.40 0.52 0.42
Diluted net earnings per common share 0.05 0.39 0.50 0.41
Pro forma basic net earnings per common share (1)(2) 0.23 0.40 0.49 0.42
Pro forma diluted net earnings per common share (1)(2) $ 0.22 $ 0.39 0.47 0.41
1998
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
Net sales $ 375,170 $ 412,994 $ 445,018 $ 488,134
Gross profit 48,365 53,688 60,577 67,607
Operating profit 4,978 8,194 9,349 9,070
Earnings before income taxes 3,992 7,174 8,422 7,787
Net earnings 2,387 4,546 5,586 4,891
Basic net earnings per common share 0.18 0.34 0.42 0.36
Diluted net earnings per common share 0.17 0.33 0.40 0.35
Pro forma basic net earnings per common share (1) 0.18 0.33 0.39 0.36
Pro forma diluted net earnings per common share (1) $ 0.18 $ 0.32 $ 0.37 $ 0.34
(1) Pro forma adjustments to net earnings per common share add back nonrecurring merger expenses
and adjust income taxes as if NorthCenter Foodservice was taxed as a C-corporation for income
tax purposes rather than as an S-corporation prior to the merger of NorthCenter Foodservice
in February 1999.
(2) 1999 excludes a nonrecurring gain of $768 on the sale of an investment.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risks are related to fluctuations in
interest rates and changes in commodity prices. The Company's primary
interest rate 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. For fixed-rate debt, interest rate changes affect the
fair market value but do not impact earnings or cash flows. For
floating-rate debt, interest rate changes generally do not affect the
fair market value but do impact future earnings and cash flows,
assuming other facts remain constant. As of January 1, 2000, the
Company's total debt consisted of fixed and floating rate debt of
$50.0 million and $43.1 million, respectively. At January 1, 2000,
the fair market value of the Company's fixed rate debt was
approximately $48.0 million. Holding other variables constant, such
as debt levels, a one percentage point decrease in interest rates
would increase the unrealized fair market value of the fixed-rate debt
by approximately $500,000. The earnings and cash flows impact for the
next year resulting from a one percentage point increase in interest
rates would be approximately $430,000, holding other variables
constant. Substantially all of the Company's floating rate debt is
based on LIBOR.
From time to time, the Company uses forward swap contracts for
hedging purposes to reduce the effect of changing fuel prices. These
contracts are recorded using hedge accounting. Under hedge
accounting, the gain or loss on the hedge is deferred and recorded as
a component of the underlying expense. During the second quarter of
1999, the Company entered into a forward swap contract for fuel, which
is used in the normal course of its distribution business. This
contract fixed a certain portion of the Company's forecasted fuel
costs through March 2000. Based on fuel prices at January 1, 2000,
the estimated fair value of the fuel contract was $489,000. A 10%
decline in fuel prices would decrease the fair value of this contract
by approximately $124,000.
Item 8. Financial Statements and Supplementary Data.
Page of Form 10-K
Financial Statements:
Report of Independent Auditors...................... F-1
Consolidated Balance Sheets......................... F-2
Consolidated Statements of Earnings................. F-3
Consolidated Statements of Shareholders' Equity..... F-4
Consolidated Statements of Cash Flows............... F-5
Notes to Consolidated Financial Statements.......... F-6
Financial Statement Schedules:
Independent Auditors' Report on Financial Statement
Schedule.......................................... S-1
Schedule II - Valuation and Qualifying Accounts..... S-2
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Proxy Statement issued in connection with the Shareholders'
meeting to be held on May 3, 2000 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 3, 2000 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 3, 2000 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 3, 2000 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 23 of this Form 10-K.
2. Financial Statement Schedules. See page 23 of this Form 10-K.
3. Exhibits:
A. Incorporated by reference to the Company's Registration Statement
on Form S-1 (No. 33-64930):
Exhibit
Number Description
3.1 -- Restated Charter of Registrant.
3.2 -- Restated Bylaws of Registrant.
4.1 -- Specimen Common Stock certificate.
4.2 -- Article 5 of the Registrant's Restated Charter
(included in Exhibit 3.1).
4.3 -- Article 6 of the Registrant's Restated Bylaws (included
in Exhibit 3.2).
10.1 -- Loan Agreement dated 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.
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 Annual Report
on Form 10-K for the fiscal year ended December 28, 1996:
Exhibit
Number Description
10.15 -- Performance Food Group Company Employee Savings and Stock
Ownership Plan Savings Trust.
F. Incorporated by Reference to the Company's Report on Form 8-K
dated May 20, 1997:
Exhibit
Number Description
10.16 -- Rights Agreement dated as of May 16, 1997 between
Performance Food Group Company and First Union
National Bank of North Carolina, as Rights Agent.
G. Incorporated by Reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 27, 1997:
Exhibit
Number Description
10.17 -- Participation Agreement dated as of August 29, 1997 among
Performance Food Group Company, First
Security Bank, National Association and First Union National
Bank (as agent for the Lenders and Holders).
10.18 -- Lease Agreement dated as of August 29, 1997 between First
Security Bank, National Association and
Performance Food Group Company.
H. Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 27, 1997:
Exhibit
Number Description
10.19 -- Form of Change in Control Agreement dated October 29, 1997
with Blake P. Auchmoody, John D. Austin,
Roger L. Boeve, John R. Crown, C. Michael Gray, Thomas
Hoffman, Mark H. Johnson, Kenneth Peters,
Robert C. Sledd and David W. Sober.
10.20 -- Form of Change in Control Agreement dated October 29, 1997
with certain key executives.
I. Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 27, 1998:
Exhibit
Number Description
10.21 -- Form of Note Purchase Agreement dated as of May 8, 1998 for
6.77% Senior Notes due May 8, 2010.
J. Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended January 2, 1999:
Exhibit
Number Description
10.22 -- Performance Food Group Company Executive Deferred
Compensation Plan
K. Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended April 3, 1999:
Exhibit
Number Description
10.23 -- Revolving Credit Agreement dated as of March 5, 1999
10.24 -- Letter of Credit and Reimbursement Agreement by and among
KMB Produce, Inc. and First Union
National Bank, dated as of March 1, 1999
10.25 -- Guaranty Agreement by and among Performance Food Group
Company and First Union National Bank,
dated as of March 1, 1999
10.26 -- Amendment to Certain Operative Agreements
L. Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 2, 1999:
Exhibit
Number Description
10.27 -- First Amendment to Certain Operative
Agreements dated August 31, 1999
M. Filed herewith:
Exhibit
Number Description
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
January 2, 1999 (SEC purposes only).
27.3 -- Restated Financial Data Schedule for Year Ended
December 27, 1997 (SEC purposes only).
(b) During the fourth quarter ended January 1, 2000, the Company
filed no reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Richmond, Commonwealth of Virginia, on March 30, 2000.
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 March 30, 2000
Robert C. Sledd Executive Officer and
Director [Principal
Executive Officer]
/s/ C. Michael Gray President, Chief March 30, 2000
C. Michael Gray Operating Officer and
Director
/s/ Roger L. Boeve Executive Vice President March 30, 2000
Roger L. Boeve and Chief Financial
Officer [Principal
Financial Officer and
Principal Accounting
Officer]
/s/ Charles E. Adair Director March 30, 2000
Charles E. Adair
/s/ Fred C. Goad, Jr. Director March 30, 2000
Fred C. Goad, Jr.
/s/ Timothy M. Graven Director March 30, 2000
Timothy M. Graven
/s/ John E. Stokely Director March 30, 2000
John E. Stokely
Independent Auditors' Report
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 1, 2000 and January 2, 1999, 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 1, 2000.
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 1,
2000 and January 2, 1999, and the results of their operations and
their cash flows for each of these fiscal years in the three-year
period ended January 1, 2000, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Richmond, Virginia
February 7, 2000
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share amounts) 1999 1998
ASSETS
Current assets:
Cash $ 5,606 $ 7,796
Trade accounts and notes receivable, less allowance
for doubtful accounts of $4,477 and $3,891 119,126 110,372
Inventories 108,550 90,388
Prepaid expenses and other current assets 4,030 4,915
Deferred income taxes 5,570 808
Total current assets 242,882 214,279
Property, plant and equipment, net 113,930 93,402
Goodwill, net of accumulated amortization of $5,941 and $3,593 97,975 72,483
Other intangible assets, net of accumulated
amortization of $1,926 and $1,722 5,353 5,337
Other assets 1,905 2,211
Total assets $ 462,045 $ 387,712
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Outstanding checks in excess of deposits $ 14,082 $ 33,589
Current installments of long-term debt 703 797
Trade accounts payable 116,821 93,182
Accrued expenses 36,751 23,431
Income taxes payable 3,646 -
Total current liabilities 172,003 150,999
Long-term debt, excluding current installments 92,404 74,305
Deferred income taxes 8,294 5,323
Total liabilities 272,701 230,627
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;
14,112,151 and 13,458,773 shares issued and outstanding 141 135
Additional paid-in capital 102,681 89,188
Retained earnings 88,857 70,631
191,679 159,954
Loan to leveraged employee stock ownership plan (2,335) (2,869)
Total shareholders' equity 189,344 157,085
Commitments and contingencies (notes 4, 7, 8, 9, 10, 12, 13 and 15)
Total liabilities and shareholders' equity $ 462,045 $ 387,712
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share amounts) 1999 1998 1997
Net sales $ 2,055,598 $ 1,721,316 $ 1,331,002
Cost of goods sold 1,773,632 1,491,079 1,159,593
Gross profit 281,966 230,237 171,409
Operating expenses 242,625 198,646 146,344
Operating profit 39,341 31,591 25,065
Other income (expense):
Interest expense (5,388) (4,411) (2,978)
Nonrecurring merger expenses (3,812) - -
Gain on sale of investment 768 - -
Other, net 342 195 111
Other expense, net (8,090) (4,216) (2,867)
Earnings before income taxes 31,251 27,375 22,198
Income tax expense 12,000 9,965 8,298
Net earnings $ 19,251 $ 17,410 $ 13,900
Weighted average common shares outstanding 13,772 13,398 12,810
Basic net earnings per common share $ 1.40 $ 1.30 $ 1.09
Weighted average common shares and dilutive
potential common shares outstanding 14,219 13,925 13,341
