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 OCTOBER 2, 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 November 12, 1999, 14,111,834 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 October 2, 1999, and the related condensed
consolidated statements of earnings for the three-month and nine-
month periods ended October 2, 1999 and September 26, 1998, and the
condensed consolidated statements of cash flows for the nine-month
periods ended October 2, 1999 and September 26, 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
November 2, 1999
PART I - FINANCIAL INFORMATION
Item Financial Statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
October 2, January 2,
1999 1999
(Unaudited)
Assets
Current assets:
Cash $ 7,068 $ 7,796
Trade accounts and notes receivable,net 124,867 110,372
Inventories 99,579 90,388
Other current assets 7,077 5,723
Total current assets 238,591 214,279
Property, plant and equipment, net 105,620 93,402
Intangible assets, net 101,978 78,023
Other assets 1,471 2,008
Total assets $ 447,660 $ 387,712
Liabilities and Shareholders' Equity
Current liabilities:
Outstanding checks in excess of deposits $ 16,456 $ 33,589
Current installments of long-term debt 695 797
Accounts payable 111,084 93,182
Other current liabilities 36,152 23,431
Total current liabilities 164,387 150,999
Long-term debt, excluding current installments 94,678 74,305
Deferred income taxes 5,323 5,323
Total liabilities 264,388 230,627
Shareholders' equity 183,272 157,085
Total liabilities and shareholders' equity $ 447,660 $ 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)
Three Months Ended Nine Months Ended
October 2, September 26, October 2, September 26,
1999 1998 1999 1998
Net sales $ 534,583 $ 445,018 $ 1,502,921 $ 1,233,182
Cost of goods sold 460,208 384,441 1,297,698 1,070,552
Gross profit 74,375 60,577 205,223 162,630
Operating expenses 62,266 51,228 176,758 140,109
Operating profit 12,109 9,349 28,465 22,521
Other income (expense):
Interest expense (1,299) (1,065) (3,942) (3,132)
Nonrecurring merger expenses - - (3,812) -
Other, net 862 138 966 199
Other expense, net (437) (927) (6,788) (2,933)
Earnings before income taxes 11,672 8,422 21,677 19,588
Income tax expense 4,436 2,836 8,360 7,069
Net earnings $ 7,236 $ 5,586 $ 13,317 $ 12,519
Basic net earnings per common share $ 0.52 $ 0.42 $ 0.97 $ 0.94
Weighted average common shares
outstanding 13,911 13,413 13,659 13,382
Diluted net earnings per common share $ 0.50 $ 0.40 $ 0.94 $ 0.90
Weighted average common shares and
potential dilutive common shares
outstanding 14,368 13,949 14,125 13,898
See accompanying notes to unaudited condensed consolidated financial statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
October 2, September 26,
1999 1998
Cash flows from operating activities:
Net earnings $ 13,317 $ 12,519
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 10,253 8,210
ESOP contributions applied to principal
of ESOP debt 400 369
(Gain) on sale of investment (768) -
Loss (gain) on disposal of property,
plant and equipment 56 (83)
Change in operating assets and liabilities,net 6,232 (480)
Net cash provided by operating activities 29,490 20,535
Cash flows from investing activities:
Purchases of property, plant and equipment (14,357) (20,245)
Proceeds from sale of investment 1,563 -
Proceeds from sale of property, plant and equipment 97 591
Net cash paid for acquisitions (15,818) (23,730)
Increase in intangibles and other assets (251) (254)
Net cash used by investing activities (28,766) (43,638)
Cash flows from financing activities:
Increase (decrease) in outstanding checks in
excess of deposits (17,750) 255
Net borrowings (payments) on notes payable to banks 18,890 (19,786)
Repayment of promissory notes - (7,278)
Issuance of long-term debt 2,394 50,041
Principal payments on long-term debt (8,946) (846)
Distributions of pooled company (1,025) (241)
Effect of conforming fiscal year of pooled company - 84
Employee stock option, incentive and employee stock
purchase plans and related income tax benefit 4,985 1,174
Net cash provided by (used for) financing
activities (1,452) 23,403
Net increase (decrease) in cash (728) 300
Cash at beginning of period 7,796 3,880
Cash at end of period $ 7,068 $ 4,180
See accompanying notes to unaudited condensed consolidated financial statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
October 2, 1999 and September 26, 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, as restated for the pooling-of-
interests described in Note 2. 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, results of operations and
cash flows 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 August 28, 1999, the Company acquired the
common stock of Dixon Tom-A-Toe Companies, Inc.
