UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 3, 1999
Commission File No.: 0-22192
PERFORMANCE FOOD GROUP COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Tennessee 54-0402940
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
6800 Paragon Place, Suite 500
Richmond, Virginia 23230
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code (804) 285-7340
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
As of August 13, 1999, 13,786,781 shares of the Registrant's Common
Stock were outstanding.
Independent Accountants' Review Report
The Board of Directors and Shareholders
Performance Food Group Company:
We have reviewed the accompanying condensed consolidated balance
sheet of Performance Food Group Company and subsidiaries (the
Company) as of July 3, 1999, and the related condensed
consolidated statements of earnings for the three-month and six-
month periods ended July 3, 1999 and June 27, 1998, and the
condensed consolidated statements of cash flows for the six-month
periods ended July 3, 1999 and June 27, 1998. These condensed
consolidated financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Performance
Food Group Company and subsidiaries as of January 2, 1999, and
the related consolidated statements of earnings, shareholders'
equity and cash flows for the year then ended (not presented
herein); and in our report dated February 7, 1999, we expressed
an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of January
2, 1999 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/KPMG LLP
Richmond, Virginia
August 3, 1999
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
[CAPTION]
July 3, January 2,
1999 1999
(Unaudited)
Assets
Current assets:
Cash 5,614 7,796
Trade accounts and notes receivable, net 108,115 110,372
Inventories 92,035 90,388
Other current assets 6,505 5,723
Total current assets 212,269 214,279
Property, plant and equipment, net 97,485 93,402
Intangible assets, net 83,042 78,023
Other assets 1,918 2,008
Total assets 394,714 387,712
Liabilities and Shareholders' Equity
Current liabilities:
Outstanding checks in excess of deposits 21,667 33,589
Current installments of long-term debt 696 797
Accounts payable 95,125 93,182
Other current liabilities 32,712 23,431
Total current liabilities 150,200 150,999
Long-term debt, excluding current installments 74,714 74,305
Deferred income taxes 5,323 5,323
Total liabilities 230,237 230,627
Shareholders' equity 164,477 157,085
Total liabilities and sh 394,714 387,712
See accompanying notes to unaudited condensed consolidated financial statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (Unaudited)
(In thousands, except per share amounts)
[CAPTION]
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
1999 1998 1999 1998
Net sales $ 501,960 $ 412,994 $ 968,338 $ 788,164
Cost of goods sold 434,105 359,306 837,490 686,111
Gross profit 67,855 53,688 130,848 102,053
Operating expenses 57,779 45,494 114,492 88,881
Operating profit 10,076 8,194 16,356 13,172
Other income (expense):
Interest expense (1,357) (1,064) (2,643) (2,067)
Nonrecurring merger expenses - - (3,812) -
Other, net 110 44 104 61
Other expense, net (1,247) (1,020) (6,351) (2,006)
Earnings before income taxes 8,829 7,174 10,005 11,166
Income tax expense 3,399 2,628 3,924 4,233
Net earnings $ 5,430 $ 4,546 $ 6,081 $ 6,933
Basic net earnings per common share $ 0.40 $ 0.34 $ 0.45 $ 0.52
Weighted average common shares outstanding 13,586 13,387 13,532 13,366
Diluted net earnings per common share $ 0.39 $ 0.33 $ 0.43 $ 0.50
Weighted average common shares and potential
dilutive common shares outstanding 14,043 13,901 14,010 13,875
See accompanying notes to unaudited condensed consolidated financial statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
[CAPTION]
Six Months Ended
July 3, June 27,
1999 1998
Cash flows from operating activities:
Net earnings $ 6,081 $ 6,933
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 6,589 5,189
ESOP contributions applied to principal of
ESOP debt 266 245
Loss (gain) on disposal of property, plant
and equipment 51 (76)
Changes in operating assets and liabilities,net 11,052 7,154
Net cash provided by operating activities 24,039 19,445
Cash flows from investing activities:
Purchases of property, plant and equipment (9,419) (13,303)
Proceeds from sale of property, plant and equipment 86 515
Net cash paid for acquisitions (5,518) (19,948)
Increase in intangibles and other assets (801) (93)
Net cash used by investing activities (15,652) (32,829)
Cash flows from financing activities:
Increase (decrease) in outstanding checks in excess
of deposits (11,922) 1,258
Net borrowings (payments) on note payable to banks 8,238 (30,280)
Repayment of promissory notes - (7,278)
Issuance of long-term debt 851 50,625