Diluted net earnings per common share $ 1.35 $ 1.25 $ 1.04
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Loan to Total
Common stock Additional Retained leveraged shareholders'
(Dollar amounts in thousands) Shares Amount paid-in capital earnings ESOP equity
Balance at December 28, 1996 12,513,191 $ 126 $ 68,297 $ 40,880 $ (3,835) $ 105,468
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
Distributions of pooled company - - - (1,010) - (1,010)
Net earnings - - - 13,900 - 13,900
Balance at December 27, 1997 13,333,286 134 87,412 53,770 (3,367) 137,949
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
Distributions of pooled company - - - (451) - (451)
Effect of conforming fiscal year
of pooled company - - - (98) - (98)
Net earnings - - - 17,410 - 17,410
Balance at January 2, 1999 13,458,773 135 89,188 70,631 (2,869) 157,085
Issuance of shares for acquisitions 303,928 3 8,507 - - 8,510
Employee stock option, incentive
and purchase plans and related
income tax benefits 349,450 3 4,986 - - 4,989
Principal payments on loan to
leveraged ESOP - - - 534 534
Distributions of pooled company - - - (1,025) - (1,025)
Net earnings - - - 19,251 - 19,251
Balance at January 1, 2000 14,112,151 $ 141 $ 102,681 $ 88,857 $ (2,335) $ 189,344
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands) 1999 1998 1997
Cash flows from operating activities:
Net earnings $ 19,251 $ 17,410 $ 13,900
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation 11,081 9,152 7,319
Amortization 3,056 2,349 1,273
ESOP contributions applied to principal of ESOP debt 534 498 468
Gain on sale of investment (768) - -
Loss (gain) on disposal of property, plant and equipment (32) 36 (50)
Deferred income taxes 226 1,380 1,241
Gain on insurance settlement - - (1,300)
Loss on writedown of leasehold improvements - - 1,287
Changes in operating assets and liabilities, net of effects
of companies acquired:
Decrease (increase) in trade accounts and notes receivable 213 (17,603) (2,589)
Increase in inventories (15,519) (9,533) (7,669)
Decrease (increase) in prepaid expenses and other current assets 6 (1,152) (819)
Increase in trade accounts payable 17,161 20,701 10,034
Increase in accrued expenses 7,118 4,032 776
Increase (decrease) in income taxes payable 4,676 (2,941) 424
Total adjustments 27,752 6,919 10,395
Net cash provided by operating activities 47,003 24,329 24,295
Cash flows from investing activities, net of effects of
companies acquired:
Purchases of property, plant and equipment (26,006) (26,663) (9,054)
Proceeds from sale of investment 1,563 - -
Proceeds from sale of property, plant and equipment 1,061 3,600 197
Net proceeds from insurance settlement - - 4,200
Net cash paid for acquisitions (18,066) (23,857) (54,631)
Increase in intangibles and other assets (366) (170) (648)
Net cash used by investing activities (41,814) (47,090) (59,936)
Cash flows from financing activities:
Increase (decrease) in outstanding checks in excess
of deposits (20,124) 10,848 4,489
Net proceeds from (payments on) revolving credit facility 13,317 (26,560) 27,183
Proceeds from issuance of long-term debt - 50,041 1,813
Proceeds from issuance of Industrial Revenue Bonds 4,640 - -
Repayment of promissory notes - (7,278) -
Principal payments on long-term debt (9,176) (1,602) (1,210)
Distributions of pooled company (1,025) (451) (1,010)
Effect of conforming fiscal year of pooled company - (98) -
Employee stock option, incentive and purchase plans
and related income tax benefits 4,989 1,777 2,608
Net cash provided (used) by financing activities (7,379) 26,677 33,873
Net increase (decrease) in cash (2,190) 3,916 (1,768)
Cash, beginning of year 7,796 3,880 5,648
Cash, end of year $ 5,606 $ 7,796 $ 3,880
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
______________________________________________________________________
January 1, 2000 and January 2, 1999
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.
The Company services these customers through three operating
segments: broadline foodservice distribution ("Broadline");
customized foodservice distribution ("Customized"); and fresh-cut
produce processing ("Fresh-Cut"). Broadline distributes
approximately 25,000 food and food-related products to a
combination of approximately 25,000 traditional and multi-unit
chain customers. Broadline consists of eleven operating locations
that independently design their own product mix, distribution
routes and delivery schedules to accommodate the varying needs of
their customers. 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 customers can be more efficiently served through
centralized information systems, dedicated distribution routes
and relatively large and consistent orders per delivery. The
Customized distribution network covers 50 states and several
foreign countries from five distribution facilities. Fresh-Cut
processes and distributes a variety of fresh produce primarily
for quick-service restaurants mainly in the Southeastern and
Southwestern United States.
The Company operates through the following subsidiaries and
division: Pocahontas Foods, USA, Inc.; Caro Foods, Inc. ("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. ("VFG"); Affiliated Paper Companies, Inc.
("APC"); PFG-Lester Broadline, Inc. ("Lester"); NorthCenter
Foodservice Corporation ("NCF"); Fresh Advantage, Inc. ("Fresh
Advantage"); and PFG Florida division.
