UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1996
Commission file number 0-22192
PERFORMANCE FOOD GROUP COMPANY
(Exact name of registrant as specified in its charter)
Tennessee 54-0402940
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification Number)
6800 Paragon Place, Ste. 500
Richmond, Virginia 23230
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code:
(804) 285-7340
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant on March 21, 1997 was approximately $ 174,825,483.
The market value calculation was determined using the closing sale price
of the Registrant's common stock on March 21, 1997, as reported on The
Nasdaq Stock Market.
Shares of common stock, $.01 par value per share, outstanding on March 21,
1997, were 11,693,229.
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 6, 1997 are incorporated by reference
into Items 10, 11, 12 and 13.
PERFORMANCE FOOD GROUP COMPANY
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Part I
Item 1. Business. ................................... 3
The Company and its Business Strategy.......... 3
Customers and Marketing ....................... 3
Products and Services ......................... 4
Suppliers and Purchasing ...................... 5
Operations..................................... 6
Recently Completed Acquisition................. 7
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 8. Financial Statements and Supplementary Data..... 21
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......... 21
Part III
Item 10. Directors and Executive Officers of the
Registrant ..................................... 21
Item 11. Executive Compensation.......................... 21
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................. 21
Item 13. Certain Relationships and Related Transactions.. 22
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................... 22
3
PERFORMANCE FOOD GROUP COMPANY
PART I
Item 1. Business.
The Company and its Business Strategy
Performance Food Group Company (the "Company") markets and
distributes a wide variety of food and food-related products to the food-
service,or "away-from-home eating," industry. The foodservice industry
consists oftwo major customer types: "traditional" foodservice customers
consisting of independent restaurants, hotels, cafeterias, schools, health-
care facilities and other institutional customers, and "multi-unit chain"
customers consisting of regional and national quick-service restaurants and
casual dining restaurants. Products and services provided to the Company's
traditional and multi-unit chain customers are supported by identical physical
facilities, vehicles,equipment and personnel. The Company's customers are
located primarily in the Southern, Southwestern, Midwestern and Northeastern
United States. The Company operates through a number of subsidiaries, each of
which focuses on specific regional markets or sectors of the foodservice
distribution industry.
The Company's objective is to continue to grow its foodservice
distribution business through internal growth and acquisitions. The Company's
internal growth strategy is to increase sales to existing customers and
identify new customers for whom the Company can act as the principal supplier.
The Company also intends to consider, from time to time, strategic
acquisitions of other foodservice distribution companies both to further
penetrate existing markets and to expand into new markets. Finally, the
Company strives to achieve higher productivity in its existing operations.
The Company uses a 52/53 week fiscal year ending on the Saturday
closest to December 31. The fiscal years ended December 28, 1996, December
30, 1995 and December 31, 1994 (all 52 week years) are referred to herein as
1996, 1995 and 1994, respectively.
Customers and Marketing
The Company believes that foodservice customers select a
distributor based on timely and accurate delivery of orders, consistent product
quality, value added services and price. These services include assistance in
managing inventories, menu planning and controlling costs through increased
electronic computer communications and more efficient deliveries. An
additional consideration for certain of the Company's larger, multi-unit chain
customers is the operational efficiency gained by dealing with one, or a
limited number of, foodservice distributors.
4
The Company's traditional foodservice customers include
independent restaurants, hotels, cafeterias, schools, healthcare facilities and
other institutional customers. The Company has attempted to develop long-
term relationships with these customers by focusing on improving efficiencies
and increasing the average size of deliveries to these customers. The
Company's traditional foodservice customers are supported in this effort by
more than 300 sales and marketing representatives and product specialists.
Sales representatives service customers in person or by telephone, accepting
and processing orders, reviewing account balances, disseminating new product
information and providing business assistance and advice where appropriate.
The Company has an ongoing emphasis on educating sales representatives
about the Company's products and giving them the tools necessary to deliver
added value to the basic delivery of food and food-related items. Sales
representatives are generally compensated through a combination of
commission and salary based on a combination of factors relating to
profitability and collections. These representatives use laptop computers to
assist customers by entering orders, checking product availability and pricing
and developing menu planning ideas on a real-time basis. No single traditional
foodservice customer accounted for more than 2% of the Company's
consolidated net sales in 1996.
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
650 Wendy's, Subway, Popeye's and Church's quick-service restaurants. The
Company's primary customers for its fresh-cut produce products include
approximately 2,850 McDonald's, Taco Bell, Hardee's and Burger King
restaurants, and more recently the Company has developed fresh-cut produce
products for retail customers, including supermarkets. The Company's sales
programs to multi-unit customers tend to be tailored to the individual customer
and include a more tailored product offering than for the Company's traditional
foodservice customers. Sales to these customers are typically higher-volume,
lower gross margin sales which require fewer, larger deliveries than
traditional foodservice customers. These programs offer operational and cost
efficiencies for both the customer and the Company and therefore result in
reduced operating expenses as a percent of sales which offset 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 30%, 29% and 33% of consolidated net sales for 1996, 1995 and 1994,
respectively. Net sales to Outback accounted for 19%, 15% and 11% of
consolidated net sales for 1996, 1995 and 1994, respectively. No other multi-
unit customer accounted for more than 6% of the Company's consolidated net
sales in 1996.
Products and Services
The Company distributes more than 15,000 national brand and
private label food and food-related products to over 16,000 foodservice
customers. These items include a broad selection of "center-of-the-plate" or
entree items such as meats, seafood and poultry, canned and dry groceries,
frozen foods, fresh produce, fresh-cut vegetables, refrigerated and dairy
products, paper products and cleaning supplies, restaurant equipment and other
supplies. The Company's private label products include items marketed under
the Pocahontas, Healthy USA, Premium Recipe and Colonial Tradition
specialty lines, as well as fresh-cut produce products purchased and processed
by the Company and marketed under the Fresh Advantage label.
5
The Company provides customers with other value-added services
in the form of assistance in managing inventories, menu planning and
improving their efficiency and profitability. As described below, the Company
also provides procurement and merchandising services to approximately 140
independent distributors as well as the Company's own distribution network.
These procurement and merchandising services include negotiating vendor
supply agreements and quality assurance related to the Company's private
label and national branded products.
The following table sets forth the percentage of the Company's
consolidated net sales by product and service category in 1996:
Percentage of Net
Sales for 1996
Center-of-the-plate 33%
Canned and dry groceries 23
Frozen foods 16
Refrigerated and dairy products 10
Fresh-cut produce 5
Paper products and cleaning supplies 7
Other produce 3
Equipment and supplies 2
Procurement, merchandising and
other services 1
Total 100%
Suppliers and Purchasing
The Company procures its products from independent suppliers,
food brokers and merchandisers, including its wholly-owned subsidiary,
Pocahontas Foods, USA, Inc. ("Pocahontas"). The Company purchases both
nationally branded items as well as private label specialty items under the
Company's controlled labels. Independent suppliers include large national and
regional food manufacturers and consumer products companies, meatpackers
and produce shippers. The Company constantly seeks to maximize its
purchasing power through volume purchasing. Although each operating
subsidiary is responsible for placing its own orders and can select the
products that appeal most to its customers, each subsidiary is encouraged to
participate in Company-wide purchasing programs, which enable it to take
advantage of the Company's consolidated purchasing power. Subsidiaries are
also encouraged to consolidate their product offerings to take advantage of
volume purchasing. The Company is not dependent on a single source for any
significant item and no third-party supplier represents more than 3% of the
Company's total product purchases.
6
Pocahontas selects foodservice products for its "Pocahontas,"
"Healthy USA," "Premium Recipe" and "Colonial Tradition" labels and
markets these private label products, as well as nationally branded foodservice
products, to the Company's own distribution operations and approximately 140
independent foodservice distributors nationwide. For its services, the
Company receives marketing fees paid by vendors. Approximately 15,000 of
the products sold through Pocahontas are sold under the Company's labels.
Approximately 400 vendors, located in all areas of the country, supply
products through the Pocahontas distribution network. Because Pocahontas
negotiates supply agreements on behalf of its independent distributors as a
group, the distributors that utilize the Pocahontas procurement and
merchandising group enhance their purchasing power.
Operations
Each of the Company's subsidiaries has substantial autonomy in its
operations, subject to overall corporate management controls and guidance.
The Company's corporate management provides centralized direction in the
areas of strategic planning, general and financial management, sales and
merchandising. Individual marketing efforts are undertaken at the subsidiary
level and most of the Company's name recognition in the foodservice business
is based on the tradenames of its individual subsidiaries. Purchasing is also
conducted by each subsidiary separately, in response to the individual needs of
customers, although subsidiaries are encouraged to participate in Company-
wide purchasing programs. Each subsidiary has primary responsibility for its
own human resources, governmental compliance programs, principal
accounting, billing and collection. Financial information reported by the
Company's subsidiaries is consolidated and reviewed by the Company's
corporate management.
Distribution operations are conducted out of thirteen distribution
centers located in Tennessee, Georgia, Florida, Louisiana, Texas and
Maryland. Customer orders are assembled in the Company's distribution
facilities and then sorted, placed on pallets and loaded onto trucks and
trailersin delivery sequence. Deliveries covering long distances are made in
large tractor-trailers that are generally leased by the Company. Deliveries
within shorter distances are made in trucks, which are either leased or owned
by the Company. Certain of the Company's larger multi-unit chain customers are
serviced using dedicated trucks due to the relatively large and consistent
delivery size and geographic distribution of these rapidly growing customers.
As a result, deliveries to these customers are generally more efficient and
result in decreased operating expenses as a percentage of sales which offset the
lower gross margins on this type of account. The trucks and delivery trailers
used by the Company have separate temperature-controlled compartments. The
Company utilizes a computer system to design the least costly route sequence
for the delivery of its products.