("Dixon"), an Atlanta-based privately owned
processor of fresh-cut produce. Dixon operates
as a wholly owned subsidiary of the Company and
has operations in the Southeastern and Midwestern
states. On August 31, 1999, the Company acquired
certain net assets of State Hotel Supply Company,
Inc. ("State Hotel"), a privately owned meat
processor based in Newark, New Jersey. State
Hotel serves many of the leading restaurants and
food retailers in New York City and the
surrounding region. The operations of State
Hotel will be combined with the operations of AFI
Foodservice Distributors, Inc. ("AFI").
Together, Dixon and State Hotel had 1998 sales,
which will contribute to the Company's ongoing
operations, of approximately $80 million. The
aggregate purchase price for the stock of Dixon
and the assets of State Hotel was $18.2 million.
To fund these acquisitions, the Company issued
approximately 304,000 shares of its common stock
and financed $9.7 million with proceeds from
an existing credit facility. The aggregate
consideration payable to the former shareholders
of State Hotel is subject to increase in certain
circumstances.
The acquisitions of Dixon and State Hotel
have been accounted for using the purchase
method; therefore, the acquired assets and
liabilities have been recorded at their estimated
fair values at the date of acquisition. The
excess of the purchase price over the fair value
of tangible net assets acquired for these
acquisitions was approximately $19.8 million and
is being amortized on a straight-line basis over
estimated lives ranging from 5 to 40 years.
The consolidated statements of earnings and
cash flows reflect the results of these acquired
companies from the date of acquisition through
October 2, 1999. The unaudited consolidated
results of operations for the first nine months
of 1999, excluding non-recurring merger expenses
discussed below of $3.8 million, and 1998 on a pro
forma basis as though these acquisitions had been
completed as of the beginning of 1998 are as follows:
Nine Months Ended
Oct. 2, 1999 Sept. 26, 1998
(in thousands, except per share amounts)
Net sales $ 1,555,633 $ 1,295,026
Gross profit 216,455 176,600
Net earnings 13,367 10,313
Basic net earnings per common share .96 .75
Diluted net earnings per common share .93 .73
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 of the Company and
NCF, including $3.8 million of non-recurring
merger expenses previously reported by the
Company, and the combined amounts presented in
the accompanying consolidated financial
statements are summarized below:
Three Months Ended Nine Months Ended
Oct. 2, Sept. 26, Oct. 2, Sept. 26,
1999 1998 1999 1998
(in thousands)
Net sales:
The Company $ 499,519 $ 415,289 $ 1,418,762 $ 1,157,441
NCF 35,064 29,729 84,159 75,741
Combined $ 534,583 $ 445,018 $ 1,502,921 $ 1,233,182
Net earnings (loss):
The Company $ 6,164 $ 4,687 $ 14,402 $ 11,448
NCF 1,072 899 (1,085) 1,071
Combined $ 7,236 $ 5,586 $ 13,317 $ 12,519
Adjustments to conform NCF's accounting
methods and practices to those of the Company
consisted primarily of depreciation and were not
material.
NCF, prior to the merger with the Company,
was treated as an S-corporation for Federal
income tax purposes. The following 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:
Three Months Ended Nine Months Ended
Oct. 2, Sept. 26, Oct. 2, Sept. 26,
(in thousands, except per share amounts) 1999 1998 1999 1998
Net sales $ 534,583 $ 445,018 $ 1,502,921 $ 1,233,182
Cost of goods sold 460,208 384,441 1,297,698 1,070,552
Gross profit 74,375 60,577 205,223 162,630
Operating expenses 62,266 51,228 176,758 140,109
Operating profit 12,109 9,349 28,465 22,521
Other income (expense):
Interest expense (1,299) (1,065) (3,942) (3,132)
Other, net 862 138 966 199
Other expense, net (437) (927) (2,976) (2,933)
Earnings before income taxes 11,672 8,422 25,489 19,588
Income tax expense 4,436 3,200 9,737 7,483
Net earnings $ 7,236 $ 5,222 $ 15,752 $ 12,105
Basic net earnings per common share $ 0.52 $ 0.39 $ 1.15 $ 0.90
Weighted average common shares
outstanding 13,911 13,413 13,659 13,382
Diluted net earnings per common share $ 0.50 $ 0.37 $ 1.11 $ 0.87
Weighted average common shares and
potential dilutive common shares
outstanding 14,368 13,949 14,125 13,898
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 agreement, was
financed with proceeds from an existing credit
facility. The aggregate consideration payable to
the former shareholders of APC and VFG is subject
to further increase in certain circumstances.