Principal payments on long-term debt (8,781) (472)
Distributions of pooled company (1,025) (191)
Effect of conforming fiscal year of pooled company - 84
Employee stock option, incentive and employee stock
purchase plans and related income tax benefit 2,070 714
Net cash provided by (used for) financing
activities (10,569) 14,460
Net increase (decrease) in cash (2,182) 1,076
Cash at beginning of period 7,796 3,880
Cash at end of period $ 5,614 $ 4,956
See accompanying notes to unaudited condensed consolidated financial statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
July 3, 1999 and June 27, 1998
1. Basis of Presentation
The accompanying condensed consolidated financial statements
of Performance Food Group Company and subsidiaries (the
"Company") are unaudited, with the exception of the January 2,
1999 condensed consolidated balance sheet, which was derived from
the audited consolidated balance sheet in the Company's latest
Annual Report on Form 10-K. The unaudited condensed consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
reporting, and in accordance with Rule 10-01 of Regulation S-X.
In the opinion of management, the unaudited condensed
consolidated financial statements contained in this report
reflect all adjustments, consisting of only normal recurring
accruals, which are necessary for a fair presentation of the
financial position and the results of operations for the interim
periods presented. The results of operations for any interim
period are not necessarily indicative of results for the full
year.
These unaudited condensed consolidated financial statements,
note disclosures and other information should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company's latest Annual Report on Form 10-
K.
2. Business Combinations
On February 28, 1999, the Company completed a merger with
NorthCenter Foodservice Corporation ("NCF"), in which NCF became
a wholly-owned subsidiary of the Company. NCF was a privately-
owned foodservice distributor based in Augusta, Maine and had
1998 net sales of approximately $98 million. The merger was
accounted for as a pooling-of-interests and resulted in the
issuance of approximately 850,000 shares of the Company's common
stock in exchange for all of the outstanding stock of NCF.
Accordingly, the consolidated financial statements for periods
prior to the combination have been restated to include the
accounts and results of operations of NCF.
The results of operations, including $3.8 million of
nonrecurring merger expenses previously reported by the Company
and the combined amounts presented in the accompanying
consolidated financial statements are summarized below:
(Amounts in thousands)
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
1999 1998 1999 1998
Net sales:
The Company $ 474,361 $ 388,670 $ 919,244 $ 742,152
NCF 27,599 24,324 49,094 46,012
Combined $ 501,960 $ 412,994 $ 968,338 $ 788,164
Net earnings (loss):
The Company $ 5,010 $ 4,196 $ 8,238 $ 6,761
NCF 420 350 (2,157) 172
Combined $ 5,430 $ 4,546 $ 6,081 $ 6,933
Adjustments to conform NCF's accounting methods and
practices to those of the Company consist primarily of
depreciation and were not material.
NCF, prior to the merger with the Company, was treated as an
S-corporation for Federal income tax purposes. The following pro
forma disclosures present the combined results of operations,
excluding non-recurring merger expenses of $3.8 million, as if
NCF was taxed as a C-corporation for the periods presented:
[CAPTION]
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
(Amounts in thousands) 1999 1998 1999 1998
Net sales $ 501,960 $ 412,994 $ 968,338 $ 788,164
Cost of goods sold 434,105 359,306 837,490 686,111
Gross profit 67,855 53,688 130,848 102,053
Operating expenses 57,779 45,494 114,492 88,881
Operating profit 10,076 8,194 16,356 13,172
Other income (expense):
Interest expense (1,357) (1,064) (2,643) (2,067)
Other, net 110 44 104 61
Other expense, net (1,247) (1,020) (2,539) (2,006)
Earnings before income taxes 8,829 7,174 13,817 11,166
Income tax expense 3,399 2,762 5,319 4,298
Net earnings $ 5,430 $ 4,412 $ 8,498 $ 6,868
Weighted average common
shares outstanding 13,586 13,387 13,532 13,366
Basic net earnings per
common share $ 0.40 $ 0.33 $ 0.63 $ 0.51
Weighted average common
shares and potential
dilutive common shares
outstanding 14,043 13,901 14,010 13,875
Diluted net earnings per
common share $ 0.39 $ 0.32 $ 0.61 $ 0.49
On June 1, 1998, the Company acquired certain net assets
related to the group and chemicals business of Affiliated Paper
Companies, Inc. ("APC"), a privately owned marketing organization
based in Tuscaloosa, Alabama. APC provides procurement and
merchandising services for a variety of paper, disposable and
sanitation supplies to more than 300 independent distributors.
