1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-6544
SYSCO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-1648137
(State or other jurisdiction of (IRS employer
incorporation or organization identification number)
1390 ENCLAVE PARKWAY, HOUSTON, TEXAS 77077-2099
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 584-1390
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Common Stock, $1.00 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 report), 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 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 of the registrant held by
stockholders who were not affiliates (as defined by regulations of the
Securities and Exchange Commission) of the registrant was approximately
$7,731,000,000 at September 11, 1998 (based on the closing sales price on the
New York Stock Exchange Composite Tape on September 11, 1998, as reported by The
Wall Street Journal (Southwest Edition)). At September 11, 1998, the registrant
had issued and outstanding an aggregate of 334,679,271 shares of its common
stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement to be filed not later than 120 days after June
27, 1998 are incorporated by reference into Part III..
===============================================================================
2
PART I
ITEM 1. BUSINESS
Sysco Corporation (together with its subsidiaries and divisions hereinafter
referred to as "SYSCO" or the "Company") is engaged in the marketing and
distribution of a wide range of food and related products to the foodservice or
"food-prepared-away-from-home" industry. The foodservice industry consists of
two major customer segments -- "traditional" and "chain restaurant." Traditional
foodservice customers include restaurants, hospitals, schools, hotels and
industrial caterers. SYSCO's chain restaurant customers include regional pizza
and national hamburger, chicken and steak chain operations.
Services to the Company's traditional foodservice and chain restaurant customers
are supported by similar physical facilities, vehicles, materials handling
equipment and techniques, and administrative and operating staffs.
CUSTOMERS AND PRODUCTS
The traditional foodservice segment includes businesses and organizations which
prepare and serve food to be eaten away from home. Products distributed by the
Company include a full line of frozen foods, such as meats, fully prepared
entrees, fruits, vegetables and desserts, and a full line of canned and dry
goods, fresh meats, imported specialties and fresh produce. The Company also
supplies a wide variety of nonfood items, including paper products such as
disposable napkins, plates and cups; tableware such as china and silverware;
restaurant and kitchen equipment and supplies; medical and surgical supplies;
and cleaning supplies. SYSCO distributes both nationally-branded merchandise and
products packaged under its own private brands.
The Company believes that prompt and accurate delivery of orders, close contact
with customers and the ability to provide a full array of products and services
to assist customers in their foodservice operations are of primary importance in
the marketing and distribution of products to the traditional customer segment
of the foodservice industry. SYSCO offers daily delivery to certain customer
locations and has the capability of delivering special orders on short notice.
Through its more than 10,350 sales, marketing and service representatives, the
Company keeps informed of the needs of its customers and acquaints them with new
products. SYSCO also provides ancillary services relating to its foodservice
distribution such as providing customers with product usage reports and other
data, menu-planning advice, contract services for installing kitchen equipment,
installation and service of beverage dispensing machines and assistance in
inventory control.
No single traditional foodservice customer accounted for as much as 5% of
SYSCO's sales for its fiscal year ended June 27, 1998. Approximately 5% of
traditional foodservice sales during fiscal 1998 resulted from a process of
competitive bidding. There are no material long-term contracts with any
traditional foodservice customer that may not be cancelled by either party at
its option.
The Company's SYGMA Network operations specialize in customized service to chain
restaurants, which service is also provided to a lesser extent by many of the
Company's traditional foodservice operations. SYSCO's sales to the chain
restaurant industry consist of a variety of food products necessitated by the
increasingly broad menus of chain restaurants. The Company believes that
consistent product quality and timely and accurate service are important factors
in the
3
selection of a chain restaurant supplier. No chain restaurant customer accounted
for as much as 3% of SYSCO's sales for its fiscal year ended June 27, 1998, and
there are no material long-term contracts with any chain restaurant customer
that may not be cancelled by either party at its option.
SYSCO does not record sales on the basis of the type of foodservice industry
customer, but based upon available information, the Company estimates that sales
by type of customer during the past three fiscal years were as follows:
Fiscal Fiscal Fiscal
Type of Customer 1998 1997 1996
---------------- ------ ------ -----
Restaurants 62% 61% 61%
Hospitals and nursing homes 11 11 11
Schools and colleges 7 7 7
Hotels and motels 5 6 6
Other 15 15 15
--- --- ---
Totals 100% 100% 100%
=== === ===
SOURCES OF SUPPLY
SYSCO estimates that it purchases from thousands of independent sources, none of
which accounts for more than 5% of the Company's purchases. These sources of
supply consist generally of large corporations selling brand name and private
label merchandise and independent private label processors and packers.
Generally, purchasing is carried out on a decentralized basis through centrally
developed purchasing programs (see "Corporate Headquarters' Services and
Controls" below) and direct purchasing programs established by the Company's
various operating subsidiaries and divisions. The Company continually develops
relationships with suppliers but has no material long-term purchase commitments
with any supplier.
ACQUISITIONS AND DIVESTITURES
Since its formation as a Delaware corporation in 1969 and commencement of
operations in March 1970, SYSCO has grown both through internal expansion of
existing operations and acquisitions of formerly independent companies. The
shareholders of nine companies exchanged their stock for SYSCO common stock at
the formation of the Company, and through the end of fiscal 1998, fifty-four
companies have been acquired, as follows:
4
Date
Company Acquired
------- --------
The Grant Grocer Company June 1970
The Albany Frosted Foods, Inc. and Affiliated Companies September 1970
Arrow Food Distributors, Inc. January 1971
Koon Food Sales, Inc. March 1971
Rome Foods Company October 1971
Saunders Food Distributors, Inc. October 1971
Hallsmith Company, Inc. April 1972
The Miesel Company June 1972
Robert Orr & Company July 1972
Jay Rodgers Co. July 1972
Hardin's, Inc. August 1972
Baraboo Food Products, Inc. May 1973
E. R. Cochran Company December 1973
The Fialkow Company December 1973
Sterling-Keeleys Incorporated December 1973
Harrisonburg Fruit & Produce Co. April 1974
Alabama Complete Foods, Inc. July 1974
Swan Food Sales, Inc. October 1974
Tri-State General Food Supply Co., Inc. December 1974
Marietta Institutional Wholesalers, Inc. June 1975
Monticello Provision Company August 1975
Oregon Film Service, Inc. and Affiliated Companies September 1975
Mid-Central Fish & Frozen Foods, Inc. December 1975
Glen-Webb & Co. December 1978
Select-Union Foods, Inc. April 1979
S.E. Lankford, Jr. Produce, Inc. September 1981
General Management Corporation and Subsidiaries January 1982
Frosted Foods, Inc. January 1982
Pegler & Company October 1983
Bell Distributing Company December 1983
DiPaolo Food Distributors, Inc. June 1985
B. A. Railton Company September 1985
CML Company, Inc. September 1985
New York Tea Company September 1985
Operating divisions of PYA/Monarch, Inc. and
PYA/Monarch of Texas, Inc. (Wholly-owned
subsidiaries of Sara Lee Corporation)
Amarillo, Texas September 1985
Austin, Texas September 1985
Beaumont, Texas September 1985
Trammell, Temple & Staff, Inc. January 1986
Deaktor Brothers Provision Co. March 1986
Bangor Wholesale Foods, Inc. June 1986
General Foodservice Supply, Inc. December 1986
Vogel's June 1987
Major-Hosking's, Inc. July 1987
Foodservice distribution - related businesses of
Staley Continental, Inc. (CFS Continental) August 1988
Olewine's, Inc. December 1988
Oklahoma City-based foodservice distribution
businesses of Scrivner, Inc. April 1990
New York and Pennsylvania-based foodservice
distribution businesses of Scrivner, Inc. April 1991
Benjamin Polakoff & Son, Inc. May 1992
Perloff Brothers, Inc. (Tartan Foods) December 1992
St. Louis Division of Clark Foodservice, Inc. February 1993
Ritter Food Corporation August 1993
Strano Foodservice July 1996
Foodservice distribution division of Jordan's Meats May 1998
Foodservice distribution division of Beaver Street
Fisheries, Inc. June 1998
5
CORPORATE HEADQUARTERS' SERVICES AND CONTROLS
SYSCO's corporate staff, consisting of approximately 770 persons, provides a
number of services to the Company's operating divisions and subsidiaries. These
persons possess experience and expertise in, among other areas, accounting and
finance, cash management, data processing, employee benefits, engineering and
insurance. Also provided are legal, marketing and tax compliance services as
well as warehousing and distribution services which provide assistance in space
utilization, energy conservation, fleet management and work flow.