The Company uses a 52/53 week fiscal year ending on the Saturday
closest to December 31. The fiscal years ended January 1, 2000,
January 2, 1999 and December 27, 1997 (52, 53 and 52 week years,
respectively) are referred to herein as 1999, 1998 and 1997,
respectively. As a result of the merger with NCF on February 26,
1999, discussed in Note 4, the consolidated financial statements
for years prior to the combination have been restated to include
the accounts and results of operations of NCF.
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.
(c) Inventories
The Company values inventory at the lower of cost or market using
both the first-in, first-out 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 follows 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-compete agreements and deferred
loan costs. These intangible assets are amortized on a straight-
line basis over their estimated useful lives, which range from 5
to 40 years.
(g) Net Earnings Per Common Share
Basic net earnings per common share is computed using the
weighted average number of common shares outstanding during the
year. Diluted net earnings per common share is calculated using
the weighted average common shares and potentially dilutive
common shares, calculated using the treasury stock method,
outstanding during the year. Potentially dilutive common shares
consist of options issued under various stock plans described in
Note 13.
(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 13).
The Company has adopted the disclosure requirements of SFAS No.
123.
(i) Accounting Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions 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 1, 2000 and January 2, 1999, 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 values due to the relatively short
maturities of those instruments. The carrying value of the
Company's floating-rate, long-term debt approximates fair value
due to the variable nature of the interest rates charged on such
borrowings. The Company estimates the fair value of its fixed-
rate, long-term debt, consisting primarily of $50.0 million of
6.77% Senior Notes, using discounted cash flow analysis based on
current borrowing rates. At January 1, 2000 and January 2, 1999,
the fair value of the Company's 6.77% Senior Notes was
approximately $48.0 million and $52.8 million, respectively.
(k) Impairment of Long-Lived Assets
Long-lived assets, including intangible 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 1998 and 1997 consolidated financial
statements have been reclassified to conform with the 1999
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
17%, 18% and 21% of consolidated net sales for 1999, 1998 and
1997, respectively. Net sales to Outback accounted for 16%, 15%
and 15% of consolidated net sales for 1999, 1998 and 1997,
respectively. At January 1, 2000, amounts receivable from these
two customers represented 18% 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 February 26, 1999, the Company completed a merger with 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 was 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.
Accordingly, the consolidated financial statements for periods
prior to the combination have been restated to include the
accounts and results of operations of NCF. The Company incurred
nonrecurring merger expenses of $3.8 million in 1999 associated
with the NCF merger. These expenses include professional fees
and transaction costs, as well as certain contractual payments to
NCF employees.
The results of operations of the Company and NCF, including the
related $3.8 million of nonrecurring merger expenses, and the
combined amounts presented in the accompanying consolidated
financial statements are summarized below:
(In thousands) 1999 1998
Net sales:
The Company $ 1,945,370 $ 1,622,870
NCF 110,228 98,446
Combined $ 2,055,598 $ 1,721,316
Net earnings:
The Company $ 18,818 $ 16,168
NCF 433 1,242
Combined $ 19,251 $ 17,410
Adjustments to conform to NCF's accounting methods and practices
to those of the Company consisted primarily of depreciation and
were not material. Prior to the merger, NCF's fiscal year end
was the Saturday closest to February 28. For 1998, NCF conformed
its fiscal year end to that of the Company. The effect of
conforming NCF's year end was approximately $98,000.
NCF, prior to the merger with the Company, was treated as an S-
corporation for Federal income tax purposes. The following
disclosures, including unaudited pro forma tax expense, present
the combined results of operations, excluding nonrecurring merger
expenses of $3.8 million, as if NCF was taxed as a C-corporation
for the years presented:
(In thousands, except per share amounts) 1999 1998
Net sales $ 2,055,598 $ 1,721,316
Cost of goods sold 1,773,632 1,491,079
Gross profit 281,966 230,237
Operating expenses 242,625 198,646
Operating profit 39,341 31,591
Other income (expense):
Interest expense (5,388) (4,411)
Other, net 1,110 195
Other expense, net (4,278) (4,216)
Earnings before income taxes 35,063 27,375
Income tax expense 13,359 10,539
Net earnings $ 21,704 $ 16,836
Weighted average common shares outstanding 13,772 13,398
Basic net earnings per common share $ 1.58 $ 1.26
Weighted average common shares and
dilutive potential common shares outstanding 14,219 13,925
Diluted net earnings per common share $ 1.53 $ 1.21
On August 28, 1999, the Company acquired the common stock of
Dixon Tom-A-Toe Companies, Inc. ("Dixon"), an Atlanta-based
privately owned processor of fresh-cut produce. Dixon has
operations in the Southeastern and Midwestern United States. Its
operations have been combined with the operations of Fresh
Advantage, Inc. On August 31, 1999, AFI acquired certain net
assets of State Hotel Supply Company, Inc. ("State Hotel"), a
privately owned meat processor based in Newark, New Jersey.
State Hotel provides Certified Angus Beef and other meats to many
of the leading restaurants and food retailers in New York City
and the surrounding region. The financial results of State Hotel
have been combined with the operations of AFI. On December 13,
1999, VFG acquired certain net assets of Nesson Meat Sales
("Nesson"), a privately owned meat processor based in Norfolk,
Virginia. Nesson supplies Certified Angus Beef and other meats
to many leading restaurants and other foodservice operations in
the Tidewater Virginia area. The financial results of Nesson
have been combined with the operations of VFG. Together, Nesson,
Dixon and State Hotel had 1998 sales, which will contribute to
the Company's ongoing operations, of approximately $100 million.