On July 27, 1998, the Company acquired certain net assets of the
Virginia Foodservice Group ("VFG") based in Richmond, Virginia, a
division of a privately owned foodservice distributor in which a
member of the Company's management has a minor ownership
interest. VFG is a foodservice distributor primarily servicing
traditional foodservice customers in the Central Virginia market.
Collectively, these companies had 1997 net sales of approximately
$69 million. The aggregate purchase price for the assets APC and
VFG of approximately $29.4 million, which includes an additional
$4.4 million paid in the first quarter of 1999 to the former
shareholders of VFG and an additional $1.1 million paid in the
second quarter to the former shareholders of APC as a result of
meeting certain performance criteria under the purchase
agreements, was financed with proceeds from an existing credit
facility. The aggregate consideration payable to the former
shareholders of APC and VFG is subject to increase in certain
circumstances.
The acquisitions of APC and VFG have been accounted for
using the purchase method and, accordingly, the acquired assets
and liabilities have been recorded at their estimated fair values
at the date of acquisition. The excess of the purchase price
over the fair value of tangible net assets acquired was
approximately $29.4 million and is being amortized on a straight-
line basis over estimated lives ranging from 5 to 40 years.
The consolidated statements of earnings and cash flows
reflect the results of these acquired companies from the date of
the acquisition through July 3, 1999. The unaudited consolidated
results of operations for the first six months of 1998 on a pro
forma basis as though these acquisitions had been consummated as
of the beginning of 1998 are as follows:
Six Months Ended
June 27, 1998
Net sales $ 822,731
Gross profit 111,749
Net earnings 7,095
Basic net earnings per common share 0.53
Diluted net earnings per common share $ 0.51
3. Supplemental Cash Flow Information
Six Months Ended
July 3, June 27,
(Amounts in thousands) 1999 1998
Cash paid during the period for:
Interest $ 2,555 $ 1,730
Income taxes $ 291 $ 5,126
4. Industry Segment Information
During the fourth quarter of 1998, the Company adopted SFAS
No. 131, Disclosure about Segments of an Enterprise and Related
Information. The adoption of SFAS No. 131 requires the
presentation of descriptive information about reportable segments
which is consistent with that made available to the management of
the Company to assess performance of various operating units.
Under SFAS No. 131, the Company has three reportable
segments: broadline foodservice distribution ("Broadline"),
customized foodservice distribution ("Customized") and fresh cut
produce processing ("Fresh Cut"). Broadline distributes
approximately 25,000 food and food-related products to a
combination of approximately 21,000 traditional and multi-unit
chain customers. Broadline consists of eleven operating
locations that independently design their own product mix,
distribution routes and delivery schedules to accommodate the
varying needs of these customers. Customized focuses on serving
certain of the Company's multi-unit chain customers whose sales
volume, growth, product mix, service requirements and geographic
locations are such that these customers can be more efficiently
served through centralized information systems, dedicated
distribution routes and relatively large and consistent orders
per delivery. Customized currently distributes products in
approximately 40 states through four distribution facilities.
Fresh Cut processes and distributes a variety of fresh produce
and vegetables primarily to multi-unit chain customers primarily
in the Southeastern and Southwestern United States.
