UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission File No.: 0-22192
PERFORMANCE FOOD GROUP COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Tennessee 54-0402940
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization)) Identification Number)
6800 Paragon Place, Suite 500 23230
Richmond, Virginia (Zip Code)
(Address of Principal Executive
Offices)
Registrant's Telephone Number, Including Area Code
(804) 285-7340
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.
X Yes No
As of November 10, 2000, 14,107,728 shares of
the Registrant's Common Stock were outstanding.
Independent Accountants' Review Report
The Board of Directors and Shareholders
Performance Food Group Company:
We have reviewed the accompanying condensed
consolidated balance sheet of Performance Food Group
Company and subsidiaries (the Company) as of September
30, 2000, the related condensed consolidated statements
of earnings for the three-month and nine-month periods
ended September 30, 2000 and October 2, 1999, and the
related condensed consolidated statements of cash flows
for the nine-month periods ended September 30, 2000 and
October 2, 1999. These condensed consolidated
financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards
established by the American Institute of Certified
Public Accountants. A review of interim financial
information consists principally of applying analytical
procedures to financial data and making inquiries of
persons responsible for financial and accounting
matters. It is substantially less in scope than an
audit conducted in accordance with auditing standards
generally accepted in the United States of America, the
objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the condensed
consolidated financial statements referred to above for
them to be in conformity with accounting principles
generally accepted in the United States of America.
We have previously audited, in accordance with auditing
standards generally accepted in the United States of
America, the consolidated balance sheet of Performance
Food Group Company and subsidiaries as of January 1,
2000, and the related consolidated statements of
earnings, shareholders' equity and cash flows for the
year then ended (not presented herein); and in our
report dated February 7, 2000, we expressed an
unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance
sheet as of January 1, 2000 is fairly stated, in all
material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/KPMG LLP
Richmond, Virginia
October 30, 2000
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
September 30, January 1,
2000 2000
(Unaudited)
Assets
Current assets:
Cash $ 9,607 $ 5,606
Trade accounts and notes receivable, net 150,687 119,126
Inventories 120,751 108,550
Other current assets 9,595 9,600
Total current assets 290,640 242,882
Property, plant and equipment, net 125,915 113,930
Intangible assets, net 111,235 103,328
Other assets 1,436 1,905
Total assets $ 529,226 $ 462,045
Liabilities and Shareholders' Equity
Current liabilities:
Outstanding checks in excess of deposits $ 27,009 $ 14,082
Current installments of long-term debt 701 703
Trade accounts payable 131,477 116,821
Other current liabilities 44,190 40,397
Total current liabilities 203,377 172,003
Long-term debt, excluding current installments 110,430 92,404
Deferred income taxes 8,391 8,294
Total liabilities 322,198 272,701
Shareholders' equity 207,028 189,344
Total liabilities and shareholders' equity $ 529,226 $ 462,045
See accompanying notes to unaudited condensed consolidated financial statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
Net sales $ 693,127 $ 534,583 $ 1,927,480 $ 1,502,921
Cost of goods sold 599,904 460,208 1,669,869 1,297,698
Gross profit 93,223 74,375 257,611 205,223
Operating expenses 78,084 62,266 222,520 176,758
Operating profit 15,139 12,109 35,091 28,465
Other income (expense):
Interest expense (1,716) (1,299) (4,604) (3,942)
Nonrecurring merger expenses - - - (3,812)
Other, net 10 862 50 966
Other expense, net (1,706) (437) (4,554) (6,788)
Earnings before income taxes 13,433 11,672 30,537 21,677
Income tax expense 5,104 4,436 11,604 8,360
Net earnings $ 8,329 $ 7,236 $ 18,933 $ 13,317
Basic net earnings per common share $ 0.60 $ 0.52 $ 1.36 $ 0.97
Weighted average common shares outstanding 13,983 13,911 13,948 13,659
Diluted net earnings per common share $ 0.57 $ 0.50 $ 1.31 $ 0.94
Weighted average common shares and dilutive
potential common shares outstanding 14,697 14,368 14,487 14,125
See accompanying notes to unaudited condensed consolidated financial statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
September 30, October 2,
2000 1999
Cash flows from operating activities:
Net earnings $ 18,933 $ 13,317
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 10,105 8,033
Amortization 2,848 2,220
ESOP contributions applied to principal of ESOP debt 412 400
Gain on sale of investment - (768)