The acquisitions of APC and VFG have been
accounted for using the purchase method 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 for these acquisitions 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 October 2, 1999. The unaudited
consolidated results of operations for the first
nine months of 1998 on a pro forma basis as
though these acquisitions had been consummated as
of the beginning of 1998 are as follows:
Nine Months Ended
Sept. 26, 1998
(in thousands, except per share amounts)
Net sales $ 1,270,807
Gross profit 172,737
Net earnings 12,430
Basic net earnings per common share 0.93
Diluted net earnings per common share 0.89
3. Supplemental Cash Flows Information
Nine Months Ended
Oct. 2, Sept. 26,
(in thousands) 1999 1998
Cash paid during the period for:
Interest $ 3,116 $ 1,903
Income taxes $ 3,976 $ 7,181
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. Certain 1998 amounts
have been restated to conform to the 1999
presentation, consistent with management's
reporting structure.
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 48 states through five
distribution facilities. Fresh Cut processes and
distributes a variety of fresh produce and
vegetables primarily to multi-unit chain
customers mainly in the Southeastern and
Southwestern United States.
Fresh Corporate &
(in thousands) Broadline Customized Cut Intersegment Consolidated
Third Quarter 1999
Net external sales $ 297,732 $ 213,776 $ 23,075 $ - $ 534,583
Intersegment sales 1,026 - 3,688 (4,714) -
Operating profit 9,503 2,738 1,171 (1,303) 12,109
Total assets 304,523 88,226 46,925 7,986 447,660
Interest expense (income) 1,759 598 66 (1,124) 1,299
Depreciation and amortization 2,461 407 639 157 3,644
Capital expenditures 2,321 323 1,940 354 4,938
Third Quarter 1998
Net external sales $ 255,724 $ 174,816 $ 14,478 $ - $ 445,018
Intersegment sales 747 - 3,154 (3,901) -
Operating profit 7,052 2,207 722 (632) 9,349
Total assets 277,081 72,787 13,524 11,152 374,544
Interest expense (income) 2,224 213 (151) (1,221) 1,065
Depreciation and amortization 2,310 355 321 34 3,020
Capital expenditures 3,022 3,819 151 31 7,023
Fresh Corporate &
(in thousands) Broadline Customized Cut Intersegment Consolidated
Year-to-Date 1999
Net external sales $ 849,859 $ 598,765 $ 54,297 $ - $ 1,502,921
Intersegment sales 2,586 - 10,098 (12,684) -
Operating profit 21,447 7,630 3,256 (3,868) 28,465
Total assets 304,523 88,226 46,925 7,986 447,660
Interest expense (income) 4,991 1,746 35 (2,830) 3,942
Depreciation and amortization 7,260 1,208 1,357 428 10,253
Capital expenditures 8,416 1,085 4,028 828 14,357
Year-to-Date 1998
Net external sales $ 699,963 $ 491,091 $ 42,128 $ - $ 1,233,182
Intersegment sales 2,118 - 9,966 (12,084) -
Operating profit 16,488 6,057 2,294 (2,318) 22,521
Total assets 277,081 72,787 13,524 11,152 374,544
Interest expense (income) 5,824 890 (372) (3,210) 3,132
Depreciation and amortization 6,180 1,059 879 92 8,210
Capital expenditures 6,161 13,028 983 73 20,245
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:
Three Months Ended Nine Months Ended
Oct. 2, Sept. 26, Oct. 2, Sept. 26,
1999 1998 1999 1998
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 86.1 86.4 86.3 86.8
Gross profit 13.9 13.6 13.7 13.2
Operating expenses 11.6 11.5 11.8 11.4
Operating profit 2.3 2.1 1.9 1.8
Other expense, net 0.1 0.2 0.5 0.2
Earnings before income taxes 2.2 1.9 1.4 1.6
Income tax expense 0.8 0.6 0.5 0.6
Net earnings 1.4 % 1.3 % 0.9 % 1.0 %
Comparison of Periods Ended October 2, 1999 and
September 26, 1998
Net sales increased 20.1% to $534.6 million
for the three months ended October 2, 1999 (the