7
The following table summarizes certain information with respect to the
Company's principal operations:
Approx.
Number of
Number Customer
Principal of Locations
Principal Types of Facili- Currently Major
Region(s) Business ties Served Customers
Kenneth South, Foodservice 5 3,600 Cracker Barrel
O. Southwest distribution ,Outback, Don
Lester, Midwest Pablo's,
Co., and Harrigans and
Inc. Northeast other restau-
Lebanon rants, health-
,TN care facili-
ties and
schools
schools
Caro South and Foodservice 3 3,000 McDonald's,
Produce Southeast distribution, Taco Bell,
and fresh-cut Hardee's,
Insti- produce Popeye's,
tution- Church's and
al Foods, other restau-
Inc. and rants, health-
Subsidi- care facili-
aries ties and
Houma, LA schools
Milton's South and Foodservice 1 3,500 Subway and
Food- Southeast distribution other restau-
service, rants, health-
Inc. care facili-
Atlanta, ties and
GA schools
B&R Foods Florida Foodservice 1 2,000 Restaurants,
Division distribution healthcare
Tampa, FL facilities and
schools
Hale Tennessee, Foodservice 1 1,800 Restaurants,
Brothers/ Virginia distribution healthcare
Summit, and facilities
Inc. Kentucky and schools
Morris-
town, TN
Perform- South and Foodservice 2 2,600 Popeye's,
ance Food Southwest distribution Church's,
Group of Kentucky Fried
Texas, LP Chicken, Dairy
(formerly Queen, and
McLane other restau-
Food- rants, health-
service) care facili-
Temple, TX ties and
schools
Pocahontas Nationwide Procurement 1 140 Independent
Foods, USA and merchan- foodservice
, Inc. dising distributors
Richmond, and vendors
VA
Recently Completed Acquisition
Subsequent to the Company's year end, on December 30, 1996, the
Company completed the acquisition of certain net assets of McLane
Foodservice -- Temple, Inc. ("McLane Foodservice"), a wholly-owned
subsidiary of McLane Company, Inc., based in Temple, Texas for
approximately $30.0 million. McLane Foodservice operated distribution
centers in Temple and Victoria, Texas and had 1996 net sales of approximately
$180 million. Simultaneously with the closing, the Company purchased the
distribution center in Victoria from an independent third party for
approximately $1.5 million. The purchase was financed with borrowings
under the Company's revolving credit facility.
8
Competition
The foodservice distribution industry is highly competitive. The
Company competes with numerous smaller distributors on a local level, as well
as with a few national or regional foodservice distributors. Some of these
distributors have substantially greater financial and other resources than the
Company. Although large multi-unit chain customers usually remain with one
or more distributors over a long period of time, bidding for long-term
contracts or arrangements is highly competitive and distributors may market
their services to a particular chain of restaurants over a long period of
time before they are invited to bid. In the fresh-cut produce area of the
business, competition comes mainly from smaller processors, although the
Company encounters intense competition from larger national and regional
processors when selling produce to chain restaurants and supermarkets.
Management believes that most purchasing decisions in the foodservice
business are based on the quality of the product, the distributor's ability
to completely and accurately fill orders, provide timely deliveries and on
price.
Regulation
The Company's operations are subject to regulation by state and
local health departments, the U.S. Department of Agriculture and the Food and
Drug Administration, which generally impose standards for product quality
and sanitation. The Company's facilities are generally inspected at least
annually by state and/or federal authorities. In addition, the Company is
subject to regulation by the Environmental Protection Agency with respect to
the disposal of waste water and the handling of chemicals used in cleaning.
The Company's relationship with its fresh food suppliers with
respect to the grading and commercial acceptance of product shipments is
governed by the Federal Produce and Agricultural Commodities Act, which
specifies standards for sale, shipment, inspection and rejection of
agricultural products. The Company is also subject to regulation by state
authorities for accuracy of its weighing and measuring devices.
Certain of the Company's distribution facilities have underground
and above-ground storage tanks for diesel fuel and other petroleum products
which are subject to laws regulating such storage tanks. Such laws have not
had a material adverse effect on the capital expenditures, earnings or
competitive position of the Company.
Management believes that the Company is in substantial compliance
with all applicable government regulations.
Tradenames
Except for the Pocahontas and Fresh Advantage tradenames, the
Company does not own or have the right to use any patent, trademark,
tradename, license, franchise or concession, the loss of which would have a
material adverse effect on the operations or earnings of the Company.
9
Employees
As of December 28, 1996, the Company had approximately 2,000
full-time employees, including approximately 500 in management, marketing
and sales and the remainder in operations. The Company's employees are not
represented by a union or a collective bargaining unit, and the Company
considers its employee relations to be satisfactory.
Risk Factors
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is including the
following cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward looking statements of the Company made by, or on behalf of, the
Company.
Low Margin Business; Economic Sensitivity. The foodservice
distribution industry generally is characterized by relatively high volume with
relatively low profit margins. A significant portion of the Company's sales
are at prices that are based on product cost plus a percentage markup. As a
result, the Company's profit levels may be negatively impacted during periods
of food price deflation even though the Company's gross profit percentage may
remain constant. The foodservice industry is also sensitive to national and
regional economic conditions, and the demand for foodservice products
supplied by the Company has been adversely affected from time to time by
economic downturns. In addition, the Company's operating results are
particularly sensitive to, and may be materially adversely impacted by,
difficulties with the collectibility of accounts receivable, inventory
control, competitive price pressures and unexpected increases in fuel or
other transportation-related costs. There can be no assurance that one or
more of such factors will not adversely affect future operating results. The
Company has experienced losses due to the uncollectibility of accounts
receivable in the past and could experience such losses in the future.
Reliance on Major Customers. The Company derives a substantial
portion of its net sales from customers within the restaurant industry,
particularly certain rapidly growing multi-unit chain customers. Sales to
units of Cracker Barrel accounted for 30% and 29% of the Company's consolidated
net sales in 1996 and 1995, respectively. Sales to Outback accounted for 19%
and 15% of the Company's consolidated net sales in 1996 and 1995,
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 materially adverse impact on the
Company's operating results. The Company has been the primary supplier of
food and food-related products to Cracker Barrel since 1975. See "Business -
Customers and Marketing."
Acquisitions. A significant portion of the Company's historical
growth has been achieved through acquisitions of other foodservice
distributors, and the Company's growth strategy includes additional
acquisitions. There can be no assurance that the Company will be able to make
successful acquisitions in the future. Furthermore, there can be no assurance
that future acquisitions will not have an adverse effect upon the Company's
operating results, particularly in quarters immediately following the
consummation of such transactions, while the operations of the acquired
business are being integrated into the Company's operations. Following the
acquisition of other businesses in the future, the Company may decide to
consolidate the operations of any acquired business with existing operations,
which may result in the establishment of provisions for consolidation. To the
extent the Company's expansion is dependent upon its ability to obtain
additional financing for acquisitions, there can be no assurance that the
Company will be able to obtain financing on acceptable terms. See "Business -
Operations" and "Business - Recently Completed Acquisition."
10
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 materially 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.
11
Executive Officers
The following table sets forth certain information concerning the
executive officers of the Company as of December 28, 1996.
Name Age Position
Robert C. Sledd 44 Chairman, Chief Executive Officer and Director
C. Michael Gray 47 President, Chief Operating Officer and Director
Jerry J. Caro 54 Founding Chairman, Senior Vice President and Director
Roger L. Boeve 58 Executive Vice President and Chief Financial Officer
Thomas Hoffman 57 Senior Vice President
David W. Sober 64 Vice President of Human Resources and Secretary
Robert C. Sledd has served as Chairman of the Board of Directors
since February 1995 and has served as Chief Executive Officer and a director
of the Company since 1987. Mr. Sledd served as President of the Company
from 1987 to February 1995. Mr. Sledd has served as a director of Taylor &
Sledd Industries, Inc., a predecessor of the Company, since 1974, and served as
President and Chief Executive Officer of that Company from 1984 to 1987.
Mr. Sledd also serves as a director of SCP Pool Corporation.
C. Michael Gray has served as President and Chief Operating
Officer of the Company since February 1995 and has served as a director of the
Company since 1992. Mr. Gray served as President of Pocahontas, from 1981
to 1995. Mr. Gray had been employed by Pocahontas since 1975, serving as
Marketing Manager and Vice President of Marketing. Prior to joining
Pocahontas, Mr. Gray was employed by the Kroger Company as a produce
buyer.
Jerry J. Caro has served as Founding Chairman of the Company
since February 1995, as a director of the Company since 1987 and as Senior
Vice President since 1989. Mr. Caro served as Vice Chairman of the Company
from 1988 to February 1995. Although Mr. Caro is no longer involved in day
to day management of the Company, pursuant to an agreement with the
Company, he provides consulting services as requested. Prior to joining the
Company, Mr. Caro was the President of Caro Produce & Institutional Foods,
Inc., a wholly-owned subsidiary of the Company.
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, a wholly-owned subsidiary of the Company,
since 1989. Prior to joining the Company in 1989, Mr. Hoffman had served in
executive capacities at Booth Fisheries Corporation, a subsidiary of Sara Lee
Corporation, as well as C.F.S. Continental, Miami and International
Foodservice, Miami, two foodservice distributors.
12
David W. Sober has served as Vice President for Human Resources
since 1987 and as Secretary of the Company since March 1991. Mr. Sober
served as Vice President for Purchasing of the Company from March 1991 to
July 1994. Mr. Sober served as Corporate Vice President and Secretary for
Taylor & Sledd Industries, Inc., a predecessor of the Company, during 1986
and 1987. Mr. Sober held various positions in other companies in the
wholesale and retail food industries, including approximately 30 years with the
A&P grocery store chain.