Loss on disposal of property, plant and equipment 36 56
Change in operating assets and liabilities, net (21,541) 6,232
Net cash provided by operating activities 10,793 29,490
Cash flows from investing activities:
Purchases of property, plant and equipment (22,059) (14,357)
Proceeds from sale of investment - 1,563
Proceeds from sale of property, plant and equipment 634 97
Net cash paid for acquisitions (8,800) (15,818)
Decrease (increase) in intangibles and other assets 425 (251)
Net cash used by investing activities (29,800) (28,766)
Cash flows from financing activities:
Increase (decrease) in outstanding checks in excess of deposits 12,683 (17,750)
Net borrowings on notes payable to banks 15,032 18,890
Proceeds from issuance of long-term debt 3,454 2,394
Principal payments on long-term debt (634) (8,946)
Repurchases of common stock (11,907) -
Distributions of pooled company - (1,025)
Employee stock option, incentive and employee stock purchase
plans and related income tax benefits 4,380 4,985
Net cash provided by (used for) financing activities 23,008 (1,452)
Net increase (decrease) in cash 4,001 (728)
Cash at beginning of period 5,606 7,796
Cash at end of period $ 9,607 $ 7,068
See accompanying notes to unaudited condensed consolidated financial statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
September 30, 2000 and October 2, 1999
1. Basis of Presentation
The accompanying condensed consolidated financial
statements of Performance Food Group Company and
subsidiaries (the "Company") are unaudited, with the
exception of the January 1, 2000 condensed consolidated
balance sheet, which was derived from the audited
consolidated balance sheet in the Company's latest
Annual Report on Form 10-K. The unaudited condensed
consolidated financial statements have been prepared in
accordance with accounting principles generally
accepted in the United States of America for interim
financial reporting, and in accordance with Rule 10-01
of Regulation S-X.
In the opinion of management, the unaudited
condensed consolidated financial statements contained
in this report reflect all adjustments, consisting of
only normal recurring accruals, which are necessary for
a fair presentation of the financial position and the
results of operations for the interim periods
presented. The results of operations for any interim
period are not necessarily indicative of results for
the full year.
These unaudited condensed consolidated financial
statements, note disclosures and other information
should be read in conjunction with the consolidated
financial statements and notes thereto included in the
Company's latest Annual Report on Form 10-K.
2. Business Combinations
On February 26, 1999, the Company completed a
merger with NorthCenter Foodservice Corporation
("NCF"), in which NCF became a wholly-owned subsidiary
of the Company. NCF was a privately-owned foodservice
distributor based in Augusta, Maine, and had 1998 net
sales of approximately $98 million. The merger 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 had 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
included certain contractual payments to NCF employees,
as well as professional fees and transaction costs.
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 condensed consolidated financial
statements are summarized below:
Three Months Nine Months
(In thousands) Ended Ended
October 2, October 2,
1999 1999
Net sales:
The Company $ 499,519 $ 1,418,762
NCF 35,064 84,159
Combined $ 534,583 $ 1,502,921
Net earnings (loss):
The Company $ 6,164 $ 14,402
NCF 1,072 (1,085)
Combined $ 7,236 $ 13,317
Adjustments to conform NCF's accounting methods
and practices to those of the Company consisted
primarily of depreciation and were not material. NCF,
prior to the merger with the Company, was treated as an
S-corporation for Federal income tax purposes. The
following disclosures 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 period presented:
Nine Months
(In thousands, except Ended
per share amounts) October 2,
1999
Operating profit $ 28,465
Other income (expense):
Interest expense (3,942)
Other, net 966
Other expense, net (2,976)
Earnings before income taxes 25,489
Income tax expense 9,737
Net earnings $ 15,752
Weighted average common shares outstanding 13,659
Basic net earnings per common share $ 1.15
Weighted average common shares and dilutive
potential common shares outstanding 14,125
Diluted net earnings per common share $ 1.11
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., a subsidiary of the Company. On
August 31, 1999, AFI Food Service Distributors, Inc.
("AFI"), a subsidiary of the Company, 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 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"), a subsidiary
of the Company, 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 restaurants and other
foodservice operations in the Tidewater Virginia area.