The aggregate purchase price for the common stock of Dixon and
the net assets of Nesson and State Hotel was $20.4 million. To
fund these acquisitions, the Company issued approximately 304,000
shares of its common stock and financed $11.9 million with
proceeds from the Credit Facility. The aggregate consideration
payable to the former shareholders of Dixon and State Hotel is
subject to increase in certain circumstances.
The acquisitions of Nesson, Dixon and State Hotel have been
accounted for using the purchase method; therefore, the acquired
assets and liabilities have been recorded at their estimated fair
values at the dates of acquisition. The excess of the purchase
price over the fair value of tangible net assets acquired for
these acquisitions was approximately $19.8 million and is being
amortized on a straight-line basis over estimated lives ranging
from 5 to 40 years.
On June 1, 1998, the Company acquired certain net assets related
to the group and chemicals business of 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 a number of independent
distributors. On July 27, 1998, the Company acquired certain net
assets of 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 for the assets of APC
and VFG was approximately $29.4 million, which includes an
additional $4.4 million paid in the first quarter of 1999 to the
former shareholders of VFG, and an additional $1.1 million paid
in the second quarter of 1999 to the former shareholders of APC
as a result of meeting certain performance criteria under the
purchase agreements. These purchases were financed with proceeds
from the the Company's credit facilities. The aggregate
consideration payable to the former shareholders of APC and VFG
is subject to further increase in certain circumstances.
The acquisitions of APC and VFG have been accounted for using the
purchase method. Therefore, the acquired assets and liabilities
have been recorded at their estimated fair values at the dates of
acquisition. The excess of the purchase price over the fair value
of tangible net assets acquired of $29.4 million 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 dates of
acquisition through January 1, 2000. The unaudited consolidated
results of operations on a pro forma basis as though these
acquisitions had been consummated as of the beginning of 1998 are
as follows:
(In thousands, except per share amounts) 1999 1998
Net sales $ 2,122,242 $ 1,858,760
Gross profit 295,898 261,122
Net earnings 17,278 13,584
Basic net earnings per common share $ 1.24 $ .99
Diluted net earnings per common share 1.20 .95
The pro forma results are presented for information only and are
not necessarily indicative of the operating results that would
have occurred had the NCF merger and the other acquisitions been
consummated as of the above dates.
5. Property, Plant and Equipment
Property, plant and equipment as of January 1, 2000 and January
2, 1999 consist of the following:
(In thousands) 1999 1998
Land $ 5,952 $ 3,818
Buildings and building improvements 79,272 69,383
Transportation equipment 19,334 18,118
Warehouse and plant equipment 33,159 23,370
Office equipment, furniture and fixtures 23,993 16,956
Leasehold improvements 5,081 3,794
Construction-in-process 9,302 2,402
176,093 137,841
Less accumulated depreciation and amortization 62,163 44,439
Property, plant and equipment, net $ 113,930 $ 93,402
6. Supplemental Cash Flow Information
Supplemental disclosures of cash flow information for 1999, 1998
and 1997 are as follows:
(In thousands) 1999 1998 1997
Cash paid during the year for:
Interest $ 5,323 $ 3,908 $ 2,785
Income taxes $ 7,126 $ 12,262 $ 6,583
Effects of companies acquired:
Fair value of assets acquired $ 49,097 $ 33,417 $ 101,536
Fair value of liabilities assumed (22,521) (9,560) (30,390)
Stock issued for acquisitions (8,510) - (16,515)
Net cash paid for acquisitions $ 18,066 $ 23,857 $ 54,631
7. Financial Instruments
The Company uses forward swap contracts for hedging purposes to
reduce the effect of changing fuel prices. These contracts are
recorded using hedge accounting. Under hedge accounting, the
gain or loss on the hedge is deferred and recorded as a component
of the underlying expense.
During the second quarter of 1999, the Company entered into a
forward swap contract for fuel, which is used in the normal
course of its distribution business. This contract fixes a
certain portion of the Company's forecasted fuel costs through
March 2000. The following table represents the Company's
outstanding fuel hedge contract as of January 1, 2000:
Notional Average
Amount Contract Estimated
(In thousands, except average contract price) (gallons) Price Fair Value
Forward swap contract 1,777 $ .4230 $ 489
8. Long-term Debt
Long-term debt as of January 1, 2000 and January 2, 1999 consists
of the following:
(In thousands) 1999 1998
Revolving Credit Facility $ 34,994 $ 12,453
Senior Notes 50,000 50,000
Industrial Revenue Bonds 4,640 -
ESOP loan 2,335 2,869
Other notes payable 1,138 9,780
Total long-term debt 93,107 75,102
Less current maturities 703 797
Long-term debt, excluding current installments $ 92,404 $ 74,305
Revolving Credit Facility
On March 5, 1999, the Company entered into an $85.0 million
revolving credit facility with a group of commercial banks which
replaced the Company's existing $30.0 million credit facility.