Fresh Corporate & h e &
(Amounts in thousands) Broadline Customized Cut Intersegment Consolidated
Second Quarter 1999
Net external sales $ 282,448 $ 204,013 $ 15,499 $ - $ 501,960
Intersegment sales 800 - 3,410 (4,210) -
Operating profit 7,512 2,895 1,250 (1,581) 10,076
Total assets 285,850 81,908 14,606 12,350 394,714
Interest expense
(income) 1,660 597 (29) (871) 1,357
Depreciation and
amortization 2,429 401 359 147 3,336
Capital expenditures 3,145 426 1,759 161 5,491
Second Quarter 1998
Net external sales $ 232,336 $ 166,223 $ 14,435 $ - $ 412,994
Intersegment sales 717 - 3,590 (4,307) -
Operating profit 5,869 2,232 1,033 (940) 8,194
Total assets 253,013 67,066 13,764 8,054 341,897
Interest expense
(income) 1,877 380 (124) (1,069) 1,064
Depreciation and
amortization 2,075 354 288 30 2,747
Capital expenditures 1,869 7,242 350 26 9,487
Fresh Corporate & h e &
Broadline Customized Cut Intersegment Consolidated
Year-to-Date 1999
Net external sales $ 552,127 $ 384,989 $ 31,222 $ - $ 968,338
Intersegment sales 1,560 - 6,410 (7,970) -
Operating profit 12,649 4,892 2,085 (3,270) 16,356
Total assets 285,850 81,908 14,606 12,350 394,714
Interest expense
(income) 3,232 1,148 (31) (1,706) 2,643
Depreciation and
amortization 4,799 801 718 271 6,589
Capital expenditures 6,095 762 2,088 474 9,419
Year-to-Date 1998
Net external sales $ 444,239 $ 316,275 $ 27,650 $ - $ 788,164
Intersegment sales 1,371 - 6,812 (8,183) -
Operating profit 10,054 3,850 1,572 (2,304) 13,172
Total assets 253,013 67,066 13,764 8,054 341,897
Interest expense
(income) 3,600 677 (221) (1,989) 2,067
Depreciation and
amortization 3,869 704 558 58 5,189
Capital expenditures 3,220 9,209 832 42 13,303
5. Subsequent Events
Subsequent to quarter end, the Company executed a definitive
agreement to acquire the common stock of Dixon Tom-A-Toe
Companies, Inc. ("Dixon"), an Atlanta-based privately-owned
processor of fresh-cut produce. Dixon has operations in the
Southeastern and Midwestern generating annual sales of approximately
$60 million.
In addition, the Company signed a definitive agreement to
acquire certain assets of State Hotel Supply Company, Inc.
("State Hotel"), a privately-owned meat processor based in
Newark, New Jersey. State Hotel serves many of the leading
restaurants and food retailers in New York City and surrounding
region. This acquisition is expected to add approximately $25
million in annualized net sales.
These acquisitions are expected to close during the third
quarter and will be accounted for under the purchase method of
accounting.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
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, systems 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 includes
primarily labor-related expenses, delivery costs and occupancy
expenses.
Results of Operations
The following table sets forth, for the periods indicated, the
components of the condensed consolidated statements of earnings
expressed as a percentage of net sales:
[CAPTION]
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
1999 1998 1999 1998
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 86.5 87.0 86.5 87.0
Gross profit 13.5 13.0 13.5 13.0
Operating expenses 11.5 11.0 11.8 11.3
Operating profit 2.0 2.0 1.7 1.7
Other expense, net 0.2 0.3 0.7 0.3
Earnings before
income taxes 1.8 1.7 1.0 1.4
Income tax expense 0.7 0.6 0.4 0.5
Net earnings 1.1 % 1.1 % 0.6 % 0.9 %
Comparison of Periods Ended July 3, 1999 to June 27, 1998.
Net sales increased 21.5% to $502.0 million for the three
months ended July 3, 1999 (the "1999 quarter") from $413.0
million for the three months ended June 27, 1998 (the "1998
quarter"). Net sales increased 22.9% to $968.3 million for the
six months ended July 3, 1999 (the "1999 period") from $788.2
million for the six months ended June 27, 1998 (the "1998
period"). Net sales in the Company's existing operations
increased 17% over the 1998 quarter and 18% over the 1998 period
while acquisitions contributed the remaining 5% of the Company's
total sales growth for both the quarter and period. Inflation
amounted to approximately 1% for both the 1999 quarter and
period.