Item 2. Properties.
The following table presents information as to the primary real
properties and facilities of the Company and its operating subsidiaries and
division:
Approx.
Area
in Sq. Ft Principal Uses Owned/Leased
(Expiration Date
Location if Leased)
Performance Food Group 5,000 Corporate offices Leased (2000)
Company
Richmond, Virginia
Tampa, Florida (B&R Foods Administrative Owned
Division) 96,000 offices, product
inventory and
distribution
Kenneth O. Lester Company, Inc. 140,000 Administrative Leased (1998)
Lebanon, Tennessee offices, product
inventory and
distribution
Lebanon, Tennessee 176,000 Product inventory Owned
and distribution
Gainesville, Florida 70,000 Product inventory Owned
and distribution
Dallas, Texas 75,000 Product inventory Owned
and distribution
Belcamp, Maryland (1) 75,000 Product inventory Leased (2001)
and distribution
Caro Produce & Institutional 152,000 Administrative Owned
Foods, Inc. offices, produce
Houma, Louisiana processing, product
inventory and
distribution
Dallas, Texas 81,000 Product inventory Leased (1999)
and distribution,
produce processing
Hale Brothers/Summit, Inc. 74,000 Administrative offices, Owned
Morristown, Tennessee product inventory and
distribution
Pocahontas Foods, USA, Inc. 131,000 Administrative offices, Owned
Richmond, Virginia product inventory and
distribution
Milton's Foodservice, Inc. 166,000 Administrative offices, Owned
Atlanta, Georgia product inventory
and distribution
Performance Food Group of
Texas, LP (2)
Temple, Texas 135,000 Administrative offices, Owned
product inventory
and distribution
Victoria, Texas 250,000 Product inventory Owned
and distribution
(1) The Belcamp, Maryland facility was opened in January 1997.
(2) Performance Food Group of Texas, LP (formerly McLane Foodservice) and
related properties were acquired by the Company on December 30, 1996
_______________
13
Item 3. Legal Proceedings.
From time to time the Company is involved in routine litigation and
proceedings in the ordinary course of business. The Company does not have
pending any litigation or proceeding that management believes will have a
material adverse effect upon the Company.
Item 4. Submission of Matters to a Vote of Shareholders.
No matters were submitted to a vote of the shareholders during the
fourth quarter ended December 28, 1996.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.
The prices in the table below represent the high and low sales price for
Performance Food Group Company's common stock as reported by the Nasdaq
National Market. The prices have been adjusted to reflect a 3-for-2 stock
split, effected as a stock dividend, in July 1996. As of March 21, 1997,
Performance Food Group had approximately 980 shareholders of record. 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.
1996
High Low
First Quarter $16.83 $14.17
Second Quarter $21.50 $15.71
Third Quarter $17.00 $13.50
Fourth Quarter $17.25 $11.25
For the Year $21.50 $11.25
1995
High Low
First Quarter $11.33 $ 8.17
Second Quarter $14.17 $10.83
Third Quarter $17.00 $13.33
Fourth Quarter $16.33 $14.67
For the Year $17.00 $ 8.17
14
Item 6. Selected Consolidated Financial Data.
Fiscal Year Ended
Dec. 28, Dec.30, Dec. 31, Jan. 1, Jan. 2,
(In thousands, except per
share data) 1996 1995 1994 1994 1993
Statement of Earnings Data:
Net sales $784,219 $664,123 $473,414 $379,363 $325,575
Cost of goods sold 673,407 568,097 405,104 319,986 274,152
Gross profit 110,812 96,026 68,310 59,377 51,423
Operating expenses 92,227 80,302 60,125 50,588 45,297
Operating profit 18,585 15,724 8,185 8,789 6,126
Other income (expense):
Interest expense (627) (2,727) (388) (1,311) (1,955)
Interest income 20 16 8 53 25
Other, net 156 (2) (286) 81 (70)
Other expense, net (451) (2,713) (666) (1,177) (2,000)
Earnings before income taxes
and cumulative effect of
accounting change 18,134 13,011 7,519 7,612 4,126
Income tax expense 7,145 5,088 2,985 3,092 1,721
Earnings before cumulative
effect of accounting change $10,989 $ 7,923 $4,534 $4,520 $ 2,405
Cumulative effect of change
in method of accounting for
income taxes - - - - 157
Net earnings $10,989 $ 7,923 $4,534 $4,520 $ 2,248
Per Share Data:
Earnings before cumulative
effect of accounting change $ 0.94 $ 0.82 $ 0.47 $ 0.60 $ 0.36
Cumulative effect of change
in method of accounting
for income taxes - - - - 0.02
Net earnings $ 0.94 $ 0.82 $ 0.47 $ 0.60 $ 0.34
Weighted average common shares
and common share equivalents
outstanding 11,686 9,631 9,600 7,501 6,673
Other Data:
Depreciation and amortization $ 5,484 $ 5,319 $ 3,481 $2,870 $2,313
Capital expenditures 9,074 13,921 12,436 9,105 2,837
Balance Sheet Data (end of period):
Working capital $42,967 $30,299 $16,386 $19,183 $ 5,903
Property, plant and equipment,
net 55,697 51,640 35,352 26,411 19,970
Total assets 182,897 155,134 99,075 83,488 63,844
Short-term debt (including
current installments
of long-term debt) 650 3,210 3,211 1,893 9,381
Long-term debt 7,225 37,009 4,966 5,700 14,685
Shareholders' equity 101,135 55,791 46,263 40,643 11,431
15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
GENERAL
The Company was founded in 1987 as a result of the combination of
the businesses of Pocahontas Foods, USA, Inc., a foodservice procurement and
merchandising group in Richmond, Virginia, and Caro Produce & Institutional
Foods, Inc., a distributor of fresh produce and other foodservice products and
services in Louisiana and Texas, and has grown both internally through
increased sales to existing and new customers and by acquisition of existing
foodservice distributors. The Company's acquisitions include:
the November 1987 acquisition of Pocahontas Foodservice, Inc., a
broadline distributor based in Gainesville, Florida;
the July 1988 acquisition of the Kenneth O. Lester Company, Inc., a
broadline and customized distributor based in Lebanon, Tennessee;
the December 1989 acquisition of Hale Brothers, Inc., a broadline
distributor based in Morristown, Tennessee ("Hale");
the December 1991 acquisition of B&R Foods, Inc., a broadline distributor
based in Tampa, Florida;
the December 1992 purchase of certain assets of Loubat-L.Frank, Inc., a
broadline distributor based in New Orleans, Louisiana;
the May 1993 acquisition by Hale of Summit Distributors, Inc., a broadline
distributor based in Johnson City, Tennessee;
the January 1995 acquisition of Milton's Foodservice, Inc., a broadline
distributor based in Atlanta, Georgia ("Milton's"); and
the June 1995 acquisition by Milton's of Cannon Foodservice, Inc., a
broadline distributor based in Asheville, North Carolina ("Cannon").
The Company derives its revenue primarily from the sale of food and
food-related products to the foodservice, or "away-from-home eating,"
industry. The foodservice industry consists of two major customer types:
"traditional" foodservice customers, consisting of independent restaurants,
hotels, cafeterias, schools, healthcare facilities and other institutional
customers, and "multi-unit chain" customers, consisting of regional and
national quick-service restaurants and casual dining restaurants. Products and
services provided to the Company's traditional and multi-unit chain customers
are supported by identical physical facilities, vehicles, equipment and
personnel. The principal components of the Company's expenses include cost
of goods sold, which represents the amount paid to manufacturers and growers
for products sold, and operating expenses, which include primarily labor-
related expenses, delivery costs and occupancy expenses.
The Company's growth has created the need for additional facilities
and the expansion of existing facilities. The Company has increased its
distribution and processing capacity through the acquisition of other
distributors as well as through expansions of its existing facilities and
construction of new facilities. The Company's sales to certain multi-unit
chain customers increased dramatically during 1994 and, as a result, capacity
was exceeded at both the Lebanon, Tennessee and Gainesville, Florida
distribution centers.
The capacity constraints adversely affected operations at both
locations and resulted in increased operating expenses. Operating efficiencies
improved in 1995 with the 105,000 square foot expansion of the distribution
facility in Lebanon completed in November 1994 and the 34,000 square foot
expansion of the Gainesville center completed in May 1995. In addition, the
Company completed construction of a 75,000 square foot distribution center in
Dallas, Texas in February 1996 and has leased a 75,000 square foot facility in
16
Belcamp, Maryland which became operational in January 1997. The Company
incurred certain start-up expenses for the Dallas facility during the fourth
quarter of 1995 and first quarter of 1996, and expects to incur certain start-
up costs in the first quarter of 1997 associated with the Belcamp facility.
The Company is also considering expanding certain of its other distribution
centers during 1997 to efficiently service the Company's continued growth.
The Company's fiscal year ends on the Saturday closest to December
31. Consequently, the Company will periodically have a 53-week fiscal year.
The Company's fiscal years ended December 28, 1996, December 30, 1995
and December 31, 1994, herein referred to as 1996, 1995 and 1994,
respectively, were all 52-week years.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
components of the consolidated statements of earnings expressed as a
percentage of net sales.
1996 1995 1994
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 85.9 85.5 85.6
Gross profit 14.1 14.5 14.4
Operating expenses 11.7 12.1 12.7
Operating profit 2.4 2.4 1.7
Other expense, net 0.1 0.4 0.1
Earnings before income taxes 2.3 2.0 1.6
Income tax expense 0.9 0.8 0.6
Net earnings 1.4% 1.2% 1.0%
COMPARISON OF 1996 TO 1995
Net sales increased 18.1% to $784.2 million for 1996 compared with
$664.1 million for 1995. Substantially all of the increase in net sales was
attributable to internal growth. Inflation during 1996 accounted for
approximately 1% of the sales growth.