The corporate staff also administers a consolidated product procurement program
engaged in the task of developing, obtaining and assuring consistent quality
food and nonfood products. The program covers the purchasing and marketing of
SYSCO(R) Brand merchandise, as well as private label and national brand
merchandise, encompassing substantially all product lines. The Company's
operating subsidiaries and divisions may participate in the program at their
option.
CAPITAL IMPROVEMENTS
To maximize productivity and customer service, the Company continues to
construct and modernize its distribution facilities. During fiscal 1998, 1997
and 1996, approximately $259,000,000, $211,000,000, and $236,000,000,
respectively, were invested in facility expansions, fleet additions and other
capital asset enhancements. The Company estimates its capital expenditures in
fiscal 1999 should be in the range of $240,000,000 to $260,000,000. During the
three years ended June 27, 1998, capital expenditures have been financed
primarily by internally generated funds, the Company's commercial paper program
and bank borrowings.
EMPLOYEES
As of June 27, 1998, the Company had approximately 33,400 employees, 22% of whom
are represented by unions, primarily the International Brotherhood of Teamsters.
Contract negotiations are handled locally with monitoring and assistance by the
corporate staff. Collective bargaining agreements covering approximately 25% of
the Company's union employees expire during fiscal 1999. SYSCO considers its
labor relations to be satisfactory.
COMPETITION
The business of SYSCO is competitive with numerous companies engaged in
foodservice distribution. While competition is encountered primarily from local
and regional distributors, a few companies compete with SYSCO on a national
basis. The Company believes that, although price and customer contact are
important considerations, the principal competitive factor in the foodservice
industry is the ability to deliver a wide range of quality products and related
services on a timely and dependable basis. Although SYSCO has less than 10% of
the foodservice industry market in the United States and Canada, SYSCO
believes, based upon industry trade data, that its sales to the "food-prepared-
away-from-home" industry are the largest of any foodservice distributor. While
adequate industry statistics are not available, the Company believes that in
most instances its local operations are among the leading distributors of food
and related nonfood products to foodservice customers in their respective
trading areas.
6
DEBT ISSUANCE
On June 3, 1998 SYSCO filed with the Securities and Exchange Commission a new
$500,000,000 shelf registration of debt securities. On July 22, 1998 SYSCO
issued 6.5% debentures totaling $225,000,000 under the shelf registration, due
on August 1, 2028. These debentures were priced at 99.685% of par, are
unsecured, are not subject to any sinking fund requirement and include a
redemption provision which allows SYSCO the right to retire the debentures at
any time prior to maturity at the greater of par plus accrued interest or an
amount designed to insure that the debenture holders are not penalized by the
early redemption. Proceeds from the debentures were used to pay down outstanding
commercial paper.
On April 22, 1997, in two separate offerings, SYSCO drew down the remaining
$150,000,000 of the $500,000,000 shelf registration filed with the Securities
and Exchange Commission in June 1995. SYSCO issued 7.16% debentures totaling
$50,000,000 due April 15, 2027. These debentures were priced at par, are
unsecured, are not subject to any sinking fund requirement and are redeemable at
the option of the holder on April 15, 2007, but otherwise are not redeemable
prior to maturity. SYSCO also issued 7.25% senior notes totaling $100,000,000
due April 15, 2007. These notes were priced at 99.611% of par and are unsecured,
not redeemable prior to maturity and not subject to any sinking fund
requirement.
GENERAL
Except for the SYSCO(R) trademark, the Company does not own or have the right to
use any patents, trademarks, licenses, franchises or concessions, the loss of
which would have a materially adverse effect on the operations or earnings of
the Company.
SYSCO is not engaged in material research activities relating to the development
of new products or the improvement of existing products. In fiscal 1996 the
Company completed an internally developed project that involved the redesign and
development of the computer operating systems through which SYSCO's operating
companies will process, control and report the results of all transactions. In
the second quarter of fiscal 1998, SYSCO recorded a one-time, after-tax,
non-cash charge of $28,053,000 to comply with a new consensus ruling by the
Emerging Issues Task Force of the Financial Accounting Standards Board (EITF
Issue No. 97-13), requiring reengineering costs associated with computer systems
development to be expensed as they are incurred. Prior to this ruling, SYSCO had
capitalized business process reengineering costs incurred in connection with its
SYSCO Uniform Systems information systems redevelopment project in accordance
with generally accepted accounting principles. Installation will continue
company-wide through calendar year 1999 and such installation is expected to
provide the basis for business expansion over the next several years without
having a material adverse effect on the business or operations of the Company.
Amounts that remain capitalized are being amortized as completed portions of the
project are put into use.
The Company's distribution facilities have tanks for the storage of diesel fuel
and other petroleum products which are subject to laws regulating such storage
tanks. Other federal, state and local provisions relating to the protection of
the environment or the discharge of materials do not materially impact the
Company's use or operation of its facilities. The Company anticipates that
compliance with these laws will not have a material effect on the capital
expenditures, earnings or competitive position of SYSCO and its subsidiaries.
7
Sales of the Company do not generally fluctuate on a seasonal basis, and
therefore, the business of the Company is not deemed to be seasonal.
The Company operates 93 facilities within the United States and three in Canada.
8
ITEM 2. PROPERTIES
The table below shows the number of distribution facilities and self-serve
centers occupied by the Company in each state or province and the aggregate
cubic footage devoted to cold and dry storage.
Number of Cold Storage Dry Storage
Facilities (Thousands (Thousands
Location and Centers Cubic Feet) Cubic Feet)
-------- ----------- ------------ -----------
Alabama 1 65 324
Alaska 1 331 965
Arizona 1 1,485 3,410
Arkansas 1 1,200 1,145
California 9 7,998 14,302
Colorado 4 2,759 5,176
Connecticut 1 2,489 2,737
Florida 5 12,593 14,746
Georgia 2 3,468 6,815
Idaho 1 998 1,154
Illinois 3 3,355 4,498
Indiana 1 1,404 1,832
Iowa 1 687 1,215
Kansas 1 1,975 2,592
Kentucky 1 2,330 2,648
Louisiana 1 2,575 1,875
Maine 2 1,341 2,030
Maryland 4 6,309 6,836
Massachusetts 3 4,130 3,696
Michigan 3 4,976 8,102
Minnesota 1 2,085 2,370
Mississippi 1 2,125 2,690
Missouri 1 1,128 1,348
Montana 1 2,043 1,830
Nebraska 1 2,092 2,618
New Jersey 2 1,681 4,185
New Mexico 1 1,856 1,855
New York 7 5,506 8,912
North Carolina 1 1,929 2,421
Ohio 4 6,152 11,493
Oklahoma 3 1,145 2,737
Oregon 2 3,431 3,455
Pennsylvania 4 4,743 6,937
South Dakota 1 3 166
Tennessee 4 6,289 9,223
Texas 8 11,179 17,474
Utah 1 1,810 1,845
Virginia 1 1,186 1,672
Washington 1 2,604 2,712
Wisconsin 2 4,083 3,782
British Columbia, Canada 2 1,426 1,855
Ontario, Canada 1 1,073 1,030
-- ------- -------
Total 96 128,037 178,708
== ======= =======
9
The Company owns approximately 268,000,000 cubic feet of its distribution
facilities and self-serve centers (or 87.9% of the total cubic feet), and the
remainder is occupied under leases expiring at various dates from fiscal 1999 to
2011, exclusive of renewal options. Certain of the facilities owned by the
Company are either subject to mortgage indebtedness or industrial revenue bond
financing arrangements totaling $54,718,000 at June 27, 1998. Such mortgage
indebtedness and industrial revenue bond financing arrangements mature at
various dates to 2026.