Gross profit increased 26.4% to $67.9 million in the 1999
quarter from $53.7 million in the 1998 quarter. Gross profit
increased 28.2% to $130.8 million in the 1999 period from $102.1
in the 1998 period. Gross profit margin increased to 13.5% for
both the 1999 quarter and period compared to 13.0% for both the
1998 quarter and period. The increase in gross profit margin was
due primarily to the following factors. During the second half
of 1998 and in the first quarter of 1999, the Company acquired
three broadline distribution and merchandising companies that have
higher gross margins than the Company's customized distribution
operations. Sales also grew internally in the Company's produce
processing operations by approximately 6.9% during the 1999
quarter and 12.2% for the 1999 period which operations currently
have higher margins than the Company's foodservice distribution
operations.
Operating expenses increased 27.0% to $57.8 million in the
1999 quarter compared with $45.5 million in the 1998 quarter.
Operating expenses increased 28.8% to $114.5 million in the 1999
period from $88.9 million in the 1998 period. As a percentage of
net sales, operating expenses increased to 11.5% in the 1999
quarter from 11.0% in the 1998 quarter and to 11.8% in the 1999
period from 11.3% in the 1998 period. The increase in operating
expenses as a percent of net sales is due primarily to the
following factors. The Company incurred additional expense due
to an increase in labor costs to maintain a high level of service
to its customers. Operating expenses as a percentage of net
sales were also impacted by the acquisition of APC which has a
higher expense ratio than many of the Company's other
subsidiaries.
Operating profit increased 23.0% to $10.1 million in the
1999 quarter from $8.2 million in the 1998 quarter.
Additionally, operating profit increased 24.2% to $16.4 million
in the 1999 period from $13.2 million in the 1998 period.
Operating profit margin remained the same at 2.0% for both the
1999 and 1998 quarters and 1.7% for both the 1999 and 1998
period.
Other expense increased to $1.2 million in 1999 from $1.0
million in the 1998 quarter. Other expense also increased to
$6.4 million in the 1999 period from $2.0 million in the 1998
period. Other expense for the 1999 period included a $3.8
million nonrecurring expense related to the merger with NCF.
Interest expense for the 1999 quarter amounted to $1.4 million
compared to $1.1 million for the 1998 quarter. Interest expense
amounted to $2.6 million for the 1999 period compared with $2.1
million for the 1998 period.
Income tax expense increased to $3.4 million in the 1999
quarter from $2.6 million in the 1998 quarter primarily as a
result of higher pre-tax income compared to the prior year's
period. Income tax expense decreased to $3.9 million in the 1999
period from $4.2 million in the 1998 period as a result of lower
pretax earnings due to the merger expenses discussed above. As a
percentage of earnings before income taxes, the provision for
income taxes was 38.5% and 36.6% for the 1999 and 1998 quarters,
and 39.2% and 37.9% for the 1999 and 1998 periods, respectively.
The fluctuation in the effective tax rate is due primarily to the
merger with NCF, which was taxed as an S-Corporation for income
tax purposes prior to the merger with the Company.
Net earnings increased 19.5% to $5.4 million in the 1999
quarter compared to $4.5 million in the 1998 quarter. Net
earnings decreased 12.3% to $6.1 million in the 1999 period from
$6.9 million in the 1998 period. As a percentage of net sales,
net earnings remained at 1.1% for both the 1999 and 1998
quarters, and decreased to 0.6% from 0.9% for the 1999 and 1998
periods, respectively.
Liquidity and Capital Resources
The Company has historically financed its operations and
growth primarily with cash flow from operations, borrowings under
its credit facility, operating leases, normal trade credit terms
and 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
principally with accounts payable.
Cash provided by operating activities was $24.0 million and
$19.4 million for the 1999 and 1998 periods, respectively. The
increase in cash provided by operating activities resulted
primarily from decreased levels of trade receivables and
increased levels of trade payables and accrued expenses.