In addition, the Company entered into a $5.0 million working
capital line of credit with the lead bank of the group.
Collectively, these two facilities are referred to as the "Credit
Facility." The Credit Facility expires in March 2002.
Approximately $35.0 million was outstanding under the Credit
Facility at January 1, 2000. The Credit Facility also supports
up to $10.0 million of letters of credit. At January 1, 2000,
the Company was contingently liable for $6.3 million of
outstanding letters of credit that reduce amounts available under
the Credit Facility. At January 1, 2000, the Company had $48.7
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 1,
2000, the Credit Facility bore interest at 6.65%. Additionally,
the Credit Facility requires the maintenance of certain financial
ratios, as defined in the Company's credit agreement, regarding
debt to capitalization, interest coverage and minimum net worth.
Senior Notes
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 issuance were used to repay amounts outstanding under the
Company's credit facilities and for general corporate purposes.
Industrial Revenue Bonds
On March 19, 1999, $9.0 million of Industrial Revenue Bonds were
issued on behalf of a subsidiary of the Company to finance the
construction of a produce-processing facility. These bonds
mature in March 2019. Approximately $4.6 million of the proceeds
from these bonds have been used and are reflected on the
Company's consolidated balance sheet as of January 1, 2000.
Interest varies as determined by the remarketing agent for the
bonds and was 5.55% at January 1, 2000. The bonds are secured by
a letter of credit issued by a commercial bank.
ESOP Loan
The Company sponsors a leveraged employee stock ownership plan
that was financed with proceeds of a note payable to a commercial
bank (the "ESOP loan"). The ESOP loan is secured by the common
stock of the Company acquired by the employee stock ownership
plan and is guaranteed by the Company. The loan is payable in
quarterly installments of $170,000, which includes interest based
on LIBOR plus a spread over LIBOR (5.74% at January 1, 2000).
The loan matures in 2003.
Maturities of long-term debt are as follows:
(In thousands)
2000 $ 703
2001 711
2002 35,697
2003 614
2004 42
Thereafter 55,340
Total long-term debt $ 93,107
9. Shareholders' Equity
In May 1997, the Company's Board of Directors approved a
shareholder rights plan. A dividend of one stock purchase right
(a "Right") per common share was distributed to shareholders of
record on May 30, 1997. Common shares issued subsequent to the
adoption of the rights plan automatically have Rights attached to
them. Under certain circumstances, each Right entitles the
shareholders to one-hundredth of one share of preferred stock,
par value $.01 per share, at an initial exercise price of $100
per Right. The Rights will be exercisable only if a person or
group acquires 15% or more of the Company's outstanding common
stock. Until the Rights become exercisable, they have no
dilutive effect on the Company's net earnings per common share.
The Company can redeem the Rights, which are non-voting, at any
time prior to their becoming exercisable at a redemption price of
$.001 per Right. The Rights will expire in May 2007, unless
redeemed earlier by the Company.
10. 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 1, 2000, the Company is
obligated under operating lease agreements to make future minimum
lease payments as follows:
(In thousands)
2000 $ 15,221
2001 13,159
2002 11,494
2003 8,622
2004 5,989
Thereafter 31,129
Total minimum lease payments $ 85,614
Total rental expense for operating leases in 1999, 1998 and 1997
was approximately $16.3 million, $12.8 million and $10.1 million,
respectively.
During the third quarter of 1999, the Company increased its
master operating lease facility from $42.0 million to $47.0
million, which is used to construct or purchase four distribution
centers. Two of these distribution centers became operational in
early 1999, and two distribution centers are planned to become
operational in 2000. 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 maximum
residual value guarantees of 88% of the aggregate property cost.
These residual value guarantees are not included in the above
table of future minimum lease payments. The Company expects the
fair value of the properties included in this facility to
eliminate or substantially reduce the Company's exposure under
the residual value guarantees. Through January 1, 2000, total
construction expenditures by the lessor were approximately $32.1
million under this facility.
11. Income Taxes
Income tax expense consists of the following:
(In thousands) 1999 1998 1997
Current:
Federal $ 11,677 $ 8,048 $ 6,800
State 747 537 257
12,424 8,585 7,057
Deferred:
Federal (608) 1,208 1,174
State 184 172 67
(424) 1,380 1,241
Total income tax expense $ 12,000 $ 9,965 $ 8,298
The effective income tax rates for 1999, 1998 and 1997 were
38.4%, 36.4% and 37.4%, respectively. Actual income tax expense
differs from the amount computed by applying the applicable U.S.