"1999 quarter") from $445.0 million for the three
months ended September 26, 1998 (the "1998
quarter"). Net sales increased 21.9% to $1.50
billion for the nine months ended October 2, 1999
(the "1999 period") from $1.23 billion for the
nine months ended September 26, 1998 (the "1998
period"). Net sales in the Company's existing
operations increased 17% over the 1998 quarter
and period, while acquisitions contributed 3% and
5% of the Company's total sales growth for the
1999 quarter and period, respectively. In the
1999 quarter, sales grew internally in Broadline,
Customized and Fresh Cut by 13%, 22%, and 12%,
respectively, over the 1998 quarter. Sales in
the 1999 period also grew internally in
Broadline, Customized and Fresh Cut by 15%, 22%,
and 13%, respectively, over the 1998 period.
Inflation was not significant in either the 1999
quarter or period.
Gross profit increased 22.8% to $74.4
million in the 1999 quarter from $60.6 million in
the 1998 quarter. Gross profit increased 26.2%
to $205.2 million in the 1999 period from $162.6
million in the 1998 period. Gross profit margin
increased to 13.9% and 13.7% for the 1999 quarter
and period, respectively, compared to 13.6% and
13.2% for the 1998 quarter and period,
respectively. Gross margins improved slightly in
each of the Company's reportable segments.
Margins also increased partly as the result of
the acquisition of two broadline and
merchandising companies in the second half of
1998 and the first quarter of 1999. These
companies have higher gross margins than the
Company's customized distribution operations.
Operating expenses increased 21.5% to $62.3
million in the 1999 quarter compared with $51.2
million in the 1998 quarter. Operating expenses
increased 26.2% to $176.8 million in the 1999
period from $140.1 million in the 1998 period.
As a percentage of net sales, operating expenses
increased to 11.6% in the 1999 quarter from 11.5%
in the 1998 quarter, and to 11.8% in the 1999
period from 11.4% in the 1998 period. The
increase in operating expenses as a percentage 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 June 1998 acquisition
of APC which has a higher expense ratio than many
of the Company's other subsidiaries.
Operating profit increased 29.5% to $12.1
million in the 1999 quarter from $9.3 million in
the 1998 quarter. Additionally, operating profit
increased 26.4% to $28.5 million in the 1999
period from $22.5 million in the 1998 period.
Operating profit margin increased to 2.3% and
1.9% for the 1999 quarter and period,
respectively, compared to 2.1% and 1.8% for the
1998 quarter and period, respectively.
Other expense decreased to $437,000 in the
1999 quarter from $927,000 in the 1998 quarter.
Included in other expense in the 1999 quarter was
a gain of $768,000 on the sale of an investment.
Other expense increased to $6.8 million in the
1999 period from $2.9 million in the 1998 period.
Other expense for the 1999 period included a $3.8
million non-recurring expense related to the
merger with NCF. Interest expense for the 1999
quarter amounted to $1.3 million compared to $1.1
million for the 1998 quarter. Interest expense
amounted to $3.9 million for the 1999 period
compared with $3.1 million for the 1998 period.
Income tax expense increased to $4.4 million
in the 1999 quarter from $2.8 million in the 1998
quarter primarily as a result of higher pre-tax
income compared to the prior year's quarter.
Income tax expense increased to $8.4 million in
the 1999 period from $7.1 million in the 1998
period, also primarily as a result of higher pre-
tax income compared to the prior year's period.