The financial results of Nesson have been combined with
the operations of VFG. Together, Dixon, State Hotel
and Nesson had 1998 sales that contributed to the
Company's ongoing operations of approximately $100
million on an annualized basis.
On August 4, 2000, the Company acquired the common
stock of Carroll County Foods, Inc. ("CCF"), a
privately-owned broadline foodservice distributor based
in New Windsor, Maryland. CCF provides products and
services to traditional foodservice accounts in a
region that includes Baltimore, Maryland and
Washington, DC. CCF had 1999 sales of approximately
$45 million.
In the 1999 period, the Company paid a total of
approximately $15.8 million and issued a total of
approximately 304,000 shares of its common stock for
the acquisitions of Dixon and State Hotel and to the
former shareholders of AFFLINK, Inc. (formerly
Affliated Paper Companies, Inc. "AFFLINK"), AFI and
VFG, which were acquired prior to 1999, as a result of
certain contractual obligations in those purchase
agreements. In the 2000 period, the Company paid a
total of approximately $8.8 million and issued a total
of approximately 235,000 shares of its common stock for
the acquisition of CCF and to the former shareholders
of AFFLINK and Dixon as a result of certain contractual
obligations in those purchase agreements.
The acquisitions of Dixon, State Hotel, Nesson and
CCF 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 $28.8 million and is being amortized on a
straight-line basis over estimated lives ranging from 5
to 40 years.
The condensed consolidated statements of earnings
and cash flows reflect the results of these acquired
companies from the dates of acquisition through
September 30, 2000. The unaudited consolidated results
of operations on a pro forma basis as though these
acquisitions had been consummated as of the beginning
of 1999 are as follows:
Three Months Nine Months
Ended Ended
(In thousands, except September 30, October 2, September 30, October 2,
per share amounts) 2000 1999 2000 1999
Net sales $ 695,749 $ 559,482 $ 1,956,012 $ 1,595,614
Gross profit 93,825 79,406 262,472 223,283
Net earnings 7,803 6,819 18,918 11,171
Basic net earnings
per common share $ 0.56 $ 0.48 $ 1.34 $ 0.79
Diluted net earnings
per common share 0.53 0.46 1.29 0.76
The pro forma results are presented for
information purposes only and are not necessarily
indicative of the operating results that would have
occurred had the Dixon, State Hotel, Nesson and CCF
acquisitions been consummated as of the beginning of
1999.
3. Supplemental Cash Flow Information
Supplemental disclosures of cash flow information
for the 2000 and 1999 periods are as follows:
Nine Months Ended
September 30, October 2,
(In thousands) 2000 1999
Cash paid during the period for:
Interest $ 3,799 $ 3,116
Income taxes $ 7,906 $ 3,976
4. Industry Segment Information
The Company has three reportable segments:
broadline foodservice distribution ("Broadline");
customized foodservice distribution ("Customized"); and
fresh-cut produce processing ("Fresh-Cut"). Broadline
distributes approximately 25,000 food and non-food
products to a combination of approximately 27,000
street and chain customers. Broadline consists of
twelve 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 casual-dining chain customers who
generally prefer a centralized point of contact that
facilitates item and menu changes, tailored
distribution routing and customer service resolution.
The Company believes these customers can be more
efficiently served by warehousing a limited number of
stock keeping units, or SKU's, and making larger, more
consistent deliveries. The Customized segment has five
distribution facilities that currently serve customers
in 49 states and several foreign countries. Fresh-Cut
processes and distributes a variety of fresh produce
primarily for quick-service restaurants mainly in the
Southeastern and Southwestern United States. Certain
1999 amounts have been reclassified to conform to the
2000 presentation consistent with management's
reporting structure.