The Company owns its approximately 188,000 square foot headquarters office
complex in Houston, Texas.
Facilities in Modesto, California, Minneapolis, Minnesota, Little Rock,
Arkansas, Kansas City, Kansas, Palmetto, Florida, Portland, Maine and
Harrisonburg, Virginia (which in the aggregate account for approximately 6% of
fiscal 1998 sales) are operating near capacity and the Company is currently
constructing expansions for these distribution facilities. A full service
distribution facility near San Diego, California has been completed and is
scheduled to open during the second quarter of fiscal 1999. The Company is
planning to complete construction of a full service distribution facility near
Birmingham, Alabama during fiscal 1999.
The Company's fleet of approximately 5,770 delivery vehicles consists of tractor
and trailer combinations, vans and panel trucks, most of which are either wholly
or partially refrigerated for the transportation of frozen or perishable foods.
The Company owns approximately 92% of these vehicles and leases the remainder.
ITEM 3. LEGAL PROCEEDINGS
SYSCO is engaged in various legal proceedings which have arisen but have not
been fully adjudicated. These proceedings, in the opinion of management, will
not have a material adverse effect upon the consolidated financial position or
results of operations of the Company when ultimately concluded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Company, each of whom holds the
office opposite his name below until the meeting of the Board of Directors
immediately preceding the next Annual Meeting of Stockholders or until his
successor has been elected or qualified. Executive officers who are also
directors serve as directors until the expiration of their terms which, with
respect to each individual, occurs at the Annual Meeting of Stockholders in the
calendar year specified in parentheses below or until their successors have been
elected and qualified.
SERVED IN THIS
NAME OF OFFICER CAPACITY POSITION SINCE AGE
--------------- -------- -------------- ---
John F. Woodhouse Chairman of the Board 1985 67
of Directors (1998)
Bill M. Lindig President and Chief 1985, 1995 61
Executive Officer and & 1983
Director (1999)
Charles H. Cotros Executive Vice President and 1988, 1995 61
Chief Operating Officer and & 1985
Director (2000)
O. Wayne Duncan Senior Vice President, 1995 60
Operations
George L. Holm Senior Vice President, 1996 42
Operations
Thomas E. Lankford Senior Vice President, 1995 50
Operations
Gregory K. Marshall Senior Vice President 1993 51
Richard J. Schnieders Senior Vice President, 1992 & 50
Merchandising Services and 1997
Multi-Unit Sales and
Director (2000)
John K. Stubblefield, Jr. Senior Vice President and 1993 & 52
Chief Financial Officer 1994
Arthur J. Swenka Senior Vice President, 1995 61
Operations and Director (2000)
James D. Wickus Senior Vice President, 1995 55
Operations
Diane Day Sanders Vice President and Treasurer 1994 49
Each of the executive officers listed above has been employed by the Company, or
a subsidiary or division of the Company, throughout the past five years.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The principal market for SYSCO's Common Stock is the New York Stock Exchange.
The table below sets forth the high and low sales prices per share for SYSCO's
Common Stock as reported on the New York Stock Exchange Composite Tape and the
cash dividends paid for the periods indicated, adjusted for the 2-for-1 stock
split effected by a 100% stock dividend paid on March 20, 1998.
Common Stock Prices
------------------------------- Dividends
High Low Paid
----------- ------------ ---------
Fiscal 1997
First Quarter $ 17-1/4 $ 13-9/16 $0.065
Second Quarter 17-3/4 15-13/16 0.065
Third Quarter 17-13/16 14-5/8 0.075
Fourth Quarter 19-1/8 16-1/2 0.075
Fiscal 1998
First Quarter $ 19-23/32 $ 17-3/32 $0.075
Second Quarter 23-13/32 17-29/32 0.075
Third Quarter 26-3/4 21-5/8 0.085
Fourth Quarter 26-3/4 21-7/8 0.090
The number of record owners of SYSCO's Common Stock as of June 27, 1998 was
16,142.
12
Item 6.
Selected Financial Data
- - -----------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended
- - -----------------------------------------------------------------------------------------------------------------------------
(In thousands except for share data) 1998 1997 1996 1995 1994
- - -----------------------------------------------------------------------------------------------------------------------------
Sales $ 15,327,536 $ 14,454,589 $ 13,395,130 $ 12,118,047 $ 10,942,499
Earnings before income taxes 532,493 495,955 453,943 417,618 367,582
Income taxes 207,672 193,422 177,038 165,794 150,830
------------ ------------ ------------ ------------ ------------
Earnings before cumulative effect
of accounting change 324,821 302,533 276,905 251,824 216,752
Cumulative effect of accounting change (28,053) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net earnings 296,768 302,533 276,905 251,824 216,752
============ ============ ============ ============ ============
Earnings before accounting change:
Basic earnings per share 0.95 0.85 0.76 0.69 0.59
Diluted earnings per share 0.95 0.85 0.75 0.68 0.58
Cumulative effect of accounting change:
Basic earnings per share (0.08) -- -- -- --
Diluted earnings per share (0.08) -- -- -- --
Net earnings:
Basic earnings per share 0.87 0.85 0.76 0.69 0.59
Diluted earnings per share 0.86 0.85 0.75 0.68 0.58
Cash dividends per share 0.33 0.28 0.24 0.20 0.16
Total assets 3,780,189 3,433,823 3,319,943 3,097,161 2,811,729
Capital expenditures 259,353 210,868 235,891 201,577 161,485
Long-term debt 867,017 685,620 581,734 541,556 538,711
Shareholders' equity 1,356,789 1,400,472 1,474,678 1,403,603 1,240,909
------------ ------------ ------------ ------------ ------------
Total capitalization 2,223,806 2,086,092 2,056,412 1,945,159 1,779,620
============ ============ ============ ============ ============
Ratio of long-term debt to capitalization 39.0% 32.9% 28.3% 27.8% 30.3%
13
Item 7.
Management's Discussion And Analysis
LIQUIDITY AND CAPITAL RESOURCES
SYSCO provides marketing and distribution services to foodservice customers and
suppliers throughout the contiguous United States, Alaska and western and
central Canada. The company intends to continue to expand its market share
through profitable sales growth and consistent emphasis on the development of
its consolidated buying programs. The company also strives to increase the
effectiveness of its marketing associates and the productivity of its
warehousing and distribution activities. These objectives require continuing
investment. SYSCO's resources include cash provided by operations and access to
capital from financial markets.
SYSCO's operations historically have produced significant cash flow.
Cash generated from operations is first allocated to working capital
requirements; investments in facilities, fleet and other equipment required to
meet customers' needs; cash dividends; and acquisitions fitting within the
company's overall growth strategy. Any remaining cash generated from operations
also is applied toward a portion of the cost of shares repurchased in the
buyback program, while the remainder of the cost may be financed with additional
long-term debt. SYSCO's initial share repurchase program was used primarily to
offset shares issued under various employee benefit and compensation plans. The
company significantly accelerated the repurchase program beginning in February
1996. The share repurchase program reduces outstanding shares and increases
earnings per share, while maintaining long-term debt to total capitalization
within its intended target range of 30% to 40%. This ratio was 39% and 33% at
June 27, 1998 and June 28, 1997, respectively.
In November 1996, the Board authorized an additional 12,000,000 share
buyback to be completed in calendar 1997 and in July 1997 authorized an
additional 12,000,000 share buyback to be completed in fiscal 1998. The number
of shares acquired and their cost for the past three years, restated to reflect
the stock-split, was 12,129,700 shares for $263,416,000 in fiscal 1998,
18,032,800 shares for $305,301,000 in fiscal 1997 and 14,628,200 shares for
$232,070,000 in fiscal 1996. On September 4, 1998, the Board authorized a new
8,000,000 share buyback to be completed in calendar 1999.
Net cash generated from operating activities was $357,764,000 in 1998,
$498,108,000 in 1997 and $350,434,000 in 1996. Expenditures for facilities,
fleet and other equipment were $259,353,000 in 1998, $210,868,000 in 1997 and
$235,891,000 in 1996. Expenditures in fiscal 1999 should be in the range of
$240,000,000 to $260,000,000.