Gross profit increased 15.4% to $110.8 million in 1996 compared with
$96.0 million in 1995. Gross profit margin decreased to 14.1% in 1996
compared to 14.5% in 1995. The gross margin percentage declined primarily
due to the continued rapid growth of certain of the Company's large multi-unit
chain customers which generally are higher volume, lower gross margin
accounts but also allow for more efficient deliveries and use of capital,
resulting in lower operating expenses. Gross margins during 1995 were
adversely impacted by the Company's produce processing operations. During
the second quarter of 1995, California experienced adverse weather conditions
which created significant fluctuations in the price and availability of
lettuce.
Although the Company was generally able to pass the increased costs on to its
customers, the gross profit dollars per pound remained relatively comparable to
normal conditions. Thus, although produce processing sales increased
significantly during the period, gross margins did not increase
proportionately.
In addition, margins in the produce processing business continue to be
impacted by the Company's excess production capacity. The Company is
increasing its marketing efforts to further develop produce sales to utilize
this excess capacity.
17
Operating expenses increased 14.9% to $92.2 million in 1996 from
$80.3 million in 1995. As a percentage of net sales, operating expenses
declined to 11.7% in 1996 compared with 12.1% in 1995, reflecting improved
utilization of the Company's facilities at the increased level of sales and the
continued shift in mix of sales to certain of the Company's rapidly growing
multi-unit chain customers discussed above. These improvements in
utilization were offset in part by increased costs associated with the severe
weather experienced in the East and Midwest during the first quarter of 1996.
In addition, the Company incurred certain start-up expenses in the first
quarter of 1996 for the Dallas distribution center which became operational
in February 1996.
Operating profit increased 18.2% to $18.6 million in 1996 from $15.7
million in 1995. Operating profit margins remained flat at 2.4% for 1996 and
1995.
Other expense decreased to $451,000 in 1996 from $2.7 million in
1995. Other expense includes interest expense, which decreased to $627,000
in 1996 from $2.7 million in 1995. The decrease in interest expense was due
primarily to reduced debt levels after the Company's secondary stock offering
completed in March 1996. The Company used the proceeds of this offering to
repay approximately $33.3 million of debt.
Income tax expense increased 40.4% to $7.1 million in 1996 from $5.1
million in 1995 as a result of higher pre-tax earnings. As a percentage of
earnings before income taxes, income tax expense was 39.4% for 1996 versus
39.1% in 1995.
Net earnings increased 38.7% to $11.0 million in 1996 from $7.9
million in 1995. As a percentage of net sales, net earnings increased to 1.4%
in 1996 from 1.2% in 1995.
COMPARISON OF 1995 TO 1994
Net sales increased 40.3% to $664.1 million for 1995 compared to
$473.4 million for 1994. Approximately 56% of the increase in net sales was
attributable to internal growth in all areas of the Company's business, while
approximately 44% was from sales by Milton's, which was acquired on
January 3, 1995. Inflation accounted for approximately 3% of the internal
sales growth.
18
Gross profit increased 40.6% to $96.0 million in 1995 compared with
$68.3 million in 1994. Gross profit margin increased to 14.5% in 1995
compared to 14.4% in 1994. The gross margin percentage improved primarily
as a result of improvements in the Company's broadline operations. Gross
margins during 1995 and 1994 were adversely impacted, however, by the
Company's produce processing operations. During the second quarter of 1995,
California experienced adverse weather conditions which created significant
fluctuations in the price and availability of lettuce. Although the Company
was generally able to pass the increased costs on to its customers, the gross
profit dollars per pound remained relatively comparable to normal conditions.
Thus, although produce processing sales increased significantly during the
period, gross margins did not increase proportionately. In addition, margins
in the produce processing business continued to be impacted by the Company's
excess production capacity. During the third and fourth quarters of 1994,
gross profit margins were adversely affected by equipment problems in the
Company's produce processing operations. The Company purchased new equipment
during December 1994 which addressed those problems. On a year to year
comparison, the impact of lettuce prices and excess capacity in 1995 was
similar to the impact of equipment problems in the produce processing
business in 1994.
Operating expenses increased 33.6% to $80.3 million in 1995 from
$60.1 million in 1994. As a percentage of net sales, operating expenses
declined to 12.1% in 1995 compared with 12.7% in 1994, reflecting improved
utilization of the Company's facilities at the increased level of sales.
Operating profit increased 92.1% to $15.7 million in 1995 from $8.2
million in 1994. Operating profit margin increased to 2.4% in 1995 from 1.7%
in 1994.
Other expense increased to $2.7 million in 1995 from $666,000 in
1994. Other expense includes interest expense, which increased to $2.7
million in 1995 from $388,000 in 1994. The increase in interest expense was
due to the $22.5 million which was borrowed to purchase Milton's and the
$7.3 million of Milton's existing debt which was assumed by the Company at
the time of purchase and financed under the revised loan agreement executed
pursuant to the Milton's purchase.
Income tax expense increased 70.5% to $5.1 million from $3.0 million
in 1994 as a result of higher pre-tax earnings. As a percentage of earnings
before income taxes, income tax expense was 39.1% for 1995 versus 39.7% in
1994.
Net earnings increased 74.7% to $7.9 million in 1995 from $4.5 million
in 1994. As a percentage of net sales, net earnings increased to 1.2% in 1995
from 1.0% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and growth primarily with
cash flow from operations, borrowings under its revolving credit facility,
operating leases, normal trade credit terms and from the sale of the Company's
common stock. Despite the Company's large sales volume, working capital
needs are minimized because the Company's investment in inventory is
financed primarily with accounts payable.
Cash provided by operating activities was $9.9 million and $7.3 million
for 1996 and 1995, respectively. The increase in cash provided by operating
activities resulted primarily from higher net earnings offset in part by
increased levels of receivables and inventories, net of an increase of trade
payables, due to the continued growth of the Company's business.
Cash used by investing activities was $9.3 million and $36.0 million
for 1996 and 1995, respectively. Investing activities include additions to and
disposal of property, plant and equipment and the acquisition of businesses.
The Company's total capital expenditures for 1996 were $9.1 million including
approximately $1.4 million for the expansion in progress of the distribution
center in Houma, Louisiana, approximately $1.9 million to complete the
distribution center in Atlanta, Georgia, and approximately $1.8 million to
complete construction of the distribution center in Dallas, Texas. Investing
activities during 1995 included the $22.5 million purchase of Milton's ($21.7
million, net of cash on hand at the acquired company) and the $643,000
purchase of Cannon.
19
Cash provided by financing activities was $695,000 and $31.3 million
in 1996 and 1995, respectively. Financing activities in 1996 included net
proceeds of $33.3 million from the Company's secondary offering of common
stock completed in March 1996. The proceeds were used to repay the $30.0
million term loan used to finance the acquisition of Milton's and the remainder
to repay a portion of amounts outstanding under a revolving credit facility.
In 1995, cash provided by financing activities included the proceeds from a
$30.0 million term loan, from which the Company used $22.5 million to fund the
purchase of Milton's and $7.3 million to repay debt assumed in the Milton's
acquisition.
In July 1996, the Company entered into a three-year $50.0 million
revolving credit agreement (the "Credit Facility") with a commercial bank.
Approximately $3.6 million was outstanding under the Credit Facility at
December 28, 1996. The Credit Facility also supports up to $3.0 million of
letters of credit. At December 28, 1996, the Company was contingently liable
for outstanding letters of credit of $2.7 million, which reduce amounts
available under the Credit Facility. At December 28, 1996, $43.7 million was
available under the Credit Facility. The facility bears interest at LIBOR plus
a spread over LIBOR (5.56% at December 28, 1996), which varies based on the
ratio of funded debt to total capital. Additionally, the Credit Facility
requires the maintenance of certain financial ratios, as defined, regarding debt
to tangible net worth, cash flow coverage and current assets to current
liabilities.
The Company believes that cash flow from operations and borrowings
under the Credit Facility will be sufficient to finance its operations and
anticipated growth for the foreseeable future.
BUSINESS COMBINATIONS
On January 3, 1995, the Company purchased all of the outstanding
stock of Milton's Foodservice, Inc., a broadline distributor located in
Atlanta,Georgia, which now operates as a wholly-owned subsidiary of the
Company.Milton's had 1994 net sales of approximately $72.0 million. The
aggregate consideration paid by the Company for Milton's was $22.5 million in
cash plus the assumption of $7.3 million of indebtedness. On June 15, 1995,
the Company acquired certain assets of Cannon Foodservice, Inc. for
approximately $643,000. Cannon, a broadline distributor located in Asheville,
North Carolina, had 1994 net sales of approximately $9.0 million. The
operations of Cannon have been combined with the operations of Milton's and
are being conducted through the Milton's distribution facility in Atlanta,
Georgia.
These acquisitions have been accounted for using the purchase method
and, accordingly, the acquired assets and liabilities have been recorded at
their fair value at the dates of acquisition. The excess of the purchase
price over the fair value of tangible net assets acquired in these business
combinations was approximately $13.1 million. The Company's intangible assets
are being amortized on a straight-line basis ranging from 5 to 40 years. The
goodwill component is being amortized over 40 years, which reflects management's
best estimate of the appropriate period over which to amortize goodwill
associated with those acquisitions and is consistent with current industry
practice.