As a percentage of earnings before income taxes,
the provision for income taxes was 38.0% and
33.7% for the 1999 and 1998 quarters,
respectively, and 38.6% and 36.1% 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 29.6% to $7.2 million
in the 1999 quarter compared to $5.6 million in
the 1998 quarter. Net earnings increased 6.4% to
$13.3 million in the 1999 period from $12.5
million in the 1998 period. As a percentage of
net sales, net earnings increased to 1.4% from
1.3% in the 1999 and 1998 quarters, respectively,
and decreased to 0.9% from 1.0% for the 1999 and
1998 periods, respectively. Net earnings for the
1999 period were impacted by non-recurring merger
expenses related to the acquisition of NCF.
Liquidity and Capital Resources
The Company has historically financed its
operations and growth primarily with cash flows
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
$29.5 million and $20.5 million for the 1999 and
1998 periods, respectively. The increase in cash
provided by operating activities resulted
primarily from increased net earnings, adjusted
for depreciation and amortization, and improved
levels of trade receivables.
Cash used by investing activities was $28.8
million and $43.6 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 period were
$14.4 million, compared to $20.2 million for the
1998 period. The Company anticipates that its
total capital expenditures, other than for
acquisitions, for fiscal 1999 will be
approximately $22 million. In the 1999 period,
net cash paid for acquisitions included $9.7
million paid for the acquisitions of Dixon and
State Hotel, and $5.5 million paid to the former
shareholders of VFG and APC related to the
achievement of certain performance criteria under
the purchase agreements. In the 1998 period, net
cash paid for acquisitions of $23.7 million was
for the purchase of VFG and APC.
Cash used for financing activities was $1.5
million in the 1999 period, and cash provided by
financing activities was $23.4 million for the
1998 period. Cash flows in the 1999 period
included net borrowings on the revolving credit
facility ("Credit Facility") of $18.9 million.
The 1999 period also included repayments of long-
term debt in the amount of $8.9 million, as well
as a decrease in outstanding checks in excess of
deposits of $17.8 million. Additionally, the
1999 period includes $5.0 million from the
exercise of stock options and $1.0 million
distributed to the former shareholders of NCF.
Cash flows in the 1998 period included net
repayments on the Credit Facility of $19.8
million and net repayments of $7.3 million of
promissory notes used to finance the acquisition
of AFI. The 1998 period also included proceeds
of 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 $34.0 million
was outstanding under the Credit Facility at
October 2, 1999. The Credit Facility also
supports up to $10.0 million of letters of
credit. At October 2, 1999, the Company was
contingently liable for $6.3 million of
outstanding letters of credit which reduce
amounts available under the Credit Facility. At
October 2, 1999, the Company had $44.7 million
available under the Credit Facility. The Credit
Facility bears interest at LIBOR plus a spread
over LIBOR, which varies based on the ratio of
funded debt to total capital. At October 2,
1999, the Credit Facility bore interest at 5.96%.
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 $2.4 million of the proceeds from
these bonds have been used and are reflected on
the Company's balance sheet as of October 2,
1999. Interest varies as determined by the
remarketing agent for the bonds and was 4.00% at
October 2, 1999. The bonds are secured by a
letter of credit issued by a commercial bank.
During the third quarter of 1999, the
Company increased its master operating lease
agreement from $42 million to $47 million used to
construct or purchase four distribution centers
planned to become operational during 2000. Under
this agreement, the lessor owns the distribution
centers, incurs the related debt to construct the
facilities and thereafter leases each facility to
the Company. The Company has entered into a
commitment to lease each facility for a period
beginning upon the completion of each facility
and ending on September 12, 2002, including
extensions. Upon the expiration of each lease,
the Company has the option to renegotiate the
lease, sell the facility to a third party or 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. Through October 2, 1999,
construction expenditures by the lessor were
approximately $27.2 million.
The Company believes that cash flows from
operations and borrowings under the Company's
credit facilities will be sufficient to finance
its operations and anticipated growth for the
foreseeable future.