In April 1997, in two separate offerings, SYSCO drew down the remaining
$150,000,000 of the $500,000,000 shelf registration filed with the Securities
and Exchange Commission in June 1995. SYSCO issued 7.16% debentures totaling
$50,000,000 due April 15, 2027. These debentures were priced at par, are
unsecured, are not subject to any sinking fund requirement and are redeemable at
the option of the holder on April 15, 2007, but otherwise are not redeemable
prior to maturity. Also issued were 7.25% senior notes totaling $100,000,000 due
April 15, 2007. These notes were priced at 99.611% of par and are unsecured, not
redeemable prior to maturity and not subject to any sinking fund requirement. In
May 1996, SYSCO issued 7.0% senior notes totaling $200,000,000 due May 1, 2006.
These notes, which were priced at par, are unsecured, not redeemable prior to
maturity and are not subject to any sinking fund requirement.
On June 3, 1998 SYSCO filed with the Securities and Exchange Commission
a new $500,000,000 shelf registration of debt securities. On July 22, 1998 SYSCO
issued 6.5% debentures totaling $225,000,000 under the shelf registration, due
August 1, 2028. These debentures were priced at 99.685% of par, are unsecured,
are not subject to any sinking fund requirement and include a redemption
provision which allows SYSCO the right to retire the debentures at any time
prior to maturity at the greater of par plus accrued interest or an amount
designed to insure that the debenture holders are not penalized by the early
redemption. Proceeds from the debentures were used to pay down outstanding
commercial paper.
14
The net cash provided by operations less cash utilized for capital
expenditures, the stock repurchase program, cash dividends and other uses
resulted in net long-term debt of $867,017,000 at June 27, 1998. About 68% of
the long-term debt is at fixed rates averaging 7.25% and the remainder is at
floating rates averaging 5.6%. Long-term debt to capitalization was 39% at
June 27, 1998, up 6% from the 33% at June 28, 1997 and up 11% from the 28% at
June 29, 1996. SYSCO continues to have borrowing capacity available and
alternative financing arrangements are evaluated as appropriate.
SYSCO has a commercial paper program which is currently supported by a
$300,000,000 bank credit facility. During fiscal 1998, 1997 and 1996, commercial
paper and short-term bank borrowings ranged from approximately $29,581,000 to
$417,924,000, from approximately $23,376,000 to $263,782,000, and from
approximately $69,200,000 to $355,000,000, respectively.
In summary, SYSCO believes that through continued monitoring and
management of assets together with the availability of additional capital in the
financial markets, it will meet its cash requirements while maintaining proper
liquidity for normal operating purposes.
MARKET RISK
SYSCO does not utilize financial instruments for trading purposes and holds no
derivative financial instruments which could expose the company to significant
market risk. SYSCO's exposure to market risk for changes in interest rates
relates primarily to its long-term debt obligations discussed above. At June 27,
1998 the company had outstanding $294,798,000 of commercial paper with
maturities through July 7, 1998. The company's remaining long-term debt
obligations of $572,219,000 were primarily at fixed rates of interest.
Subsequent to year-end, as discussed above, SYSCO issued additional fixed rate
debt and paid down the commercial paper balance with the proceeds. SYSCO has no
significant cash flow exposure due to interest rate changes for long-term debt
obligations.
SALES
The annual increases in sales of 6% in 1998 and 8% in 1997 result from several
factors. Sales in fiscal 1998 and 1997 were affected by the relatively modest
growth in the U.S. economy, as well as in the foodservice industry. After
adjusting for food price increases and acquisitions, real sales growth was about
6% in 1998 and 5% in 1997. The cost of SYSCO's foodservice products during the
first six months of fiscal 1998 were deflated while those costs during the
latter half of the year were inflated just above 1%, resulting in zero inflation
for the entire year. This compares to an increase of approximately 2.3% in
fiscal 1997. Industry sources estimate the total foodservice market experienced
real growth of approximately 2% in calendar 1997 and 1996.
Sales for fiscal 1996 through 1998 were as follows:
- - ------------------------------------------------------------------
Year Sales % Increase
- - ------------------------------------------------------------------
1998 $15,327,536,000 6%
1997 14,454,589,000 8
1996 13,395,130,000 11
15
A comparison of the sales mix in the principal product categories during
the last three years is presented below:
- - -------------------------------------------------------------------------------
1998 1997 1996
------ ------ ------
Medical supplies 1% 1% 1%
Dairy products 9 9 9
Fresh and frozen meats 15 15 15
Seafoods 6 5 5
Poultry 10 10 10
Frozen fruits, vegetables, bakery and other 15 15 14
Canned and dry products 23 23 24
Paper and disposables 7 8 8
Janitorial products 2 2 2
Equipment and smallwares 3 3 3
Fresh produce 6 6 6
Beverage products 3 3 3
------ ------ ------
100% 100% 100%
====== ====== ======
A comparison of sales by type of customer during the last three years is
presented below:
- - -------------------------------------------------------------------------------
1998 1997 1996
------ ------ ------
Restaurants 62% 61% 61%
Hospitals and nursing homes 11 11 11
Schools and colleges 7 7 7
Hotels and motels 5 6 6
All other 15 15 15
------ ------ ------
100% 100% 100%
====== ====== ======
COST OF SALES
Cost of sales increased about 6% in 1998 and 8% in 1997. These increases were
generally in line with the increases in sales. The rate of increase is
influenced by SYSCO's overall customer and product mix as well as economies
realized in product acquisition.
OPERATING EXPENSES
Operating expenses include the costs of warehousing and delivering products as
well as selling and administrative expenses. These expenses as a percent of
sales were 14.6% for fiscal 1998, 14.4% for fiscal 1997 and 14.3% for fiscal
1996. Changes in the percentage relationship of operating expenses to sales
result from an interplay of several economic influences, including customer mix.
Inflationary increases in operating costs generally have been offset through
improved productivity.
INTEREST EXPENSE
Interest expense increased $11,920,000 or approximately 26% in fiscal 1998 as
compared to an increase of $5,483,000 or approximately 13% in fiscal 1997. The
increases in fiscal 1998 and 1997 were due primarily to increased borrowings.
Interest capitalized during the past three years was $2,095,000 in 1998,
$2,215,000 in 1997 and $2,783,000 in 1996.
OTHER, NET
Other decreased $215,000 or about 133% in fiscal 1998 and decreased $842,000 or
about 84% in fiscal 1997. Changes between the years result from fluctuations in
miscellaneous activities, primarily gains and losses on the sale of surplus
facilities.
16
EARNINGS BEFORE INCOME TAXES
Earnings before income taxes rose $36,538,000, or approximately 7%, above fiscal
1997 which had increased $42,012,000, or approximately 9%, over the prior year.
Additional sales and realization of operating efficiencies contributed to the
increases.
PROVISION FOR INCOME TAXES
The effective tax rate for 1998 and 1997 was approximately 39%.
EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Fiscal 1998 represents the twenty-second consecutive year of increased earnings
before the cumulative effect of an accounting change. Earnings before cumulative
effect of accounting change rose $22,288,000, or approximately 7%, above fiscal
1997 which had increased $25,628,000, or approximately 9%, over the prior year.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In the second quarter of fiscal 1998, SYSCO recorded a one-time, after-tax,
non-cash charge of $28,053,000 to comply with a new consensus ruling by the
Emerging Issues Task Force of the Financial Accounting Standards Board, (EITF
Issue No. 97-13), requiring reengineering costs associated with computer systems
development to be expensed as they are incurred. Prior to this change, SYSCO had
capitalized business process reengineering costs incurred in connection with its
SYSCO Uniform Systems information systems redevelopment project in accordance
with generally accepted accounting principles.
NET EARNINGS
Net earnings for the year decreased $5,765,000 or approximately 2% below fiscal
1997, which had increased $25,628,000 or approximately 9% over the prior year.
The decrease was caused by the accounting change discussed above, partially
offset by the increase in earnings before the cumulative effect of the
accounting change.