Cash used by investing activities was $15.7 million and
$32.8 million for the 1999 and 1998 periods, respectively.
Investing activities consist primarily of additions to and
disposals of property, plant and equipment and the acquisition of
businesses. The Company's total capital expenditures for the
1999 quarter were $9.4 million. The Company anticipates that its
total capital expenditures, other than for acquisitions, for
fiscal 1999 will be approximately $29 million. In addition, the
1999 period included $5.5 million paid to the former shareholders
of VFG and APC related to the achievement of certain performance
criteria under those purchase agreements.
Cash used by financing activities was $10.6 million in the
1999 period and cash provided by financing activities was $14.5
million for the 1998 period. Cash flows in the 1999 period
included net borrowings on the revolving credit facility ("Credit
Facility") of $8.2 million. The 1999 period also included
repayments of long term debt in the amount of $8.8 million, as
well as a decrease in outstanding checks in excess of deposits of
$11.9 million. Additionally, the 1999 period includes $2.1
million from the exercise of stock options and $1.0 million
distributed to the former shareholders of NCF in connection with
that acquisition. Cash flows in the 1998 period included net
repayments on the Credit Facility of $30.3 million net of
repayment of $7.3 million of promissory notes used to finance the
acquisition of AFI Foodservice Distributors, Inc. The 1998
period also included proceeds from the issuance of medium term
notes of $50.0 million.
On March 5, 1999, the Company entered into an $85.0 million
Credit Facility with a group of commercial banks which replaced
the Company's existing facility. Approximately $24.0 million was
outstanding under the Credit Facility at July 3, 1999. The
Credit Facility also supports up to $10.0 million of letters of
credit. At July 3, 1999, the Company was contingently liable for
$6.0 million of outstanding letters of credit which reduce
amounts available under the Credit Facility. At July 3, 1999,
the Company had $55.0 million available under the Credit
Facility. The Credit Facility bears interest at LIBOR plus a
spread over LIBOR, which varies based on the ratio of funded debt
to total capital. At July 3, 1999, the Credit Facility bore
interest at 5.55%. Additionally, the Credit Facility requires
the maintenance of certain financial ratios as defined in the
credit agreement.
On March 19, 1999, $9.0 million of Industrial Revenue Bonds
were issued on behalf of a subsidiary of the Company to finance
the construction of a produce processing facility. Approximately
$851,000 of the proceeds from these bonds have been used as of
July 3, 1999. Interest varies as determined by the remarketing
agent for the bonds and was approximately 4.27% at July 3, 1999.
The bonds are secured by a letter of credit issued by a
commercial bank.
In 1997, the Company completed a $42.0 million master
operating lease agreement to construct or purchase four
distribution centers planned to become operational by the end of
1999. Under this agreement, the lessor owns the distribution
centers, incurs the related debt to construct the facilities and
thereafter leases each facility to the Company. The Company has
entered into a commitment to lease each facility for a period
beginning upon the completion of each facility and ending on
September 12, 2002, including extensions. Upon the expiration of
each lease, the Company has the option to renegotiate the lease,
sell the facility to a third party or to purchase the facility at
its original cost. If the Company does not exercise its purchase
options, the Company has significant residual value guarantees of
each property. The Company expects the fair value of the
properties included in this agreement to eliminate or
substantially reduce the Company's exposure under the residual
value guarantees. At July 3, 1999, construction expenditures to
date were approximately $26.2 million.
The Company believes that cash flow from operations and
borrowings under the Company's credit facilities will be
sufficient to finance its operations and anticipated growth for
the foreseeable future.
Business Combinations
On February 28, 1999, the Company completed a merger with
NorthCenter Foodservice Corporation ("NCF"), in which NCF became
a wholly-owned subsidiary of the Company. NCF was a privately-
owned foodservice distributor based in Augusta, Maine and had
1998 net sales of approximately $98 million. The merger was
accounted for as a pooling-of-interests and resulted in the
issuance of approximately 850,000 shares of the Company's common
stock in exchange for all of the outstanding stock of NCF.