Federal corporate income tax rate of 35% to earnings before
income taxes as follows:
(In thousands) 1999 1998 1997
Federal income taxes computed at statutory rate $ 10,938 $ 9,581 $ 7,769
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income tax benefit 211 464 211
Non-deductible expenses 306 126 135
Tax credits (353) - -
Losses attributable to S-corporation periods 283 (535) (328)
Amortization of goodwill 340 288 164
Other, net 275 41 347
Total income tax expense $ 12,000 $ 9,965 $ 8,298
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 that created significant
deferred tax assets and liabilities at January 1, 2000 and
January 2, 1999 were as follows:
(In thousands) 1999 1998
Deferred tax assets:
Allowance for doubtful accounts $ 1,647 $ 1,103
Inventories 461 -
Accrued employee benefits 1,150 -
Self-insurance reserves 1,333 1,429
Deferred income 559 101
State operating loss carryforwards 732 228
Tax credit carryforwards 825 -
Other 219 100
Total gross deferred tax assets 6,926 2,961
Less valuation allowance (194) (194)
Net deferred tax assets 6,732 2,767
Deferred tax liabilities:
Property, plant and equipment 7,991 6,263
Inventories - 139
Basis difference in intangible assets 1,465 880
Total gross deferred tax liabilities 9,456 7,282
Net deferred tax liability $ (2,724) $ (4,515)
The net deferred income tax liabilities are presented in the
January 1, 2000 and January 2, 1999 consolidated balance sheets
as follows:
(In thousands) 1999 1998
Current deferred tax asset $ 5,570 $ 808
Noncurrent deferred tax liability (8,294) (5,323)
Net deferred tax liability $ (2,724) $ (4,515)
The valuation allowance relates primarily to state net operating
loss carryforwards of certain of the Company's subsidiaries. The
state net operating loss carryforwards expire in years 2009
through 2019. The Company has a state income tax credit
carryforward of approximately $825,000 which expires in 2004.
The Company believes the deferred tax assets, net of the
valuation allowance, will more likely than not be realized.
12. Employee Benefits
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, financed with assets
transferred from predecessor plans and the proceeds of the ESOP
loan, discussed in Note 8. 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 to the ESOP per year in 1999, 1998 and
1997. These amounts included interest expense on the ESOP loan of
approximately $146,000, $182,000 and $212,000 in 1999, 1998 and
1997, respectively. The release of ESOP shares is based upon debt-
service payments. Upon release, the shares are allocated to
participating employees' accounts. At January 1, 2000, 925,611
shares had been allocated to participant accounts and 355,568
shares were held as collateral for the ESOP loan. All ESOP shares
are considered outstanding for earnings-per-share calculations.
Employees participating in the defined contribution component of
the ESOP may elect to contribute between 1% and 15% 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 ESOP, for a total
match of 1.5%. In 1999, the Company matched 100% of the first 1%
of employee contributions, and 50% of the next 2% of employee
contributions, for a total match of 2%. Total matching
contributions were $1,312,000, $684,000 and $549,000 for 1999,
1998 and 1997, respectively. The Company, at the discretion of
the 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 1999, 1998 or 1997.
Employee Health Benefit Plans
The Company sponsors a self-insured, comprehensive health benefit
plan designed to provide insurance coverage to all full-time
employees and their dependents. The Company accrues 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.
13. Stock Compensation Plans
At January 1, 2000, the Company had four stock-based compensation
plans, which are described in the following paragraphs. In
accordance with APB No. 25, no compensation expense has been
recognized for the Company's stock option plans and stock
purchase plan. Had compensation expense for those plans been
determined based on the fair value at the grant date, consistent
with the method in SFAS No. 123, the Company's net earnings and
net earnings per common share would have been reduced to the
following pro forma amounts:
(In thousands except per share amounts) 1999 1998 1997
Net earnings As reported $ 19,251 $ 17,410 $ 13,900
Pro forma 17,311 15,726 13,030
Basic net earnings As reported $ 1.40 $ 1.30 $ 1.09
per common share Pro forma 1.26 1.17 1.02
Diluted net earnings As reported $ 1.35 $ 1.25 $ 1.04
per common share Pro forma 1.22 1.13 .98
The fair value of each option was estimated at the grant date
using the Black-Scholes option-pricing model. The following
weighted-average assumptions were used for all stock option plan
grants in 1999, 1998 and 1997, respectively: risk-free interest
rates of 5.28%, 5.56% and 6.14%; expected volatilities of 44.3%,
45.8% and 46.5%; expected option lives of 7.2 years, 6.4 years
and 7.6 years; and expected dividend yields of 0%, 0% and 0%.
The pro forma effects of applying SFAS No. 123 are not indicative
of future amounts because SFAS No. 123 does not apply to awards
granted prior to fiscal 1996. Additional stock option awards are
anticipated in future years.
Stock Option and Incentive Plans
The Company sponsors the 1989 Nonqualified Stock Option Plan (the
"1989 Plan"). The options granted under this plan vest ratably
over a four-year period from date of grant. At January 1, 2000,
141,870 options were outstanding, all of which were exercisable.
The options have terms of 10 years from the date of grant. No
grants have been made under the 1989 Plan since July 21, 1993.
The Company also 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 grant to each non-employee member of the Board of
Directors of 5,250 options and an annual grant of 2,500 options
at the then current market price. Options granted under the
Directors Plan totaled 10,000 in 1999, 12,750 in 1998 and 7,500
in 1997. These options vest one year from the date of grant and
have terms of 10 years from the grant date. At January 1, 2000,
59,500 options were outstanding, of which 49,500 were
exercisable.
The 1993 Employee Stock Incentive Plan (the "1993 Plan") provides
for the award of up to 1,625,000 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 1999, 1998
or 1997. Stock options granted under the 1993 Plan totaled
259,140, 405,280 and 122,100 for 1999, 1998 and 1997,
respectively. Options granted in 1999, 1998 and 1997 vest four
years from the date of the grant. At January 1, 2000, 1,078,670
options were outstanding, of which 93,365 were exercisable.