Corporate &
(In thousands) Broadline Customized Fresh-Cut Intersegment Consolidated
Third Quarter 2000
Net external sales $ 369,887 $ 292,650 $ 30,590 $ - $ 693,127
Intersegment sales 1,061 - 6,041 (7,102) -
Operating profit 10,677 3,109 2,758 (1,405) 15,139
Total assets 340,563 116,389 56,530 15,744 529,226
Interest expense (income) 2,200 874 420 (1,778) 1,716
Depreciation & amortization 2,973 508 1,103 88 4,672
Capital expenditures 2,791 480 1,783 82 5,136
Third Quarter 1999
Net external sales $ 297,732 $ 213,776 $ 23,075 $ - $ 534,583
Intersegment sales 1,026 - 3,688 (4,714) -
Operating profit 9,503 2,738 1,171 (1,303) 12,109
Total assets 304,523 90,847 46,925 5,365 447,660
Interest expense (income) 1,759 598 66 (1,124) 1,299
Depreciation & amortization 2,461 490 639 74 3,664
Capital expenditures 2,321 493 1,940 184 4,938
Corporate &
(In thousands) Broadline Customized Fresh-Cut Intersegment Consolidated
Year-To-Date 2000
Net external sales $ 1,006,762 $ 826,055 $ 94,663 $ - $ 1,927,480
Intersegment sales 2,889 - 19,022 (21,911) -
Operating profit 25,204 8,079 6,581 (4,773) 35,091
Total assets 340,563 116,389 56,530 15,744 529,226
Interest expense (income) 5,701 2,592 1,148 (4,837) 4,604
Depreciation & amortization 8,536 1,516 2,650 251 12,953
Capital expenditures 11,040 1,245 8,558 1,216 22,059
Year-To-Date 1999
Net external sales $ 849,859 $ 598,765 $ 54,297 $ - $ 1,502,921
Intersegment sales 2,586 - 10,098 (12,684) -
Operating profit 21,447 7,630 3,256 (3,868) 28,465
Total assets 304,523 90,847 46,925 5,365 447,660
Interest expense (income) 4,991 1,746 35 (2,830) 3,942
Depreciation & amortization 7,260 1,447 1,357 189 10,253
Capital expenditures 8,416 1,484 4,028 429 14,357
5. Contingencies
In April 1999, Maxwell Chase Technologies, LLC
("Maxwell") filed suit against the Company's Fresh
Advantage subsidiary. The lawsuit alleges, among other
things, patent infringement and theft of trade secrets
in the development and use of packaging materials used
in the Company's fresh-cut produce operations. Maxwell
seeks to recover compensatory and other damages, as
well as lost profits. The Company is vigorously
defending itself against this action and has filed a
counterclaim against Maxwell. The Company believes
that Maxwell's allegations are without merit and that
it is unlikely the outcome will have a material adverse
effect on the Company. However, there can be no
assurance that this matter, if decided unfavorably for
the Company, will not have a material adverse effect on
the Company's results of operations.
In addition to the matter described above, the
Company is also involved in other legal proceedings and
litigation arising in the ordinary course of business.
In the opinion of management, the outcome of the other
proceedings and litigation currently pending will not
have a material adverse effect on the Company's results
of operations.
6. Subsequent Event
On October 30, 2000, the Company signed a
definitive agreement to acquire the common stock and
membership interests of Redi-Cut Foods, Inc. and
affiliated entities (collectively "Redi-Cut"), a
privately-owned fresh-cut produce processor with
facilities in Chicago, Illinois and Kansas City,
Missouri. Redi-Cut, which provides fresh-cut produce
to national quick-service restaurants and other sectors
of the home meal replacement industry, had 1999 net
sales of approximately $113 million. The total
consideration to be paid for the acquisition is
approximately $133 million, consisting of cash, common
stock of the Company and the assumption of certain
liabilities. Additionally, the purchase price is
subject to a post-closing adjustment based upon a
review of Redi-Cut's working capital as of the closing
date. Closing is expected late in the fourth quarter
of 2000 or in early 2001.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The Company markets and distributes a wide variety
of food and non-food products to the foodservice, or
"food-away-from-home", industry. The foodservice
industry consists of two major customer types:
"street" foodservice customers, consisting of
independent restaurants, hotels, cafeterias, schools,
healthcare facilities and other institutional
customers, and "chain" customers, consisting of
regional and national quick-service restaurants and
casual-dining restaurants. The principal components of
the Company's expenses include cost of goods sold,
which represents the amounts paid to manufacturers and
growers for products sold, and operating expenses,
which include primarily labor-related expenses,
delivery costs and occupancy expenses.
As a result of the merger with NorthCenter
Foodservice Corporation ("NCF") on February 26, 1999,
the condensed consolidated financial statements for the
periods prior to the combination had been restated to
include the accounts and results of operations of NCF.