Accordingly, the consolidated financial statements for periods
prior to the combination have been restated to include the
accounts and results of operations of NCF.
On June 1, 1998, the Company acquired certain net assets
related to the group and chemicals business of Affiliated Paper
Companies, Inc. ("APC"), a privately owned marketing organization
based in Tuscaloosa, Alabama. APC provides procurement and
merchandising services for a variety of paper, disposable and
sanitation supplies to more than 300 independent distributors.
On July 27, 1998, the Company acquired certain net assets of the
Virginia Foodservice Group ("VFG") based in Richmond, Virginia, a
division of a privately owned foodservice distributor in which a
member of the Company's management has a minor ownership
interest. VFG is a foodservice distributor primarily servicing
traditional foodservice customers in the Central Virginia market.
Collectively, these companies had 1997 net sales of approximately
$69 million. The aggregate purchase price for the assets of APC
and VFG of approximately $29.4 million, which includes an
additional $4.4 million paid in the first quarter of 1999 to the
former shareholders of VFG and an additional $1.1 million paid
in the second quarter of 1999 to the former shareholders of APC
as a result of meeting certain performance criteria under the
purchase agreements, was financed with proceeds from an existing
credit facility. The aggregate consideration payable to the
former shareholders of APC and VFG is subject to increase in
certain circumstances.
The acquisitions of APC and VFG have been accounted for
using the purchase method and, accordingly, the acquired assets
and liabilities have been recorded at their estimated fair values
at the date of acquisition. The excess of the purchase price
over the fair value of tangible net assets acquired was
approximately $29.4 million and is being amortized on a straight-
line basis over estimated lives ranging from 5 to 40 years.
Year 2000 Issue
State of Readiness
In mid 1997, the Company initiated a project to address
potential business disruptions related to data processing
problems as a result of the year 2000 issue. Initially, the
project focused primarily on the Company's information technology
("IT") systems. However, the project was subsequently expanded to
include non-IT systems including, among other things,
transportation and warehouse refrigeration systems,
telecommunications and, utilities. The project consists of a
number of phases: awareness, assessment, programming/testing and
implementation. With respect to IT systems, the Company has
completed the first three phases and approximately 80% of the
implementation phase. The Company expects to complete the
implementation phase for IT systems during the third quarter of
1999. With respect to non-IT systems, the Company is in the
assessment phase to identify all critical systems requiring
remediation and is developing a timetable for remediation based
upon that assessment. As part of the year 2000 project, the
Company has initiated communications with its significant
merchandise suppliers and major customers to assess their state
of readiness for the year 2000. A significant percentage of
suppliers and customers have provided the Company with written
responses regarding their state of year 2000 readiness. The
Company is continuing to evaluate key business processes to
identify any additional non-IT systems requiring remediation and
to work with key suppliers and customers in preparing for the
year 2000. Despite this continuing effort, the Company can
provide no assurance that the IT and non-IT systems of third
party business partners with whom the Company relies upon will be
year 2000 compliant.
Costs
In addition to the year 2000 project, the Company has
underway a project to standardize the computer systems at nine of
its broadline distribution subsidiaries, which operate in a
distributed computing environment. The decision to standardize
the computer system used in these subsidiaries was based on the
Company's continued growth and need to capture information to
improve operating efficiencies and capitalize on the Company's
combined purchasing power. The plan to standardize these systems
was not accelerated by the year 2000 issue. Additionally, one of
the Company's distribution subsidiaries, which operates four
distribution facilities, processes information in a centralized
computing environment. Therefore, the Company's year 2000
remediation efforts have been minimized by focusing its year 2000
programming on two primary operating systems. The Company
anticipates incurring approximately $750,000 related to
remediating its IT systems for year 2000 compliance, of which the
Company has incurred approximately $500,000 to date. The Company
has not completed quantifying the remediation costs regarding non-
IT systems. Year 2000 remediation costs are being expensed as
incurred over the life of the project and are not expected to
have a material effect on the Company's results of operations.