DIVIDENDS
The quarterly dividend rate of nine cents per share was established in February
1998 when it was increased from the eight and one-half cents per share set in
November 1997.
RETURN ON SHAREHOLDERS' EQUITY
The return on average shareholders' equity before the cumulative effect of the
accounting change for 1998 was approximately 23% compared to 21% in 1997 and 19%
in 1996. Since inception SYSCO has averaged in excess of a 17% return on
shareholders' equity before the cumulative effect of an accounting change.
YEAR 2000
In recent years, SYSCO has been replacing and enhancing its information systems
to gain operational efficiencies. In addition, a company-wide program has been
underway to prepare its information systems and applications for the year 2000.
SYSCO has completed a comprehensive assessment of the impact of the year
2000 on all of its internal information systems and applications. SYSCO expects
to make the necessary revisions or upgrades to its systems to render it year
2000 compliant. Attention is also being focused on compliance attainment efforts
of and key interfaces with suppliers and customers. SYSCO could potentially
experience disruptions to some aspects of its various activities and operations
as a result of non-compliant systems utilized by SYSCO or unrelated third
parties. Contingency plans are therefore under development to mitigate the
extent of any such potential disruption to business operations. Based on
preliminary information, the costs to the company of addressing potential year
2000 issues are not expected to have a material adverse impact on SYSCO's
consolidated results of operations or financial position.
There can be no assurance that the efforts or the contingency plans
related to the company's systems, or those of other entities relied upon will be
successful or that any failure to convert, upgrade or appropriately plan for
contingencies would not have a material adverse effect on SYSCO.
17
FORWARD-LOOKING STATEMENTS
Certain statements made herein are foward-looking statements under the Private
Securities Litigation Reform Act of 1995. They include projected sales
increases, customer mix, product cost inflation/deflation, implementation and
anticipated results of "fold-outs", payment of dividends, consistency and
predictability of earnings and cash flow growth, continuation of the share
repurchase program, projected sales to particular customers, potential
acquisitions and year 2000 compliance efforts, timetables and the anticipated
costs of these efforts. These statements are based on current expectations and
management estimates and actual results may differ materially. Decisions to
pursue "fold-outs" and expenditures for "fold-outs" could vary depending upon
construction schedules and the timing of other purchases, such as fleet and
equipment, while "fold-out" results could be impacted by competitive conditions,
labor issues and other matters. Acquisitions depend upon the availability and
suitability of potential candidates and management's allocation of capital.
Industry growth, sales increases, customer mix, product cost
inflation/deflation, payment of dividends, the consistency and predictability of
earnings and cash flow growth and year 2000 costs and compliance efforts could
be affected by conditions in the economy, the industry and internal factors that
may alter planned results. Furthermore, potential year 2000 costs and compliance
efforts could be affected by conditions in the economy and the customer's
ability to make planned levels of sales available to SYSCO. The share repurchase
program could be affected by market prices of the company's stock as well as
management's decision to utilize its capital for other purposes.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SYSCO CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1998
Financial Statements:
Page
Report of Management on Internal Accounting Controls........... 18
Report of Independent Public Accountants....................... 20
Consolidated Financial Statements:
Consolidated Balance Sheets.............................. 21
Consolidated Results of Operations....................... 22
Consolidated Shareholders' Equity........................ 23
Consolidated Cash Flows.................................. 24
Summary of Accounting Policies........................... 25
Additional Financial Information......................... 26
Schedule:
II Valuation and Qualifying Accounts.............................. S-1
All other schedules are omitted because they are not applicable
or the information is set forth in the consolidated financial
statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
19
REPORT OF MANAGEMENT ON INTERNAL ACCOUNTING CONTROLS
The management of SYSCO is responsible for the preparation and integrity of the
consolidated financial statements of the Company. The accompanying consolidated
financial statements have been prepared by the management of the Company, in
accordance with generally accepted accounting principles, using management's
best estimates and judgment where necessary. Financial information appearing
throughout this Annual Report is consistent with that in the consolidated
financial statements.
To help fulfill its responsibility, management maintains a system of internal
controls designed to provide reasonable assurance that assets are safeguarded
against loss or unauthorized use and that transactions are executed in
accordance with management's authorizations and are reflected accurately in the
Company's records. The concept of reasonable assurance is based on the
recognition that the cost of maintaining a system of internal accounting
controls should not exceed benefits expected to be derived from the system.
SYSCO believes that its long-standing emphasis on the highest standards of
conduct and ethics, embodied in comprehensive written policies, serves to
reinforce its system of internal controls.
The Company's operations review function monitors the operation of the internal
control system and reports findings and recommendations to management and the
Board of Directors. It also oversees actions taken to address control
deficiencies and seeks opportunities for improving the effectiveness of the
system.
Arthur Andersen LLP, independent public accountants, has been engaged to express
an opinion regarding the fair presentation of the Company's financial condition
and operating results. As part of their audit of the Company's financial
statements, Arthur Andersen LLP considered the Company's system of internal
controls to the extent they deemed necessary to determine the nature, timing and
extent of their audit tests.
The Board of Directors oversees the Company's financial reporting through its
Audit Committee which consists entirely of outside directors. The Board, after a
recommendation from the Audit Committee, selects and engages the independent
public accountants annually. The Audit Committee reviews both the scope of the
accountants' audit and recommendations from both the independent public
accountants and the internal operations review function for improvements in
internal controls. The independent public accountants have free access to the
Audit Committee and from time to time confer with them without management
representation.
20
SYSCO recognizes its responsibility to conduct business in accordance with high
ethical standards. This responsibility is reflected in a comprehensive code of
business conduct that, among other things, addresses potentially conflicting
outside business interests of Company employees and provides guidance as to the
proper conduct of business activities. Ongoing communications and review
programs are designed to help ensure compliance with this code.
The Company believes that its system of internal controls is effective and
adequate to accomplish the objectives discussed above.
/s/ BILL M. LINDIG /s/ JOHN K. STUBBLEFIELD, JR.
- - ------------------------------------- -----------------------------------
Bill M. Lindig John K. Stubblefield, Jr.
President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Sysco Corporation
We have audited the accompanying consolidated balance sheets of Sysco
Corporation (a Delaware corporation) and subsidiaries as of June 27, 1998 and
June 28, 1997, and the related statements of consolidated results of operations,
shareholders' equity and cash flows for each of the three years in the period
ended June 27, 1998. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and the schedule 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 Sysco Corporation
and subsidiaries as of June 27, 1998 and June 28, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 27, 1998, in conformity with generally accepted accounting principles.
As discussed in the summary of accounting policies, effective December 27, 1997,
the Company changed its method of accounting for costs of business process
reengineering activities associated with systems development projects.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Houston, Texas
July 28, 1998
22
Consolidated Balance Sheets
- - -----------------------------------------------------------------------------------------------------------------
(In thousands except for share data) June 27, 1998 June 28, 1997
- - -----------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash $ 110,288 $ 117,696
Accounts and notes receivable, less allowances of $20,081 and $17,240 1,215,610 1,065,002
Inventories 790,501 733,782
Deferred taxes 37,073 23,720
Prepaid expenses 26,595 21,429
---------- ----------
Total current assets 2,180,067 1,961,629
Plant and equipment at cost, less depreciation 1,151,054 1,058,432
Other assets
Goodwill and intangibles, less amortization 307,959 247,423
Other 141,109 166,339
---------- ----------
Total other assets 449,068 413,762
---------- ----------
Total assets $3,780,189 $3,433,823
========== ==========
Liabilities and shareholders' equity
Current liabilities
Notes payable $ 42,333 $ 14,267
Accounts payable 849,159 827,593
Accrued expenses 292,255 240,928
Income taxes 25,523 17,741
Current maturities of long-term debt 114,920 13,285
---------- ----------
Total current liabilities 1,324,190 1,113,814
Long-term debt 867,017 685,620
Deferred taxes 232,193 233,917
Contingencies
Shareholders' equity
Preferred stock, par value $1 per share
Authorized 1,500,000 shares, issued none -- --
Common stock, par value $1 per share
Authorized 500,000,000 shares, issued 382,587,450
and 191,293,725 shares 382,587 191,294
Paid-in capital -- 32,258
Retained earnings 1,796,488 1,771,548
---------- ----------
2,179,075 1,995,100
Less cost of treasury stock, 47,578,288 and 18,855,458 shares 822,286 594,628
---------- ----------
Total shareholders' equity 1,356,789 1,400,472
---------- ----------
Total liabilities and shareholders' equity $3,780,189 $3,433,823
========== ==========
See Summary of Accounting Policies and Additional Financial Information.