Results of Operations
The following table sets forth, for the periods
indicated, the components of the condensed consolidated
statements of earnings expressed as a percentage of net
sales:
Three Months Ended Nine Months Ended
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 86.5 86.1 86.6 86.3
Gross profit 13.5 13.9 13.4 13.7
Operating expenses 11.3 11.6 11.6 11.8
Operating profit 2.2 2.3 1.8 1.9
Other expense, net 0.2 0.1 0.2 0.5
Earnings before 2.0 2.2 1.6 1.4
Income tax expense 0.8 0.8 0.6 0.5
Net earnings 1.2 % 1.4 % 1.0 % 0.9 %
Comparison of Periods Ended September 30, 2000 and
October 2, 1999
Net sales increased 29.7% to $693.1 million for
the three months ended September 30, 2000 (the "2000
quarter") from $534.6 million for the three months
ended October 2, 1999 (the "1999 quarter"). Net sales
increased 28.2% to $1.93 billion for the nine months
ended September 30, 2000 (the "2000 period") from $1.50
billion for the nine months ended October 2, 1999 (the
"1999 period"). Net sales in the Company's existing
operations increased 26.1% over the 1999 quarter and
24.1% over the 1999 period, while acquisitions
contributed the remaining 3.6% and 4.1% of the
Company's total sales growth for the 2000 quarter and
period, respectively. The Company estimates that
inflation contributed approximately 1.5% and 1.2% to
the increase in net sales for the 2000 quarter and 2000
period, respectively.
Gross profit increased 25.3% to $93.2 million in
the 2000 quarter from $74.4 million in the 1999
quarter. Gross profit increased 25.5% to $257.6 in the
2000 period from $205.2 million in the 1999 period.
Gross profit margin, which the Company defines as gross
profit as a percentage of net sales, decreased to 13.5%
in the 2000 quarter and 13.4% in the 2000 period
compared to 13.9% in the 1999 quarter and 13.7% in the
1999 period. The decrease in gross profit margin was
due primarily to increased sales to certain of the
Company's chain customers, which generally are higher
volume, lower gross margin accounts.
Operating expenses increased 25.4% to $78.1
million in the 2000 quarter compared with $62.3 million
in the 1999 quarter. Operating expenses increased
25.9% to $222.5 million in the 2000 period from $176.8
million in the 1999 period. As a percentage of net
sales, operating expenses decreased to 11.3% in the
2000 quarter from 11.6% in the 1999 quarter, and to
11.6% in the 2000 period from 11.8% in the 1999 period.
The decrease in operating expenses as a percentage of
net sales was due mainly to increased sales in the
Company's customized distribution segment, which has a
lower operating expense ratio, defined as operating
expenses as a percentage of net sales, than the
Company's broadline and fresh-cut segments, offset in
part by higher fuel costs.
Operating profit increased 25.0% to $15.1 million
in the 2000 quarter from $12.1 million in the 1999
quarter. Operating profit increased 23.3% to $35.1
million in the 2000 period from $28.5 million in the
1999 period. Operating profit margin, which the
Company defines as operating profit as a percentage of
net sales, declined to 2.2% in the 2000 quarter from
2.3% in the 1999 quarter, and to 1.8% in the 2000
period from 1.9% in the 1999 period.
Other expense, net, increased to $1.7 million in
the 2000 quarter from $0.4 million in the 1999 quarter.
Included in other expense, net, was interest expense of
$1.7 million in the 2000 quarter, compared with
interest expense of $1.3 million in the 1999 quarter.
Other expense, net, decreased to $4.6 million in the
2000 period from $6.8 million in the 1999 period.
Other expense, net, included interest expense of $4.6
million in the 2000 period and $3.9 million in the 1999
period. The 1999 period also contained nonrecurring
merger expenses related to the NCF merger of $3.8
million. Other expense, net, for the 1999 quarter and
1999 period included a gain of $768,000 on the sale of
an investment.
Income tax expense increased to $5.1 million in
the 2000 quarter from $4.4 million in the 1999 quarter,
and to $11.6 million in the 2000 period compared to
$8.4 million in the 1999 period. As a percentage of
earnings before income taxes, the provision for income
taxes was 38.0% for both the 2000 and 1999 quarters.