Business Combinations
On August 28, 1999, the Company acquired the
common stock of Dixon, an Atlanta-based privately
owned processor of fresh-cut produce. Dixon
operates as a wholly owned subsidiary of the
Company and has operations in the Southeastern
and Midwestern states. On August 31, 1999, the
Company acquired certain net assets of 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 the surrounding region. The
operations of State Hotel will be combined with
the operations of AFI. Together, Dixon and State
Hotel had 1998 sales, which will contribute to
the Company's ongoing operations, of
approximately $80 million. The aggregate purchase
price for the stock of Dixon and the assets State
Hotel was $18.2 million. To fund these
acquisitions, the Company issued approximately
304,000 shares of its common stock and financed
$9.7 million with proceeds from the Credit
Facility. The aggregate consideration payable to
the former shareholders of State Hotel is subject
to increase in certain circumstances.
The acquisitions of Dixon and State Hotel
have been accounted for using the purchase
method; therefore, the acquired assets and
liabilities have been recorded at their estimated
fair values at the date of acquisition. The
excess of the purchase price over the fair value
of tangible net assets acquired for these
acquisitions was approximately $19.8 million and
is being amortized on a straight-line basis over
estimated lives ranging from 5 to 40 years.
On February 28, 1999, the Company completed
a merger with NCF,in which NCF became a wholly
owned subsidiary of the Company. NCF was a
privately owned foodservice distributor based in
Augusta, Maine and had 1998 net sales of
approximately $98 million. The merger was
accounted for as a pooling-of-interests and
resulted in the issuance of approximately 850,000
shares of the Company's common stock in exchange
for all of the outstanding stock of NCF.
Accordingly, the consolidated financial
statements for periods prior to the combination
have been restated to include the accounts and
results of operations of NCF.
On June 1, 1998, the Company acquired
certain net assets related to the group and
chemicals business of APC, a privately owned
marketing organization based in Tuscaloosa,
Alabama. APC provides procurement and
merchandising services for a variety of paper,
disposable and sanitation supplies to more than
300 independent distributors. On July 27, 1998,
the Company acquired certain net assets of VFG
based in Richmond, Virginia, a division of a
privately owned foodservice distributor in which
a member of the Company's management has a
minor ownership interest. VFG is a foodservice
distributor primarily servicing traditional
foodservice customers in the Central Virginia
market. Collectively, these companies had 1997
net sales of approximately $69 million. The
aggregate purchase price for the assets of APC
and VFG 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
agreement, was financed with proceeds from the
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 any potential business disruptions
related to data processing problems as a result
of the year 2000 issue. Initially, the project
focused primarily on the Company's information
technology ("IT") systems. However, the project
was subsequently expanded to include non-IT
systems including, 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 implementation of a year
2000 compliant system in Broadline and Customized
and will complete its implementation of a year
2000 compliant system in Fresh Cut in November
1999. The Company will continue testing of year
2000 compliant software and hardware during the
remainder of 1999. With respect to non-IT
systems, the Company has completed its assessment
of all critical systems requiring remediation and
substantially all remediation has been completed
based upon that assessment. In addition, the
Company has utilized a consultant to evaluate the
Company's assessment and documentation of its
state of readiness for the year 2000. 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. Over 2,000
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 on whom the Company
relies 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 $800,000 related to
remediating its IT systems for year 2000
compliance, of which the Company has incurred
approximately $600,000 to date. The Company has
not completed quantifying the remediation costs
of 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 finalizing 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 a year 2000
compliant system is not implemented timely in
certain subsidiaries; or the Company's mission-
critical year 2000 compliant systems fail. The
Company also believes that a reasonably likely
worst-case scenario could involve a loss of power
supply at one or more of its subsidiaries. The
Company is developing contingency plans to
minimize or mitigate the impact of these
potential scenarios. 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 continues to
finalize 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 medium and long-term debt. The
Company currently manages this risk through a
combination of fixed and floating rates on these
obligations. As of October 2, 1999, the
Company's total debt consisted of fixed and
floating rate debt of $50.0 million and $45.4
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 October 2,
1999:
Notional Average
Amount Contract Estimated
(in thousands, except (gallons) Price Fair Value
average contract price)
___________________________________________________________
Forward swap contract 3,586 $ .4250 $ 699
___________________________________________________________
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders.
No matters were submitted to a vote of
security holders.
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibits:
10.31 Amendment to Certain Operative Agreements
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 October
2, 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: November 16, 1999