23
Consolidated Results of Operations
- - ----------------------------------------------------------------------------------------------------------------
Year Ended
- - ----------------------------------------------------------------------------------------------------------------
(In thousands except for share data) June 27, 1998 June 28, 1997 June 29, 1996
- - ----------------------------------------------------------------------------------------------------------------
Sales $ 15,327,536 $ 14,454,589 $ 13,395,130
Costs and expenses
Cost of sales 12,499,636 11,835,959 10,983,796
Operating expenses 2,236,932 2,076,335 1,917,376
Interest expense 58,422 46,502 41,019
Other, net 53 (162) (1,004)
------------ ------------ ------------
Total costs and expenses 14,795,043 13,958,634 12,941,187
============ ============ ============
Earnings before income taxes 532,493 495,955 453,943
Income taxes 207,672 193,422 177,038
------------ ------------ ------------
Earnings before cumulative effect of accounting change 324,821 302,533 276,905
Cumulative effect of accounting change (28,053) -- --
------------ ------------ ------------
Net earnings $ 296,768 $ 302,533 $ 276,905
============ ============ ============
Earnings before accounting change:
Basic earnings per share $ 0.95 $ 0.85 $ 0.76
Diluted earnings per share 0.95 0.85 0.75
Cumulative effect of accounting change:
Basic earnings per share (0.08) -- --
Diluted earnings per share (0.08) -- --
Net earnings:
Basic earnings per share 0.87 0.85 0.76
Diluted earnings per share 0.86 0.85 0.75
See Summary of Accounting Policies and Additional Financial Information.
24
Consolidated Shareholders' Equity
- - ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Treasury Stock
--------------------- --------------------------
Paid-in Retained
(In thousands except for share data) Shares Amount Capital Earnings Shares Amount
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at July 1, 1995 191,293,725 $ 191,294 $ 48,674 $ 1,379,405 8,429,203 $ 215,770
Net earnings
for year ended
June 29, 1996 276,905
Cash dividends paid,
$.24 per share (87,721)
Treasury stock purchases 7,314,100 232,070
Stock issued upon conversion of
Liquid Yield Option Notes (11,190) (3,816,525) (99,776)
Stock options exercised (2,642) (271,406) (7,123)
Employees' Stock Purchase Plan (610) (531,569) (14,339)
Management Incentive Plan 947 (242,884) (6,218)
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 29, 1996 191,293,725 $ 191,294 $ 35,179 $ 1,568,589 10,880,919 $ 320,384
Net earnings
for year ended
June 28, 1997 302,533
Cash dividends paid,
$.28 per share (99,574)
Treasury stock purchases 9,016,400 305,301
Stock options exercised (3,069) (334,139) (9,838)
Employees' Stock Purchase Plan (789) (512,603) (15,474)
Management Incentive Plan 937 (195,119) (5,745)
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 28, 1997 191,293,725 $ 191,294 $ 32,258 $ 1,771,548 18,855,458 $ 594,628
Net earnings
for year ended
June 27, 1998 296,768
Cash dividends paid,
$.33 per share (110,928)
Treasury stock purchases 6,064,850 263,416
Stock options exercised (4,308) (491,795) (15,174)
Employees' Stock Purchase Plan 1,359 (433,419) (14,048)
Management Incentive Plan 1,084 (205,950) (6,536)
2-for-1 stock split 191,293,725 191,293 (30,393) (160,900) 23,789,144
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 27, 1998 382,587,450 $ 382,587 $ -- $ 1,796,488 47,578,288 $ 822,286
=========== =========== =========== =========== =========== ===========
See Summary of Accounting Policies and Additional Financial Information.
25
Consolidated Cash Flows
- - -------------------------------------------------------------------------------------------------------------------
Year Ended
---------------------------------------------
(In thousands) June 27, 1998 June 28, 1997 June 29, 1996
- - -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 296,768 $ 302,533 $ 276,905
Add non-cash items:
Cumulative effect of accounting change 28,053 -- --
Depreciation and amortization 181,234 160,292 144,709
Interest on Liquid Yield Option Notes -- -- 2,274
Deferred tax (benefit) provision (15,077) 11,081 16,079
Provision for losses on receivables 22,959 21,588 16,427
Additional investment in certain assets and liabilities,
net of effect of businesses acquired:
(Increase) in receivables (162,276) (40,247) (123,653)
(Increase) in inventories (48,483) (6,883) (56,076)
(Increase) decrease in prepaid expenses (4,871) (2,534) 242
Increase in accounts payable 14,114 43,145 70,744
Increase in accrued expenses 50,875 27,512 6,615
Increase (decrease) in income taxes 7,782 (5,589) 12,955
(Increase) in other assets (13,314) (12,790) (16,787)
--------- --------- ---------
Net cash provided by operating activities 357,764 498,108 350,434
--------- --------- ---------
Cash flows from investing activities:
Additions to plant and equipment (259,353) (210,868) (235,891)
Proceeds from sales of plant and equipment 8,296 2,842 11,024
Acquisition of businesses, net of cash acquired (84,473) (5,330) --
--------- --------- ---------
Net cash used for investing activities (335,530) (213,356) (224,867)
--------- --------- ---------
Cash flows from financing activities:
Bank and commercial paper borrowings 303,996 92,039 146,775
Other debt borrowings (repayments) 6,813 9,885 (4,053)
Common stock reissued from treasury 33,893 28,136 25,375
Treasury stock purchases (263,416) (305,301) (232,070)
Dividends paid (110,928) (99,574) (87,721)
--------- --------- ---------
Net cash used for financing activities (29,642) (274,815) (151,694)
--------- --------- ---------
Net (decrease) increase in cash (7,408) 9,937 (26,127)
Cash at beginning of year 117,696 107,759 133,886
--------- --------- ---------
Cash at end of year $ 110,288 $ 117,696 $ 107,759
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 58,306 $ 44,575 $ 38,527
Income taxes 195,133 186,153 141,302
See Summary of Accounting Policies and Additional Financial Information.
26
SUMMARY OF ACCOUNTING POLICIES
BUSINESS AND CONSOLIDATION
SYSCO Corporation (SYSCO) is engaged in the marketing and distribution of a wide
range of food and related products to the foodservice or
"food-prepared-away-from-home" industry. These services are performed from 70
distribution facilities for approximately 300,000 customers located in the 37
states where facilities are situated, in 11 adjacent states and Alaska. The
company also has one facility in Vancouver, British Columbia and one in
Peterborough, Ontario, which service customers in those areas.
The accompanying financial statements include the accounts of SYSCO and its
subsidiaries. All significant intercompany transactions and account balances
have been eliminated. Certain amounts in the prior years have been reclassified
to conform to the 1998 presentation.
The preparation of 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 the estimates used.
Earnings of acquisitions recorded as purchases are included in SYSCO's
results of operations from the date of acquisition.
INVENTORIES
Inventories consist of food and related products held for resale and are valued
at the lower of cost (first-in, first-out method) or market.
PLANT AND EQUIPMENT
Capital additions, improvements and major renewals are classified as plant and
equipment and are carried at cost. Depreciation is recorded using the
straight-line method which reduces the book value of each asset in equal amounts
over its estimated useful life. Maintenance, repairs and minor renewals are
charged to earnings when they are incurred. Upon the disposition of an asset,
its accumulated depreciation is deducted from the original cost, and any gain or
loss is reflected in current earnings.
Applicable interest charges incurred during the construction of new
facilities are capitalized as one of the elements of cost and are amortized over
the assets' estimated useful lives. Interest capitalized during the past three
years was $2,095,000 in 1998, $2,215,000 in 1997 and $2,783,000 in 1996.