Risks and Contingency Plans
The Company is currently assessing the consequences of its
IT and non-IT remediation efforts not being completed timely or
its efforts not being successful. As part of this assessment
process, the Company is developing contingency plans including
plans to address interruption of merchandise and services
supplied to customers and supplied by third party business
partners. The Company believes the most reasonably likely worst
case scenario related to the readiness of its IT systems would be
that the implementation of a year 2000 compliant system in all
nine subsidiaries would not be completed in a timely fashion. The
Company's contingency plans in this case include backup plans to
process transactions for non-compliant subsidiaries through one
of the Company's year 2000 compliant systems. The Company is
still formulating these contingency plans. With respect to risks
associated with third party merchandise suppliers, the Company
believes the most reasonably likely worst case scenario is that
some of the Company's merchandise suppliers may have difficulty
filling orders and shipping products. The Company believes the
risk associated with merchandise suppliers' year 2000 readiness
is mitigated by the significant number of Company relationships
with alternative suppliers within various product categories,
which could be substituted in the event of non-compliance. The
Company also believes the number of non-compliant merchandise
suppliers will be minimized through its program of communicating
with key suppliers and assessing their state of year 2000
readiness. The Company has not yet completed its assessment
of all non-IT systems requiring remediation,
including various service providers. As the Company's year 2000
project continues, the Company will continue to develop
contingency plans and identify alternative business processes and
sources of supply for goods and services.
The Company's project and related assessment of costs and
risks are based on current estimates and assumptions, including
the outcome of future events regarding the continued availability
of certain resources, the timing and effectiveness of third party
remediation efforts and other factors. There can be no assurance
that the Company's contingency plans or its efforts with respect
to third party business partners will be successful, which could
have a material adverse effect on the Company's financial
position or results of operations.
Forward-Looking Statements
The Company has made certain forward-looking statements in
this quarterly report and in other contexts that are based on
estimates and assumptions and involve risks and uncertainties,
including, but not limited to, general economic conditions, the
reliance on major customers, the Company's anticipated growth,
year 2000 compliance and other financial issues. Whether such
forward-looking statements, which depend on these uncertainties
and future developments, ultimately prove to be accurate cannot
be predicted.
Item 3. Quantitative and Qualitative Disclosures About Market
Risks
The Company's primary exposure to market risk is from
changing interest rates related to the Company's long-term debt.
The Company currently manages this risk through a combination of
fixed and floating rates on these obligations. As of July 3,
1999, the Company's total debt consisted of fixed and floating
rate debt of $50.0 million and $25.4 million, respectively.
Substantially all of the Company's floating rate debt is based on
LIBOR.
During the second quarter of 1999, the Company entered into
a forward swap contract for diesel fuel, which is used in the
normal course of its distribution business. This contract
fixes a certain portion of the Company's forecasted fuel costs
through March, 2000. The following table represents the Company's
outstanding fuel hedge contract as of July 3, 1999:
Average
Notional Contract Estimated
Amount Price Fair
(gallons) Value
(In thousands except average contract price)
Forward swap contract 5,367 $.4185 $391
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a.) The Annual Meeting of Shareholders was held on May 5, 1999.
(b.) The following Director nominees were elected by the
shareholders of record as of March 15, 1999
Votes in Votes
Class III (term expires 2002): Favor Against Abstentions
C. Michael Gray 11,581,037 - 131,587
John E. Stokely 11,580,625 - 131,999
(c.) The following other matters were voted on by shareholders of
record as of March 15, 1999.
Votes in Votes
Favor Against Abstentions
Amendment to the
Company's 1993
Employee Stock Incentive
Plan to increase the
number of shares available
for issuance thereunder. 9,498,017 2,189,651 24,956
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibits:
15 Letter regarding unaudited financial
information from KPMG LLP.
27.1 Financial Data Schedule (SEC only)
27.2 Restated Financial Data Schedule (SEC only)
(b.) No reports on Form 8-K were filed during the
quarter ended July 3, 1999.
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PERFORMANCE FOOD GROUP COMPANY
By: /s/ Roger L. Boeve
Roger L. Boeve
Executive Vice President &
Chief Financial Officer
Date: August 16, 1999