20
Subsequent to the Company's year end, on December 30, 1996, the
Company completed the acquisition of certain net assets of McLane
Foodservice-Temple, Inc.("McLane Foodservice"), a wholly-owned subsidiary
of McLane Company, Inc., based in Temple, Texas for approximately $30.0
million. McLane Foodservice operates distribution centers in Temple and
Victoria, Texas and had 1996 net sales of approximately $180 million.
Simultaneously with the closing, the Company purchased the distribution
center in Victoria from an independent third party for approximately $1.5
million. The purchase was financed with borrowings under the Credit Facility.
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.
1996
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
Net sales $173,059 $192,451 $202,401 $216,308
Gross profit 25,087 26,927 28,505 30,293
Operating profit 3,130 5,258 5,239 4,958
Earnings before income taxes 2,829 5,192 5,216 4,897
Net earnings 1,712 3,139 3,159 2,979
Net earnings per common share $ 0.16 $ 0.26 $ 0.26 $ 0.25
1995
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
Net sales $151,772 $169,989 $169,481 $172,881
Gross profit 22,347 24,540 23,987 25,152
Operating profit 2,847 4,358 4,368 4,151
Earnings before income taxes 2,089 3,573 3,768 3,581
Net earnings 1,274 2,175 2,292 2,182
Net earnings per common share $ 0.13 $ 0.23 $ 0.23 $ 0.22
21
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 6, 1997 contains under the captions "Proposal 1:
Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" 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 6, 1997 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 6, 1997 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.
22
Item 13. Certain Relationships and Related Transactions.
The Proxy Statement issued in connection with the Shareholders
meeting to be held on May 6, 1997 contains under the caption "Certain
Transactions" information required by Item 13 of Form 10-K and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a). 1. Financial Statements. See index to Consolidated Financial
Statements on page 21 of this Form 10-K.
2. Financial Statement Schedules. See of page 21 this Form 10-K.
3. Exhibits:
A. Incorporated by reference to the Company's Registration Statement on
Form S-1 (No. 33-64930):
Exhibit
Number Description
3.1 -- Restated Charter of Registrant.
3.2 -- Restated Bylaws of Registrant.
4.1 -- Specimen Common Stock certificate.
4.2 -- Article 5 of the Registrant's Restated Charter (included in
Exhibit 3.1).
4.3 -- Article 6 of the Registrant's Restated Bylaws (included in
Exhibit 3.2).
10.1 -- Loan Agreement dated May 17, 1984 by and between the Industrial
Development Board of Wilson County, Tennessee and Kenneth O.
Lester Company, Inc.
10.2 -- Promissory Note executed May 17, 1984 in favor of the Industrial
Development Board of Wilson County, Tennessee.
10.3 -- Industrial Development Revenue Bond Series A due 1999.
10.4 -- Assignment from the Industrial Development Board of Wilson
County to Wachovia Bank and Trust Company, N.A. dated May 17,
1984.
10.5 -- Guaranty Agreement dated May 17, 1984 from Kenneth O. Lester
Company, Inc. to Wachovia Bank and Trust Company, N.A.
10.6 -- Loan Agreement dated July 7, 1988, as amended by various
amendments thereto, by and between the Pocahontas Food Group,
Inc. Employee Savings and Stock Ownership Trust, Sovran Bank/
Central South, Trustee,Pocahontas Food Group, Inc., and Third
National Bank, Nashville,Tennessee.
10.7 -- Guaranty Agreement dated July 7, 1988 by and between Pocahontas
Food Group, Inc. and Third National Bank, Nashville, Tennessee.
23
10.8 -- Loan Agreement dated March 1, 1993, by and between Loubat-L.
Frank, Inc. and Performance Food Group Company.
10.9 -- Promissory Note dated March 1, 1992 in favor of Performance Food
Group Company.
10.10 -- Lease Agreement by and between the Kenneth O. Lester Company
and K&F Development Company dated July 1, 1988, with an
amendment thereto.
10.11 -- Commercial Lease Agreement between Alexander & Baldwin, Inc. and
KMB Produce, Inc., a division of Caro Produce & Institutional
Foods, Inc.,dated November 20, 1991, as amended by Lease
Amendment No. 1 thereto.
10.12 -- Lease Agreement by and between the Martin-Brower Company and KMB
Produce, Inc. dated August 18, 1987.
10.13 -- 1989 Non-Qualified Stock Option Plan.
10.14 -- 1993 Employee Stock Incentive Plan.
10.15 -- 1993 Outside Directors' Stock Option Plan.
10.16 -- Performance Food Group Employee Savings and Stock Ownership Plan.
10.17 -- Trust Agreement for Performance Food Group Employee Savings and
Stock Ownership Plan.
10.18 -- Form of Pocahontas Food Group, Inc. Executive Deferred
Compensation Plan.
10.19 -- Form of Indemnification Agreement.
10.20 -- Pledge Agreement dated March 31, 1993 by and between Hunter
C. Sledd, Jr. and Pocahontas Foods, USA, Inc.
B. Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended January 1, 1994:
Exhibit
Number Description
10.21 -- First Amendment to the Trust Agreement for Pocahontas Food
Group, Inc. Employee Savings and Stock Ownership Plan.
10.22 -- Performance Food Group Employee Stock Purchase Plan.
C. Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 2, 1994:
Exhibit
Number Description
10.23 -- Lease Agreement by and between C. O. Hurt and Hale Brothers/
Summit, Inc. dated January 27, 1994.
10.24 -- Amendment to Loan Agreement dated March 4, 1994 by and among
Performance Food Group Company Employee Savings and Stock
Ownership Plan, First Tennessee Bank, N.A., Performance Food
Group Company and Third National Bank, Nashville, Tennessee.
24
10.25 -- Corporate Guaranty dated March 16, 1994 by Performance Food
Group Company in favor of Third National Bank, Nashville,
Tennessee, for the account of Employers Self Insurers Fund.
D. Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended October 1, 1994:
Exhibit
Number Description
10.26 -- Amended and Restated Lease Agreement by and between Pocahontas
Foods USA, Inc. and Taylor & Sledd, Inc. dated August 1, 1994.
10.27 -- Purchase Agreement by and between Performance Food Group Company
and the Shareholder of Milton's Institutional Foods, Inc. dated
November 3, 1994.
E. Incorporated by Reference to the Company's Report on Form 8-K dated
January 3, 1995:
Exhibit
Number Description
10.28 -- Second Amendment to Loan Agreement dated January 3, 1995 between
Performance Food Group Company, Employee Savings and Stock
Ownership Trust, First Tennessee Bank, N.A. as trustee,
Performance Food Group Company and Third National Bank,
Nashville, Tennessee.
F. Incorporated by Reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 1, 1995:
Exhibit
Number Description
10.29 -- Employment agreement dated May 17, 1995 by and between
Performance Food Group Company and Jerry J. Caro.
G. Incorporated by Reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 28, 1996:
10.30 -- Revolving Credit Agreement dated July 8, 1996 by and between
Performance Food Group Company and First Union National Bank
of Virginia.
H. Filed herewith:
10.31 -- Performance Food Group Company Employee Savings and Stock
Ownership Plan Savings Trust.
21 -- List of Subsidiaries.
23.1 -- Consent of Independent Auditors.
27 -- Financial Data Schedule ( for SEC use only).
(b) During the fourth quarter of fiscal 1996 ended December 28, 1996,
the Company filed no reports on Form 8-K.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Richmond,
State of Virginia, on March 26, 1997.
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
Robert C. Sledd Chairman, Chief Executive Officer
and Director [Principal Executive
Officer] March 26, 1996
/s/ C. Michael Gray
C. Michael Gray President, Chief Operating Officer
and Director March 26, 1996
/s/ Jerry J. Caro
Jerry J. Caro Founding Chairman, Senior Vice
President and Director March 26, 1996
/s/ Roger L. Boeve
Roger L. Boeve Executive Vice President and Chief
Financial Officer [Principal
FinancialOfficer and Principal
Accounting Officer] March 26, 1996
/s/ David W. Sober
David W. Sober Vice President and Secretary March 26, 1996
/s/Fred C. Goad,Jr.
Fred C. Goad, Jr. Director March 26, 1996
/s/Timothy M.Graven
Timothy M. Graven Director March 26, 1996
/s/Charles E.Adair
Charles E.Adair Director March 26, 1996
Report of Independent Auditors
The Board of Directors
Performance Food Group Company:
We have audited the accompanying consolidated balance sheets of
Performance Food Group Company and subsidiaries as of December 28, 1996
and December 30, 1995, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the fiscal years in the three-
year period ended December 28, 1996. 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 December 28, 1996 and
December 30, 1995, and the results of their operations and their cash flows for
each of these fiscal years in the three-year period ended December 28, 1996, in
conformity with generally accepted accounting principles.
/s/KPMG PEAT MARWICK LLP
Richmond, Virginia
February 7, 1997
F-1
CONSOLIDATED BALANCE SHEETS
December 28, December 30,
(Dollar amounts in thousands,
except per share amounts) 1996 1995
ASSETS
Current assets:
Cash $ 5,557 $ 4,235
Trade accounts and notes receivable,
less allowance for doubtful accounts
of $2,300 and $1,769 55,689 44,264
Inventories 48,005 37,844
Prepaid expenses and other current
assets 1,405 1,331
Deferred income taxes 2,771 1,853
Total current assets 113,427 89,527
Property, plant and equipment, net 55,697 51,640
Goodwill, net of accumulated
amortization of $1,089 and $769 11,760 12,075
Other intangible assets, net of
accumulated amortization of $928 and $638 991 1,138
Other assets 1,022 754
Total assets $ 182,897 $ 155,134
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Outstanding checks in excess of deposits $ 12,895 $ 13,791
Current installments of long-term debt 650 3,210
Trade accounts payable 44,494 31,943
Accrued expenses 10,984 10,086
Income taxes payable 1,437 198
Total current liabilities 70,460 59,228
Notes payable to banks 3,621 5,243
Long-term debt, excluding current installments 3,604 31,766
Deferred income taxes 4,077 3,106
Total liabilities 81,762 99,343
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; 11,663,015 shares and
9,300,006 shares issued and outstanding 117 93
Additional paid-in capital 68,083 34,172
Retained earnings 36,770 25,781
104,970 60,046
Loan to leveraged employee stock ownership
plan (3,835) (4,255)
Total shareholders' equity 101,135 55,791
Commitments and contingencies
(notes 4, 6, 7, 8, 10, 11 and 13)
$ 182,897 $ 155,134
See accompanying notes to consolidated financial statements.