The effective tax rate decreased to 38.0% in the 2000
period from 38.6% in the 1999 period. The fluctuation
in the effective tax rate for the period was due
primarily to the merger with NCF, which was taxed as an
S-corporation for income tax purposes prior to the
merger with the Company during the first quarter of
1999.
Net earnings increased to $8.3 million in the 2000
quarter compared to $7.2 million in the 1999 quarter.
Net earnings also increased to $18.9 million in the
2000 period from $13.3 million in the 1999 period. As
a percentage of net sales, net earnings decreased to
1.2% in the 2000 quarter from 1.4% in the 1999 quarter.
For the 2000 period, net earnings as a percentage of
sales increased to 1.0% from 0.9% in the 1999 period.
Liquidity and Capital Resources
The Company has historically financed its
operations and growth primarily with cash flows from
operations, borrowings under credit facilities, the
issuance of long-term debt, operating leases, normal
trade credit terms and the sale of the Company's common
stock. Despite the growth in net sales, the Company
has reduced its working capital needs by financing its
investment in inventory principally with accounts
payable and outstanding checks in excess of deposits.
Cash provided by operating activities was $10.8
million and $29.5 million for the 2000 and 1999
periods, respectively. In the 2000 period, the primary
sources of cash from operating activities were net
earnings and increased levels of trade payables,
partially offset by increased levels of trade
receivables and inventories. In the 1999 period, the
primary sources of cash from operations included net
earnings, increased levels of trade payables and
accrued expenses, partially offset by increased levels
of trade receivables, inventories and prepaid expenses.
Cash used by investing activities was $29.8
million and $28.8 million for the 2000 and 1999
periods, respectively. Investing activities primarily
include additions to and disposals of property, plant
and equipment and the acquisition of businesses. The
Company's capital expenditures, excluding acquisitions
of other businesses, for the 2000 period and the 1999
period were $22.1 million and $14.4 million,
respectively. The Company anticipates that its total
capital expenditures, excluding acquisitions, for
fiscal 2000 will be approximately $25 million. Cash
used by investing activities in the 2000 period
included $8.8 million paid for the acquisition of
Carroll County Foods, Inc. ("CCF") and payments made to
the former shareholders of AFFLINK, Inc. (formerly
Affilliated Paper Companies, Inc. "AFFLINK") and Dixon
Tom-A-Toe Companies, Inc. ("Dixon") as a result of
certain contractual obligations under the purchase
agreements. In the 1999 period, cash used by investing
activities included $15.8 million paid for the
acquisitions of Dixon and State Hotel Supply Company,
Inc. ("State Hotel") and to the former shareholders of
Virginia Foodservice Group, Inc. ("VFG"), AFFLINK and
AFI Foodservice Distributors, Inc. ("AFI") related to
the achievement of certain performance criteria under
the purchase agreements. In the 1999 period, cash
flows from investing activities also included $1.6
million from the sale of an investment.
Cash provided by financing activities was $23.0
million in the 2000 period and cash used by financing
activities was $1.5 million in the 1999 period. In the
2000 period, cash flows from financing activities
included an increase in outstanding checks in excess of
deposits of $12.7 million, net borrowings of $15.0
million on the Company's revolving credit facility,
$3.5 million of proceeds from Industrial Revenue Bonds
issued to finance the construction of a new produce-
processing facility and proceeds of $4.4 million from
the exercise of stock options. In the 2000 period,
cash used by financing activities included $0.6 million
of principal payments on long-term debt and $11.9
million paid by the Company to repurchase shares of its
common stock in the open market for use in connection
with the Company's employee benefit plans. Financing
activities in the 1999 period included a decrease in
outstanding checks in excess of deposits of $17.8
million, repayments of long-term debt of $8.9 million,
and $1.0 million distributed to the former shareholders
of NCF prior to its merger with the Company. Cash
flows from financing activities in the 1999 period also
included net borrowings of $18.9 million on the
Company's revolving credit facility, $2.4 million of
proceeds from Industrial Revenue Bonds issued to
finance the construction of a new produce-producing
facility and $5.0 million from the exercise of stock
options.