GOODWILL AND INTANGIBLES
Goodwill and intangibles represent the excess of cost over the fair value of
tangible net assets acquired and are amortized over 40 years using the
straight-line method. Accumulated amortization at June 27, 1998, June 28, 1997
and June 29, 1996 was $74,554,000, $66,521,000 and $58,668,000, respectively.
COMPUTER SYSTEMS DEVELOPMENT PROJECT
In the second quarter of fiscal 1998, SYSCO recorded a one-time, after-tax,
non-cash charge of $28,053,000 to comply with a new consensus ruling by the
Emerging Issues Task Force of the Financial Accounting Standards Board (EITF
Issue No. 97-13), requiring reengineering costs associated with computer systems
development to be expensed as they are incurred. Prior to this ruling, SYSCO
had capitalized business process reengineering costs incurred in connection with
its SYSCO Uniform Systems information systems redevelopment project in
accordance with generally accepted accounting principles.
No costs were capitalized in fiscal 1998 and fiscal 1997, while $2,994,000
was capitalized during fiscal 1996. Amounts that remain capitalized are being
amortized as completed portions of the project are put into use. Accumulated
amortization, including the one-time charge, at June 27, 1998, June 28, 1997 and
June 29, 1996 was $36,532,000, $1,624,000 and $753,000, respectively.
27
INSURANCE PROGRAM
SYSCO maintains a self-insurance program covering portions of workers'
compensation and general and automobile liability costs. The amounts in excess
of the self-insured levels are fully insured. Self-insurance accruals are based
on claims filed and an estimate for significant claims incurred but not
reported.
INCOME TAXES
SYSCO follows the liability method of accounting for income taxes as required by
the provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes."
CASH FLOW INFORMATION
For cash flow purposes, cash includes cash equivalents such as time deposits,
certificates of deposit and all highly liquid instruments with original
maturities of three months or less.
NEW ACCOUNTING STANDARDS
In the second quarter of fiscal 1998, SYSCO adopted SFAS No. 128, "Earnings Per
Share." SFAS No. 128 replaced the previously reported primary and fully-diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effect of
stock options. Diluted earnings per share under SFAS No. 128 is very similar to
the previously reported fully-diluted earnings per share. Earnings per share
amounts for each period have been presented and restated to conform to the SFAS
No. 128 requirements.
In fiscal 1998, SYSCO adopted SFAS No. 130, "Reporting Comprehensive
Income." The adoption of this standard did not have an effect on SYSCO's
reported net earnings in fiscal 1998 as SYSCO has no additional comprehensive
income under the statement.
In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP provides guidance with respect to accounting for the
various types of costs incurred for computer software developed or obtained for
SYSCO's use. SYSCO is required to and will adopt SOP 98-1 in the first quarter
of fiscal 2000 and believes that adoption will not have a significant effect on
its consolidated results of operations or financial position.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." At adoption, SOP 98-5 requires SYSCO to write-off any
unamortized start-up costs as a cumulative effect of a change in accounting
principle and, going forward, expense all start-up activity costs as they are
incurred. SYSCO is required to and will adopt SOP 98-5 in the first quarter of
fiscal 2000 and believes that adoption will not have a significant effect on its
consolidated results of operations or financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 1999. SYSCO is required to
and will adopt SFAS No. 133 in the first quarter of fiscal 2000. SYSCO does not
expect adoption to have a significant effect on its consolidated results of
operations or financial position.
Additional Financial Information
INCOME TAXES
The income tax provisions consist of the following:
- - --------------------------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Federal income taxes $189,758,000 $176,754,000 $161,142,000
State and local income taxes 17,914,000 16,668,000 15,896,000
------------ ------------ ------------
Total $207,672,000 $193,422,000 $177,038,000
============ ============ ============
28
Included in the income taxes charged to earnings are net deferred tax
benefits of $15,077,000 in 1998, and deferred tax provisions of $11,081,000 in
1997 and $16,079,000 in 1996. These components result from the effects of net
changes during the year in deferred tax assets and liabilities arising from
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the company's deferred tax assets and liabilities
are as follows:
- - --------------------------------------------------------------------------------------------------
June 27, 1998 June 28, 1997
------------- -------------
Deferred tax liabilities:
Excess tax depreciation and basis differences of assets $ 196,429,000 $ 192,068,000
Computer systems development project 11,109,000 22,855,000
Other 24,655,000 18,994,000
------------- -------------
Total deferred tax liabilities 232,193,000 233,917,000
============= =============
Deferred tax assets:
Accrued pension expenses 19,759,000 10,221,000
Accrued medical and casualty insurance expenses 6,709,000 5,254,000
Other 10,605,000 8,245,000
------------- -------------
Total deferred tax assets 37,073,000 23,720,000
------------- -------------
Net deferred tax liabilities $ 195,120,000 $ 210,197,000
============= =============
The company has enjoyed taxable earnings during each year of its
twenty-nine year existence and knows of no reason such profitability should not
continue. Consequently, the company believes that it is more likely than not
that the entire benefit of existing temporary differences will be realized and
therefore no valuation allowance has been established for deferred tax assets.
Reconciliations of the statutory Federal income tax rate to the effective
income tax rates are as follows:
- - --------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Statutory Federal income tax rate 35% 35% 35%
State and local income taxes, net of Federal income tax benefit 4 4 4
---- ---- ----
39% 39% 39%
==== ==== ====
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
The allowance for doubtful accounts receivable was $20,081,000 as of June 27,
1998, $17,240,000 as of June 28, 1997 and $16,380,000 as of June 29, 1996.
Customer accounts written off, net of recoveries, were $21,218,000 or 0.14% of
sales, $21,183,000 or 0.15% of sales and $16,048,000 or 0.12% of sales for
fiscal years 1998, 1997 and 1996, respectively.
SHAREHOLDERS' EQUITY
On February 11, 1998 the Board of Directors declared a 2-for-1 stock split
effected by a 100% stock dividend paid on March 20, 1998 to shareholders of
record on February 27, 1998. All share and per share data in these financial
statements have been restated to reflect the stock split.
In fiscal 1998, SYSCO adopted the provisions of SFAS No. 128, "Earnings Per
Share," which replaced the previously reported primary and fully-diluted
earnings per share with basic and diluted earnings per share. Basic earnings per
share have been computed by dividing net earnings by 340,380,477 in 1998,
354,470,170 in 1997 and 365,197,794 in 1996, which represents the weighted
average number of shares of common stock outstanding during those respective
years. Diluted earnings per share have been computed by dividing net earnings by
343,440,181 in 1998, 356,083,594 in 1997 and 369,715,296 in 1996, which
represents the weighted average number of shares of common stock outstanding
during those respective years adjusted for the dilutive effect of stock options
outstanding under the treasury stock method.
29
In May 1986, the Board of Directors adopted a Warrant Dividend Plan
designed to protect against those unsolicited attempts to acquire control of
SYSCO that the Board believes are not in the best interest of the shareholders.
In May 1996, the Board of Directors adopted an amended and restated plan which,
among other things, extends the expiration of the plan through May 2006. As
amended, the plan provides for a dividend distribution of one-half of one
Preferred Stock Purchase Right (Right) for each outstanding share of SYSCO
common stock. Each Right may be exercised to purchase one two-thousandth of a
share of Series A Junior Participating Preferred Stock at an exercise price of
$175, subject to adjustment. The Rights will not be exercisable until a party
either acquires 10% of the company's common stock or makes a tender offer for
10% or more of its common stock. In the event of a merger or other business
combination transaction, each Right effectively entitles the holder to purchase
$350 worth of stock of the surviving company for a purchase price of $175.
The Rights expire on May 21, 2006, and may be redeemed before expiration by
the company at a price of $0.01 per Right until a party acquires 10% of the
company's common stock or thereafter under certain circumstances. As a result of
the Rights distribution, 450,000 of the 1,500,000 authorized preferred shares
have been reserved for issuance as Series A Junior Participating Preferred
Stock.