F-2
CONSOLIDATED STATEMENTS OF EARNINGS
Fiscal Year Ended
December 28, December 30, December 31,
(Dollar amounts in thousands,
except per share amounts) 1996 1995 1994
Net sales $ 784,219 $ 664,123 $ 473,414
Cost of goods sold 673,407 568,097 405,104
Gross profit 110,812 96,026 68,310
Operating expenses 92,227 80,302 60,125
Operating profit 18,585 15,724 8,185
Other income (expense):
Interest expense (627) (2,727) (388)
Interest income 20 16 8
Other, net 156 (2) (286)
Other expense, net (451) (2,713) (666)
Earnings before income taxes 18,134 13,011 7,519
Income tax expense 7,145 5,088 2,985
Net earnings $ 10,989 $ 7,923 $ 4,534
Net earnings per common share $ 0.94 $ 0.82 $ 0.47
Weighted average common shares
and common share equivalents
outstanding 11,685,683 9,630,990 9,599,586
See accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Loan to Total
Common Stock Additional Retained leveraged shareholders'
Shares Amount paid-in capital earnings ESOP equity
(Dollar amounts in thousands)
Balance at January 1, 1994 9,053,898 $ 90 $ 31,943 $ 13,629 $(5,019) $ 40,643
Employee stock option,
incentive and purchase
plans and related income
tax benefit 76,695 1 683 - - 684
Principal payments on
loan to leveraged ESOP - - - - 402 402
Net earnings - - - 4,534 - 4,534
Balance at December 31, 1994 9,130,593 91 32,626 18,163 (4,617) 46,263
Employee stock option,
incentive and purchase
plans and related income
tax benefit 190,278 2 1,572 - - 1,574
Retirement of common stock
received from exercise of
employee stock options (20,865) - (26) (305) - (331)
Principal payments on loan
to leveraged ESOP - - - - 362 362
Net earnings - - - 7,923 - 7,923
Balance at December 30, 1995 9,300,006 93 34,172 25,781 (4,255) 55,791
Proceeds from secondary
offering of common stock 2,255,455 23 33,306 - - 33,329
Employee stock option,
incentive and purchase
plans and related income
tax benefits 107,691 1 607 - - 608
Principal payments on loan
to leveraged ESOP - - - - 420 420
Payment for fractional shares
resulting from 3-for-2 stock
split (137) - (2) - - (2)
Net earnings - - - 10,989 - 10,989
Balance at December 28,
1996 11,663,015 $ 117 $ 68,083 $ 36,770 $ (3,835) $101,135
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
December 28, December 30, December 31,
1996 1995 1994
(Dollar amounts in thousands)
Cash flows from operating activities:
Net earnings $ 10,989 $ 7,923 $ 4,534
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 5,484 5,319 3,481
ESOP contributions applied to principal
of ESOP debt 420 362 402
Loss (gain) on disposal of property,
plant and equipment (53) (97) 34
Deferred income taxes 53 (276) (49)
Changes in operating assets and liabilities,
net of effects of companies acquired:
Increase in trade accounts and
notes receivable (11,425) (6,165) (3,850)
Increase in inventories (10,161) (6,363) (2,293)
Decrease (increase) in prepaid
expenses and other
current assets (74) 546 (147)
Increase in trade accounts payable 12,551 3,920 6,039
Increase in accrued expenses 898 2,089 2,132
Increase (decrease) in income taxes
payable 1,239 76 (902)
Total adjustments (1,068) (589) 4,847
Net cash provided by operating
activitie 9,921 7,334 9,381
Cash flows from investing activities, net of
effects of companies acquired:
Purchases of property, plant and equipment (9,074) (13,921) (12,436)
Proceeds from sale of property, plant and
equipment 196 463 177
Net cash paid for acquisitions - (22,542) -
Decrease (increase) in other assets (416) - 981
Net cash used by investing
activities (9,294) (36,000) (11,278)
Cash flows from financing activities:
Increase (decrease) in outstanding checks
in excess of deposits (896) 5,263 2,034
Net proceeds from (payments on) notes
payable to banks (1,622) 2,798 1,621
Proceeds from issuance of long-term debt - 22,715 -
Principal payments on long-term debt (30,722) (756) (1,037)
Net proceeds from stock offering 33,329 - -
Employee stock option, incentive and purchase
plans and related income tax benefit 606 1,243 684
Net cash provided by financing
activities 695 31,263 3,302
Net increase in cash 1,322 2,597 1,405
Cash at beginning of year 4,235 1,638 233
Cash at end of year $ 5,557 $ 4,235 $ 1,638
See accompanying notes to consolidated financial statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
December 28, 1996 and December 30, 1995
1. Description of Business
Performance Food Group Company (the "Company"), through its operating
subsidiaries and division, is engaged in the marketing, processing and sale of
food and food-related products to the foodservice, or "away-from-home eating"
industry. The foodservice industry consists of two major customer types:
"traditional" foodservice customers consisting of independent restaurants,
hotels, cafeterias,schools, healthcare facilities and other institutions; and
"multi-unit chain" customers consisting of regional and national quick-service
restaurants and casual dining restaurants. Products and services provided to
the Company's traditional and multi-unit chain customers are supported by
identical physical facilities, vehicles, equipment, systems and personnel.
Most of the Company's customers are located in the Southern, Southwestern,
Midwestern and Northeastern United States. The Company has the following
wholly-owned subsidiaries and operating division: Pocahontas Foods, USA, Inc.;
Caro Produce & Institutional Foods, Inc. and subsidiaries ("Caro"); Kenneth O.
Lester Company, Inc. ("KOL"); Hale Brothers/Summit, Inc.; Milton's Foodservice,
Inc. ("Milton's"); and the B&R Foods division.
The Company uses a 52/53 week fiscal year ending on the Saturday closest to
December 31. The fiscal years ended December 28, 1996, December 30, 1995 and
December 31, 1994 (all 52 week years) are referred to herein as 1996, 1995 and
1994, respectively.
2. Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
(b) Revenue Recognition and Receivables
Sales are recognized upon the shipment of goods to the customer. Trade
accounts and notes receivable represent receivables from customers in the
ordinary course of business. Such amounts are recorded net of the allowance
for doubtful accounts in the accompanying consolidated balance sheets. The
provision for doubtful accounts recorded by the Company was approximately
$1,150,000,$1,762,000 and $547,000 in 1996, 1995 and 1994, respectively.
(c) Inventories
The Company values inventory at the lower of cost or market using the first-in,
first-out (FIFO) 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.
F-6
(e) Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income Taxes, which requires the use
of the asset and liability method of accounting for deferred income taxes.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts. Future tax benefits, including net
operating loss carryforwards, are recognized to the extent that realization of
such benefits is more likely than not.
(f) Intangible Assets
Intangible assets consist primarily of the excess of the purchase price over
the fair value of tangible net assets acquired (goodwill) related to purchase
business combinations, costs allocated to customer lists, non-competition
agreements and deferred loan costs. These intangible assets are being
amortized on a straight-line basis over their estimated useful lives, which
range from 5 to 40 years.
(g) Net Earnings Per Common Share
Net earnings per common share are computed using the weighted average number of
common shares outstanding during each period, including common stock
equivalents related to stock options calculated using the treasury stock
method, when dilutive.
(h) Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation. This new accounting standard
encourages, but does not require, companies to record compensation costs for
stock-based compensation plans using a fair-value based method of accounting
for employee stock options and similar equity instruments. The Company has
elected to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of grant over
the amount an employee must pay to acquire the stock (see note 13).
(i) Accounting Estimates
The preparation of the consolidated financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
that affect the reported amounts of assets, liabilities, sales and expenses.
Actual results could differ from those estimates.
(j) Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
the disclosure of fair value information regarding financial instruments whether
or not recognized on the balance sheet, for which it is practical to estimate
that value. At December 28, 1996, the carrying value of cash, trade accounts
and notes receivable, outstanding checks in excess of deposits, trade accounts
payable and accrued expenses approximate their fair value due to the relatively
short maturity of those instruments. The carrying value of the Company's long-
term debt and borrowings under its revolving credit facility approximates fair
value due to the variable nature of the interest rate charged on such
borrowings.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in
1996. This accounting standard requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
F-7
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Adoption of SFAS No.
121 did not have a material impact on the Company's financial position, results
of operations or liquidity.
(l) Reclassifications
Certain amounts in the 1995 and 1994 consolidated financial statements have
been reclassified to conform with the 1996 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 30%, 29% and 33% of consolidated net sales for
1996, 1995 and 1994, respectively. Net sales to Outback accounted for 19%,
15% and 11% of consolidated net sales for 1996, 1995 and 1994 respectively.
At December 28, 1996, amounts receivable from these two customers represented
33% of total trade receivables.
Financial instruments which 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 the customers' credit
worthiness.