On March 5, 1999, the Company entered into an
$85.0 million revolving credit facility with a group of
commercial banks that replaced the Company's then
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 $50.0 million was
outstanding under the Credit Facility at September 30,
2000. The Credit Facility also supports up to $10.0
million of letters of credit. At September 30, 2000,
the Company was contingently liable for $5.9 million of
outstanding letters of credit that reduce amounts
available under the Credit Facility. At September 30,
2000, the Company had $34.1 million available under the
Credit Facility, subject to compliance with customary
borrowing conditions. 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 September 30, 2000, borrowings under the
Credit Facility bore interest at 7.11% per annum.
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 $8.1 million of the
proceeds from these bonds have been used and are
reflected on the Company's condensed consolidated
balance sheet as of September 30, 2000. Interest
varies as determined by the remarketing agent for the
bonds and was approximately 5.60% per annum at
September 30, 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 four distribution centers. Two of these
distribution centers became operational in early 1999,
one became operational in the second quarter of 2000,
and the remaining property is scheduled to become
operational in the first quarter of 2001. Under this
facility, 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 may seek to renew the lease. If the
Company is unable or chooses not to renew the lease,
the Company has the option to sell the property to a
third party or purchase the property at its original
cost. If the properties are sold to third parties for
less than 88% of their aggregate original cost, the
Company is obligated, under a residual value guarantee,
to pay the shortfall. There can be no assurance that
the Company will be able to renew the leases or sell
the properties to third parties, and the Company will
require substantial additional financing if it is
required to purchase these properties upon the
expiration of the master operating lease facility.
Because of the location and condition of each property,
the Company believes that the fair value of the
properties included in this facility could eliminate or
substantially reduce the Company's exposure under the
residual value guarantee, although there can be no
assurance that the Company will not be required to make
payments to satisfy this guarantee. Through September
30, 2000, construction expenditures by the lessor were
approximately $40.7 million.
On June 9, 2000, the Company entered into a $60.0
million master operating lease agreement to construct
or purchase various offices and distribution centers.
Under this facility, the lessor owns the properties,
incurs the related debt to construct or purchase 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 June 9, 2005.
Upon the expiration of each lease, the Company may seek
to renew the lease. If the Company is unable or
chooses not to renew the lease, the Company has the
option to sell the property to a third party or
purchase the property at its original cost. If the
properties are sold to third parties for less than 85%
of their aggregate original cost, the Company is
obligated, under a residual value guarantee, to pay the
shortfall. There can be no assurance that the Company
will be able to renew the leases or sell the properties
to third parties, and the Company will require
substantial additional financing if it is required to
purchase these properties upon the expiration of the
master operating lease facility. Because of the
location and condition of the existing property, the
Company believes that the fair value of the property
included in this facility could eliminate or
substantially reduce the Company's exposure under the
residual value guarantee, although there can be no
assurance that the Company will not be required to make
payments to satisfy this guarantee. Through September
30, 2000, construction expenditures by the lessor were
approximately $6.0 million.
On October 23, 2000, the Company filed a shelf
registration statement registering the sale of up to
$300 million of debt or equity securities. The Company
believes that cash flows from operations, borrowings
under the Company's credit facilities and proceeds of
any sales of securities under the shelf registration
statement will be sufficient to finance its operations,
capital expenditures and anticipated growth for the
next 18 months. However, the Company may require
additional financing depending upon the Company's
future acquisition plans.
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 had been restated to include the
accounts and results of operations of NCF.
On August 28, 1999, the Company acquired the
common stock of 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., a subsidiary of the Company. On
August 31, 1999, AFI, a subsidiary of the Company,
acquired certain net assets of State Hotel, a privately-
owned meat processor based in Newark, New Jersey.
State Hotel provides Certified Angus Beef and other
meats to 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, a subsidiary of the
Company, 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 restaurants and other
foodservice operations in the Tidewater Virginia area.
The financial results of Nesson have been combined with
the operations of VFG. Together, Dixon, State Hotel
and Nesson had 1998 sales that contributed to the
Company's ongoing operations of approximately $100
million on an annualized basis.
On August 4, 2000, the Company acquired the common
stock of Carroll County Foods, Inc. ("CCF"), a
privately-owned, broadline foodservice distributor
based in New Windsor, Maryland. CCF provides products
and services to traditional foodservice accounts in a
region that includes Baltimore, Maryland and
Washington, DC. CCF had 1999 sales of approximately
$45 million.