A summary of the Company's stock option activity and related
information for all stock option plans for 1999, 1998 and 1997 is
as follows:
1999 1998 1997
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 1,338,047 $ 12.65 1,050,639 $ 9.91 1,016,162 $ 8.66
Granted 269,140 25.52 418,030 18.66 129,600 17.93
Exercised (284,289) 4.79 (73,095) 5.58 (86,972) 5.43
Canceled (42,858) 17.25 (57,527) 14.53 (8,151) 12.67
Oustanding at
end of year 1,280,040 $ 16.99 1,338,047 $ 12.65 1,050,639 $ 9.91
Options
exercisable
at year-end 284,735 $ 8.66 530,323 $ 6.18 569,448 $ 5.75
Weighted-average
fair value of
options granted
during the year $ 13.84 $ 9.83 $ 10.58
The following table summarizes information about stock options outstanding
at January 1,2000:
Options Outstanding Options Exercisable
Weighted-
Number Average Weighted- Weighted-
Range of Outstanding Remaining Average Exercisable Average
exercise at Jan. 1, Contractual Exercise Jan.1, Exercise
prices 2000 Life Price 2000 Price
$ 3.67 - $ 9.33 161,370 2.88 $ 5.82 161,370 $ 5.82
$ 10.00 - $ 14.50 340,644 5.74 13.33 95,615 10.35
$ 15.56 - $ 21.00 525,371 8.00 18.52 27,750 19.35
$ 23.75 - $ 28.40 252,655 9.28 25.84 - -
$ 3.67 - $ 28.40 1,280,040 $ 16.99 284,735 $ 8.66
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. The Company is
authorized to issue 362,500 shares under the
Stock Purchase Plan. At January 1, 2000,
subscriptions under the Stock Purchase Plan
were outstanding for approximately 34,000
shares at $20.72 per share.
14. Related Party Transactions
The Company leases land and buildings from
certain shareholders and members of their
families. The Company made lease payments
under these leases of approximately $908,000,
$673,000 and $604,000 in 1999, 1998 and 1997,
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 in 1997 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 1999 or 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.
15. 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.
16. Industry Segment Information
The Company has three reportable segments:
Broadline, Customized and Fresh-Cut. The
accounting policies of the reportable
segments are the same as those described in
Note 1. Certain 1998 and 1997 amounts have
been reclassified to conform to the 1999
presentation, consistent with management's
reporting structure:
Fresh- Corporate &
(In thousands) Broadline Customized Cut Intersegment Consolidated
1999
Net external sales $ 1,145,536 $ 823,742 $ 86,320 $ - $ 2,055,598
Intersegment sales 3,575 - 13,186 (16,761) -
Operating profit 30,167 9,933 5,009 (5,168) 39,341
Total assets 308,531 93,776 48,259 11,479 462,045
Interest expense
(income) 6,953 2,447 260 (4,272) 5,388
Depreciation and
amortization 9,906 1,605 2,033 593 14,137
Capital
expenditures 13,831 1,711 9,292 1,172 26,006
1998
Net external sales $ 985,729 $ 676,794 $ 58,793 $ - $ 1,721,316
Intersegment sales 2,879 - 13,409 (16,288) -
Operating profit 23,011 8,271 3,614 (3,305) 31,591
Total assets 279,471 80,866 15,167 12,208 387,712
Interest expense
(income) 8,376 1,122 (537) (4,550) 4,411
Depreciation and
amortization 8,702 1,455 1,219 125 11,501
Capital
expenditures 9,308 15,738 1,500 117 26,663
1997
Net external sales $ 755,831 $ 535,004 $ 40,167 $ - $ 1,331,002
Intersegment sales 2,811 - 12,907 (15,718) -
Operating profit 20,590 5,123 2,133 (2,781) 25,065
Total assets 225,673 61,701 14,198 7,373 308,945
Interest expense
(income) 6,216 1,274 (289) (4,223) 2,978
Depreciation and
amortization 6,094 1,350 1,045 103 8,592
Capital
expenditures 6,922 1,048 997 87 9,054
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Performance Food Group Company
Under date of February 7, 2000, we reported on the consolidated
balance sheets of Performance Food Group Company and subsidiaries (the
"Company") as of January 1, 2000 and January 2, 1999, 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 1, 2000, as contained in the 1999 annual report to
shareholders. These consolidated financial statements and our report
thereon are included in the 1999 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 aspects, the information set
forth therein.
/ s / KPMG LLP
Richmond, Virginia
February 7, 2000
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Beginning Ending
Balance Additions Deductions Balance
Charged Charged
to to Other
Expense Accounts
Allowance for Doubtful Accounts
December 27, 1997 $ 2,348 $ 451 $ 648 $ 677 $ 2,769
January 2, 1999 2,769 2,426 498 1,802 3,891
January 1, 2000 3,891 2,702 250 2,366 4,477
Exhibit Index
Exhibit
Number Description
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
January 2, 1999 (SEC purposes only).
27.3 -- Restated Financial Data Schedule for Year Ended December 27,
1997 (SEC purposes only).