4. Business Combinations
On January 3, 1995, the Company purchased all of the outstanding capital stock
of Milton's, a foodservice distributor located in Atlanta, Georgia, which now
operates as a wholly-owned subsidiary of the Company. Milton's had 1994 net
sales of approximately $72.0 million. The aggregate consideration paid by the
Company for Milton's was $22.5 million in cash plus the assumption of $7.3
million of indebtedness. On June 15, 1995, the Company acquired certain assets
of Cannon Foodservice, Inc. ("Cannon") for approximately $643,000. Cannon, a
foodservice distributor located in Asheville, North Carolina, had 1994 net sales
of approximately $9.0 million. The operations of Cannon have been combined with
the operations of Milton's and all operations are being conducted through the
Milton's distribution facility.
These acquisitions have been accounted for using the purchase method and,
accordingly, the acquired assets and liabilities have been recorded at their
fair values at the dates of acquisition. The excess of the purchase price over
the fair value of tangible net assets acquired in these business combinations
was approximately $13.1 million. The Company's intangible assets are being
amortized on a straight-line basis ranging from 5 to 40 years. The goodwill
component is being amortized over 40 years, which reflects management's best
estimate of the appropriate period over which to amortize the goodwill
associated with these acquisitions and is consistent with current industry
practice.
The unaudited consolidated results of operations on a pro forma basis as though
Milton's had been acquired as of the beginning of 1994 are as follows (in
thousands):
Net sales $ 545,395
Gross profit 82,844
Net earnings 4,757
Net earnings per common share $ .50
F-8
Milton's was acquired on January 3, 1995 and therefore the pro forma
consolidated results of operations for 1995 do not differ from the actual
results reported in the consolidated statements of earnings. The pro forma
results of the Cannon acquisition, assuming that it had been made at the
beginning of the years presented, would not differ materially from the actual
results reported.
The pro forma results are presented for information only and are not
necessarily indicative of the operating results that would have occurred had
the Milton's acquisition been consummated as of the above date.
5. Property, Plant and Equipment
Property, plant and equipment as of December 28, 1996 and December 30, 1995
consist of the following (in thousands):
1996 1995
Land $ 3,136 $ 2,864
Buildings and building improvements 41,833 32,089
Transportation equipment 9,911 9,939
Warehouse and plant equipment 20,398 18,666
Office equipment, furniture and fixtures 8,000 7,290
Leasehold improvements 3,095 2,673
Construction-in-process 2,160 6,507
88,533 80,028
Less accumulated depreciation and amortization 32,836 28,388
Property, plant and equipment, net $ 55,697 $ 51,640
At December 28, 1996, the Company was in the process of expanding its
distribution center in Houma, Louisiana. This project is expected to be
finished during the first quarter of 1997 with a total cost of approximately
$2.4 million, including $1.4 million incurred through December 28, 1996.
6. Supplemental Cash Flow Information
1996 1995 1994
Cash paid during the year for:
Interest $ 816 $ 2,540 $ 332
Income taxes 5,853 5,011 3,887
Effects of purchase of companies:
Fair value of assets acquired $ - $ 32,544 $ -
Liabilities assumed - (10,002) -
Net cash paid for acquisitions $ - $ 22,542 $ -
Non-cash financing activities:
Exercise of employee stock options $ - $ 331 $ -
7. Notes Payable to Banks
Notes payable to banks consist of the outstanding borrowings under a revolving
credit facility. On July 8, 1996, the Company entered into a $50.0 million
revolving credit agreement (the "Credit Facility") with a commercial bank, of
which approximately $3,621,000 was outstanding at December 28, 1996. The Credit
Facility bears interest at LIBOR plus a spread over LIBOR, which varies based on
the ratio of funded debt to total capital. At December 28, 1996, the interest
F-9
rate on the Credit Facility was 5.56%. The weighted average interest rate for
1996 was 6.07%. The facility expires in July 1999. The Credit Facility
requires the maintenance of certain financial ratios, as defined, regarding debt
to tangible net worth, cash flow coverage and current assets to current
liabilities. Additionally, the Company was contingently liable for outstanding
letters of credit in the amount of $2,713,000 at December 28, 1996, which are
not reflected in the accompanying consolidated balance sheet.
8. Long-term Debt
Long-term debt as of December 28, 1996 and December 30, 1995 consists of the
following (in thousands):
1996 1995
Loan payable to employee stock ownership plan
payable in quarterly installments of $170 which
includes interest based on LIBOR plus a spread
over LIBOR (5.57% at December 28, 1996). Loan
matures in 2003. Loan secured by stock acquired
by the employee stock ownership plan sponsored
by the Company (see note 12). $ 3,835 $ 4,255
Industrial Revenue Bonds payable in quarterly
installments of $33 plus interest computed at
82% of prime rate (6.75% at December 28, 1996),
with final payment due in 1999; secured
by certain real estate and equipment of KOL. 333 467
Notes payable to banks, bearing interest at rates
from 6.6% to 10%, generally payable in monthly
installments plus interest, and maturing at various
dates through 1999. Notes are secured by
certain assets of Caro. 86 133
Term loan payable, repaid in 1996 (see note 9). - 30,000
Notes payable, repaid in 1996. - 121
4,254 34,976
Less current installments 650 3,210
Long-term debt, excluding current installments $ 3,604 $ 31,766
Maturities of long-term debt are as follows (in thousands):
1997 $ 650
1998 678
1999 602
2000 562
2001 594
Thereafter 1,168
Total maturities of long-term debt $ 4,254
F-10
9. Shareholders' Equity
In March 1996, the Company completed a secondary offering of 2,916,824 shares
of common stock, of which the Company sold 2,255,455 shares with the remaining
shares sold by selling shareholders. Net proceeds of the offering were
approximately $33.3 million, which were used to repay a $30.0 million term loan
and approximately $3.3 million outstanding under a revolving credit facility.
In June 1996, the Company's Board of Directors declared a three-for-two stock
split effected in the form of a 50% stock dividend paid on July 15, 1996 to
shareholders of record on July 1, 1996. The split resulted in the issuance
of 3,874,807 shares of common stock. All references in these consolidated
financial statements to shares, share prices, net earnings per share and stock
plans have been restated to reflect the split.
10. Leases
The Company leases various warehouse and office facilities and certain
equipment under long-term operating lease agreements which expire at various
dates. At December 28, 1996, the Company is obligated under operating lease
agreements to make future minimum lease payments as follows (in thousands):
1997 $ 6,430
1998 5,819
1999 5,126
2000 4,611
2001 3,313
Thereafter 7,826
Total minimum lease payments $ 33,125
Total rental expenses for operating leases in 1996, 1995 and 1994 was
approximately $7,900,000, $6,177,000 and $5,170,000, respectively.
11. Income Taxes
Income tax expense consists of the following (in thousands):
1996 1995 1994
Current:
Federal $ 6,530 $ 4,874 $ 2,545
State 562 490 489
7,092 5,364 3,034
Deferred:
Federal 41 (235) (5)
State 12 (41) (44)
53 (276) (49)
Total income tax expense $ 7,145 $ 5,088 $ 2,985
F-11
The effective income tax rates for 1996, 1995 and 1994 were 39.4%, 39.1% and
39.7%, respectively. Actual income tax expense differs from the amount computed
by applying the applicable U.S. Federal corporate income tax rate to earnings
before income taxes as follows (in thousands):
1996 1995 1994
Federal income taxes computed at statutory rate $ 6,247 $ 4,454 $ 2,556
Increase (decrease) in income taxes resulting from:
State income taxes, net of Federal income
tax benefit 372 292 294
Amortization of goodwill 139 194 6
Increase in valuation allowance on deferred
tax assets 129 84 145
Other, net 258 64 (16)
Total income tax expense $ 7,145 $ 5,088 $ 2,985
Deferred taxes are recorded based upon the tax effects of differences between
the financial statement and tax basis of assets and liabilities and available
tax loss carryforwards. Temporary differences and carryforwards which give
rise to a significant portion of deferred tax assets and liabilities at
December 28, 1996 and December 30, 1995 are as follows (in thousands):
1996 1995
Deferred tax assets:
Allowance for doubtful accounts $ 906 $ 728
Inventories, principally due to costs capitalized
for tax purposes in excess of those capitalized
for financial statement purposes 588 646
Reserves for incurred but not reported self-insurance claims 1,343 832
State operating loss carryforwards 924 909
Other 120 14
Total gross deferred tax assets 3,881 3,129
Less valuation allowance (627) (758)
Net deferred tax assets 3,254 2,371
Deferred tax liabilities:
Property, plant and equipment (4,337) (3,370)
Income to be recognized for income tax purposes from the
change to the FIFO method of accounting for inventory
and differences in inventory purchase price accounting (50) (105)
Other (173) (149)
Total gross deferred tax liabilities (4,560) (3,624)
Net deferred tax liability $ (1,306) $ (1,253)
F-12
The net deferred tax liability is presented in the December 28, 1996 and
December30, 1995 consolidated balance sheets as follows (in thousands):
1996 1995
Current deferred tax asset $ 2,771 $ 1,853
Noncurrent deferred tax liability (4,077) (3,106)
Net deferred tax liability $ (1,306) $ (1,253)
The net change in the valuation allowance was a decrease of $131,000 in 1996
and an increase of $84,000 and $145,000 in 1995 and 1994, respectively. In
1996, the $131,000 net decrease in the valuation allowance consisted of a
$129,000 increase in the valuation allowance, which is included in deferred
income tax expense, offset by a $260,000 decrease attributable to the expiration
of various state net operating loss carryforwards. The entire net change in the
valuation allowance was included in deferred income tax expense in 1995 and
1994. The valuation allowance primarily relates to state net operating loss
carryforwards of certain of the Company's subsidiaries. The Company believes
the deferred tax assets, net of the valuation allowance, will more likely than
not be realized.