In the 1999 period, the Company paid a total of
approximately $15.8 million and issued a total of
approximately 304,000 shares of its common stock for
the acquisition of Dixon and State Hotel and to the
former shareholders of AFFLINK, AFI and VFG, which were
acquired prior to 1999, as a result of certain
contractual obligations in those purchase agreements.
In the 2000 period, the Company paid a total of
approximately $8.8 million and issued a total of
approximately 235,000 shares of its common stock for
the acquisition of CCF and to the former shareholders
of AFFLINK and Dixon as a result of certain contractual
obligations in those purchase agreements.
The acquisitions of Dixon, State Hotel, Nesson and
CCF 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 $28.8 million and is being amortized on a
straight-line basis over estimated lives ranging from 5
to 40 years.
On October 30, 2000, the Company signed a
definitive agreement to acquire the common stock and
membership interests of Redi-Cut Foods, Inc. and
affiliates (collectively "Redi-Cut"), a privately-owned
fresh-cut produce processor with facilities in Chicago,
Illinois and Kansas City, Missouri. Redi-Cut, which
provides fresh-cut produce to national quick-service
restaurants and other sectors of the home meal
replacement industry, had 1999 net sales of
approximately $113 million. The total consideration to
be paid for the acquisition is approximately $133
million, consisting of cash, common stock of the
Company, and the assumption of certain liabilities.
Additionally, the purchase price is subject to a post-
closing adjustment based upon a review of Redi-Cut's
working capital as of the closing date. Closing is
expected late in the fourth quarter of 2000 or in early
2001.
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.
In June 2000, the FASB issued SFAS No. 138, Accounting
for Certain Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133. In
September 2000, the FASB issued SFAS No. 140,
Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. The Company
will be required to adopt the provisions of these
standards with the fiscal year beginning on December
31, 2000. Management believes the effect of the
adoption of these standards 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.
Forward-Looking Statements
The Company has made certain forward-looking
statements in this quarterly report and in other
contexts that are based on estimates and assumptions
and involve risks and uncertainties, including, but not
limited to, general economic conditions, the reliance
on major customers, the relatively low margins and
economic sensitivity of the foodservice business, the
Company's ability to identify and successfully complete
acquisitions of other foodservice distributors, and
management of anticipated growth and other financial
issues. Whether such forward-looking statements, which
depend on these uncertainties and future developments,
ultimately prove to be accurate cannot be predicted.
Item 3. Quantitative and Qualitative Disclosures
About Market Risks
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 of the debt
but do not impact earnings or cash flows. For floating-
rate debt, interest rate changes generally do not
affect the fair market value of the debt but impact
earnings and cash flows, assuming other facts remain
constant. As of September 30, 2000, the Company's
total debt consisted of fixed and floating rate debt of
$50.0 million and $61.1 million, respectively.
Substantially all of the Company's floating rate debt
is based on LIBOR.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In April 1999, Maxwell Chase Technologies,
LLC ("Maxwell") filed suit against the
Company's Fresh Advantage subsidiary. The
lawsuit alleges, among other things, patent
infringement and theft of trade secrets in
the development and use of packaging
materials used in the Company's fresh-cut
produce operations. Maxwell seeks to recover
compensatory and other damages, as well as
lost profits. The Company is vigorously
defending itself against this action and has
filed a counterclaim against Maxwell. The
Company believes that Maxwell's allegations
are without merit and that it is unlikely the
outcome will have a material adverse effect
on the Company. However, there can be no
assurance that this matter, if decided
unfavorably for the Company, will not have a
material adverse effect on the Company's
results of operations.
In addition to the matter described above,
the Company is also involved in other legal
proceedings and litigation arising in the
ordinary course of business. In the opinion
of management, the outcome of the other
proceedings and litigation currently pending
will not have a material adverse effect on
the Company's results of operations.
Item 4. Submission of Matters to a Vote of Security
Holders.
No matters were submitted to a vote of
security holders during the quarter ended
September 30, 2000.
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibits:
15 Letter regarding unaudited financial information
from KPMG LLP
27.1 Financial Data Schedule (SEC only)
(b.) No reports on Form 8-K were filed during the
quarter ended September 30, 2000.
Signature
Pursuant to the requirements 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.
PERFORMANCE FOOD GROUP COMPANY
By: /s/ Roger L. Boeve
Roger L. Boeve
Executive Vice
President & Chief
Financial Officer
Date: November 14, 2000