12. Employee Benefits
(a) Employee Savings and Stock Ownership Plan
The Company sponsors the Performance Food Group Company Employee Savings
and Stock Ownership Plan (the "ESOP"). The ESOP consists of two components: a
leveraged employee stock ownership plan and a defined contribution plan
covering substantially all full-time employees.
In 1988, the ESOP acquired 1,821,398 shares of the Company's common stock from
existing shareholders, which were financed with assets transferred from
predecessor plans and the proceeds of a note payable to a bank
(the "ESOP debt"). The ESOP debt is secured by the common stock of the Company
acquired by the ESOP and is guaranteed by the Company. The Company is required
to make contributions to the ESOP equal to the principal and interest amounts
due on the ESOP debt. Accordingly, the outstanding balance of the ESOP debt 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 debt is recorded as interest
expense. The Company contributed approximately $680,000 in each of 1996, 1995
and 1994 to the ESOP. These amounts include interest expense on the ESOP debt
of approximately $260,000, $318,000 and $278,000 in 1996, 1995 and 1994,
respectively. At September 28, 1996, 769,459 shares had been allocated to
participant accounts and 726,607 shares were held as collateral for the ESOP
debt. Upon completion of the 1996 allocation, the Company anticipates
approximately 93,000 additional shares will be released and allocated to
participant accounts.
Employees participating in the defined contribution component of the ESOP may
elect to contribute from 1% to 10% of their qualified salary under the
provisions of Internal Revenue Code Section 401(k). The Company, at the
discretion of its board of directors, may make additional contributions to the
ESOP either to match participant contributions or to provide a general benefit
to all participants. The Company made no discretionary contributions under
the defined contribution portion of the ESOP in 1996, 1995 or 1994.
The Company has also adopted a deferred compensation plan covering certain
employee-shareholders who are not eligible to participate in the ESOP. The cost
of this plan was approximately $37,000, $38,000 and $52,000 in 1996, 1995 and
1994, respectively.
F-13
(b) Employee Health Benefit Plans
The Performance Food Group Company Health Care Plan is a self-insured,
comprehensive health benefit plan designed to provide insurance coverage to all
full-time employees and their dependents. The Company provides an accrual for
its estimated liability for these self-insured benefits, including an estimate
for incurred but not reported claims. This accrual is included in accrued
expenses in the consolidated balance sheets. The Company provides no post-
retirement benefits to former employees.
13. Stock Plans
The Company sponsors a number of stock-based compensation plans which are
described below. As discussed in note 2 to the consolidated financial
statements, the Company applies APB Opinion No. 25 in accounting for these
plans. Accordingly, no compensation cost has been recognized for its stock
option plans and its stock purchase plan. The per share weighted-average fair
value of stock options granted in 1996 and 1995 was $11.38 and $9.79,
respectively, on the date of grant using the Black-Scholes option pricing model
with the following assumptions: 1996 - expected dividend yield of 0%, risk free
interest rate of 5.46%, volatility of 47.5% and an expected life of 6.1 years;
1995 - expected dividend yield of 0%, risk free interest rate of 7.45%,
volatility of 58.4% and an expected life of 6.6 years. Had the Company
recognized compensation cost in accordance with the provisions of SFAS No. 123,
the Company's pro forma net earnings and net earnings per share for 1996 and
1995 would have been as follows:
1996 1995
Net earnings as reported $ 10,989 $ 7,923
Net earnings pro forma 10,383 7,759
Net earnings per common share as reported $ 0.94 $ 0.82
Net earnings per common share pro forma 0.89 0.81
Pro forma net earnings reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the amounts above since compensation cost
is recognized over the options' vesting period. Compensation costs for options
granted prior to 1995 have not been considered in accordance with SFAS No. 123.
(a) Stock Option and Incentive Plans
The Company sponsors the 1989 Nonqualified Stock Option Plan (the "1989 Plan").
The options vest ratably per year over a four year period from date of grant.
At December 28, 1996, 560,938 options were outstanding, of which 509,772 were
exercisable. No grants have been made under the 1989 Plan after July 21, 1993.
In 1993, the Company's shareholders approved the 1993 Outside Directors Stock
Option Plan (the "Directors Plan"). In 1996, the Company's shareholders
authorized an additional 75,000 shares under the Directors Plan. The Directors
Plan provides for an initial option grant to each director of the Company who
is not also an employee of the Company to purchase 5,250 shares and an annual
option grant to purchase 1,500 shares at the then current market price. Options
granted under the Directors Plan totaled 4,500 in 1996, 1995 and 1994. These
options vest one year from the date of grant. At December 28, 1996, 29,250
options were outstanding, of which 24,750 were exercisable.
In 1993, the Company's shareholders approved the 1993 Employee Stock Incentive
Plan (the "1993 Plan") for the award of up to 375,000 shares of common stock to
officers, key employees and consultants of the Company. In 1996, the Company's
shareholders authorized an additional 750,000 shares of common stock under the
1993 Plan. 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. The Company granted 10,190 shares of common
stock to various employees under the 1993 Plan as a portion of the incentive
compensation earned by such employees during 1994. The Company recognized
F-14
expenses related to these grants of approximately $133,000 in 1994. No grants
of common stock were made in 1996 nor 1995. Stock options granted under the
1993 Plan totaled 295,771, 141,000 and 14,250 for 1996, 1995 and 1994,
respectively. Options granted in 1996 vest four years from the date of the
grant. Options granted in 1995 and 1994 vest ratably over a four year period
from the date of the grant. At December 28, 1996, 425,974 options were
outstanding, of which 33,724 were exercisable.
The following table summarizes the transactions pursuant to the Company's stock
option plans for the three-year period ended December 28, 1996:
Number of Option Price
Shares Per Share
Outstanding at January 1, 1994 874,373 $ 3.67 to $13.17
Granted 18,750 7.83 to 14.17
Exercised (54,149) 3.67 to 6.05
Canceled (20,787) 3.67 to 6.05
Outstanding at December 31, 1994 818,187 $ 3.67 to $14.17
Granted 145,500 10.00 to 16.00
Exercised (137,764) 3.67 to 13.17
Canceled (21,719) 3.67 to 13.17
Outstanding at December 30, 1995 804,204 $ 3.67 to $16.00
Granted 300,271 14.50 to 18.33
Exercised (66,579) 3.67 to 10.00
Canceled (21,734) 6.05 to 14.50
Outstanding at December 28, 1996 1,016,162 $ 3.67 to $18.33
(b) Employee Stock Purchase Plan
The Company maintains the Performance Food Group Employee Stock Purchase
Plan (the "Stock Purchase Plan"), which permits eligible employees to invest by
means of periodic payroll deductions in the Company's common stock at 85% of the
lesser of the market price or the average market price as defined in the plan
document. In 1996, the Company's shareholders authorized an additional 112,500
shares under the Stock Purchase Plan. The total number of shares which may be
sold pursuant to this plan may not exceed 262,500 shares. At December 28,
1996,subscriptions were outstanding for approximately 27,000 shares at $12.75
per share under the Stock Purchase Plan.
14. Related Party Transactions
The Company leases land and buildings from certain shareholders and members of
their families. The Company made lease payments of approximately $933,000,
$819,000 and $774,000 in 1996, 1995 and 1994, respectively. The Company
believes the terms of these leases are no less favorable than those which would
have been obtained from unaffiliated parties.
In addition, the Company paid approximately $1,261,000, $1,322,000 and
$1,884,000 in 1996, 1995 and 1994, respectively, to a company which is owned by
a shareholder of the Company and a member of his family, for transportation
services.
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 balance sheets or results of operations.
F-15
16. Subsequent Events
On December 30, 1996, the Company completed the acquisition of certain net
assets of McLane Foodservice-Temple, Inc.("McLane Foodservice"), a wholly-owned
subsidiary of McLane Company, Inc., based in Temple, Texas. McLane Foodservice
operates distribution centers in Temple and Victoria, Texas and provides
products and services to traditional foodservice customers as well as multi-unit
chain restaurants and vending customers. The purchase price of approximately $30
million, which is subject to certain adjustments, was financed with proceeds
from an existing credit facility (see note 7).
Simultaneous with the closing, the Company also purchased the distribution
center located in Victoria, Texas from an independent third party for
approximately $1.5 million.The following unaudited pro forma condensed
consolidated results of operations assumes the acquisition occurred at the
beginning of 1996 (in thousands):
Net sales $ 962,581
Gross profit 133,848
Net earnings 10,793
Net earnings per common share $ .92
The pro forma results are presented for information only and are not
necessarily indicative of the operating results that would have occurred had
the acquisition been consummated at the beginning of 1996, or of the results
which may occur in the future.
F-16
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Performance Food Group Company:
Under date February 7, 1997, we reported on the consolidated balance sheets
of Performance Food Group Company and subsidiaries as of December 28,
1996 and December 30, 1995, and the related consolidated statements of
earnings, shareholders' equity and cash flows for each of the fiscal years in
the three-year period ended December 28, 1996, as contained in the 1996 annual
report to shareholders. These consolidated financial statements and our report
thereon are included in the 1996 annual report on Form 10-K. In connection
with our audits of the aforementioned consolidated financial statements, we
also audited the related financial statement schedule as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on
this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
Richmond, Virginia
February 7, 1997
S-1
SCHEDULE II
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Beginning Ending
Balance Additions Deductions Balance
Charged to Charged to
Expense Other Accounts
Allowance for Doubtful Accounts
December 31, 1994 $852 $547 - $512 $887
December 30, 1995 $887 $1,762 $349 $1,229 $1,769
December 28, 1996 $1,769 $1,150 - $619 $2,300
S-2