PLANT AND EQUIPMENT
A summary of plant and equipment, including the related accumulated
depreciation, appears below:
- - --------------------------------------------------------------------------------------------
Estimated
June 27, 1998 June 28, 1997 Useful Lives
--------------- --------------- ------------
Plant and equipment, at cost
Land $ 100,855,000 $ 97,384,000
Buildings and improvements 895,915,000 828,591,000 10-40 years
Equipment 1,146,192,000 1,006,211,000 3-20 years
--------------- ---------------
2,142,962,000 1,932,186,000
Accumulated depreciation (991,908,000) (873,754,000)
--------------- ---------------
Net plant and equipment $ 1,151,054,000 $ 1,058,432,000
=============== ===============
DEBT
At June 27, 1998 and June 28, 1997 SYSCO had $42,333,000 and $14,267,000,
respectively, of short-term bank borrowings. The level of such borrowings
fluctuates during the year based on working capital requirements.
SYSCO's long-term debt is comprised of the following:
- - -----------------------------------------------------------------------------------------------
June 27, 1998 June 28, 1997
------------- -------------
Commercial paper, interest averaging 5.7% in 1998
and 5.6% in 1997 $ 294,798,000 $ 18,997,000
Senior notes, interest at 9.95%, maturing in 1999 91,500,000 91,500,000
Senior notes, interest at 6.5%, maturing in 2005 149,373,000 149,283,000
Senior notes, interest at 7.0%, maturing in 2006 200,000,000 200,000,000
Senior notes, interest at 7.25%, maturing in 2007 99,657,000 99,618,000
Debentures, interest at 7.16%, maturing in 2027 50,000,000 50,000,000
Industrial Revenue Bonds, mortgages and other debt,
interest averaging 6.0% in 1998 and 6.1% in 1997,
maturing at various dates to 2026 96,609,000 89,507,000
------------- -------------
Total long-term debt 981,937,000 698,905,000
Less current maturities (114,920,000) (13,285,000)
------------- -------------
Net long-term debt $ 867,017,000 $ 685,620,000
============= =============
30
The principal payments required to be made on long-term debt during the
next five years are shown below:
Year Amount
---- ------------
1999 $114,920,000
2000 17,706,000
2001 11,112,000
2002 10,735,000
2003 19,730,000
SYSCO has a $300,000,000 revolving loan agreement maturing in fiscal 2004
which currently supports the company's commercial paper program. The commercial
paper borrowings at June 27, 1998 were $294,798,000.
In June 1995, SYSCO issued 6.5% senior notes totaling $150,000,000 due
June 12, 2005, under a $500,000,000 shelf registration filed with the Securities
and Exchange Commission in June 1995. These notes, which were priced at 99.4% of
par, are unsecured, not redeemable prior to maturity and are not subject to any
sinking fund requirement. In May 1996, SYSCO issued 7.0% senior notes totaling
$200,000,000 due May 1, 2006, under this shelf registration. These notes, which
were priced at par, are unsecured, not redeemable prior to maturity and are not
subject to any sinking fund requirement. On April 22, 1997, in two separate
offerings, SYSCO drew down the remaining $150,000,000 of the $500,000,000 shelf
registration. SYSCO issued 7.16% debentures totaling $50,000,000 due April 15,
2027. These debentures were priced at par, are unsecured, are not subject to any
sinking fund requirement and are redeemable at the option of the holder on
April 15, 2007, but otherwise are not redeemable prior to maturity. At that time
SYSCO also issued 7.25% senior notes totaling $100,000,000 due April 15, 2007.
These notes were priced at 99.611% of par and are unsecured, not redeemable
prior to maturity and are not subject to any sinking fund requirement.
On June 3, 1998 SYSCO filed with the Securities and Exchange Commission a
new $500,000,000 shelf registration of debt securities. On July 22, 1998 SYSCO
issued 6.5% debentures totaling $225,000,000 under the shelf registration, due
on August 1, 2028. These debentures were priced at 99.685% of par, are
unsecured, are not subject to any sinking fund requirement and include a
redemption provision which allows SYSCO the right to retire the debentures at
any time prior to maturity at the greater of par plus accrued interest or an
amount designed to insure that the debenture holders are not penalized by the
early redemption. Proceeds from the debentures were used to pay down outstanding
commercial paper.
The Industrial Revenue Bonds have varying structures. As of June 27, 1998
final maturities range from one to twenty-eight years and certain of the bonds
provide SYSCO the right to redeem (a call) at various dates. These call
provisions generally provide the bondholder a premium in the early call years,
declining to par value as the bonds approach maturity. Certain bonds have
provisions whereby the holder may require SYSCO to purchase or redeem the bonds
(a put) under certain circumstances. If certain of these bonds are purchased
from bondholders, they can be remarketed at the then prevailing interest rates.
Net long-term debt at June 27, 1998 was $867,017,000, of which 68% is at
fixed rates averaging 7.25% with an average life of eight years, while the
remainder is financed at floating rates averaging 5.6%. Certain loan agreements
contain typical covenants to protect noteholders such as provisions to maintain
tangible net worth and funded indebtedness at specified levels.
The fair value of SYSCO's total long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the company for debt of the same remaining maturities. The fair value
of total long-term debt approximates $1,012,914,000 at June 27, 1998.
As part of normal business activities, SYSCO issues letters of credit
through major banking institutions as required by certain supplier and insurance
agreements. As of June 27, 1998 and June 28, 1997, letters of credit outstanding
were $14,464,000 and $14,407,000, respectively. As of June 27, 1998 SYSCO has
not entered into any significant derivative or other off-balance-sheet financing
arrangements.
31
LEASES
Although SYSCO normally purchases assets, it has obligations under capital and
operating leases for certain distribution facilities, vehicles and computers.
Total rental expense under operating leases was $31,324,000, $33,343,000 and
$31,728,000 in fiscal 1998, 1997 and 1996, respectively. Contingent rentals,
subleases and assets and obligations under capital leases are not significant.
Aggregate minimum lease payments under existing non-capitalized
long-term leases are as follows:
Year Amount
---- ------
1999 $15,376,000
2000 11,971,000
2001 10,010,000
2002 7,656,000
2003 5,976,000
Later years 11,499,000
STOCK COMPENSATION PLANS
Employee Incentive Stock Option Plan
The Employee Incentive Stock Option Plan adopted in fiscal 1982 provided for
the issuance of options to purchase SYSCO common stock to officers and key
personnel of the company and its subsidiaries at the market price at date of
grant, as adjusted for stock splits. No further grants will be made under this
plan which expired in November 1991 and was replaced by the 1991 Stock Option
Plan.
The following summary presents information with regard to incentive
options under this plan:
Options Exercisable Options Outstanding
----------------------------- -----------------------------
Maximum Weighted Shares Weighted
Shares Average Price Under Average Price
Exercisable Per Share Option Per Share
----------- ------------- ---------- -------------
Balance at July 1, 1995 2,186,434 $9.40 2,186,434 $9.40
Granted -- --
Cancelled (280,786) 8.23
Exercised (543,140) 8.92
--------
Balance at June 29, 1996 1,362,508 9.84 1,362,508 9.84
Granted -- --
Cancelled (149,542) 11.08
Exercised (390,448) 9.67
--------
Balance at June 28, 1997 822,518 9.70 822,518 9.70
Granted -- --
Cancelled -- --
Exercised (303,251) 9.65
--------
Balance at June 27, 1998 519,267 $9.72 519,267 $9.72
========
32
The options outstanding at June 27, 1998 under this plan have exercise
prices ranging from $7.66 to $11.13 and have a weighted average remaining
contractual life of 2.6 years.
1991 Stock Option Plan
The 1991 Stock Option Plan was adopted in fiscal 1992 and originally
reserved 6,000,000 shares of SYSCO common stock for options to directors,
officers and key personnel of the company and its subsidiaries at the market
price at date of grant. This plan provides for the issuance of options which
are qualified as incentive stock options under the Internal Revenue Code of
1986, options which are not so qualified and stock appreciation rights. During
fiscal 1996, the shareholders approved an amendment to the plan for an
additional 16,000,000 shares to be made available for future grants of options.
To date, the company has issued stock options but no stock appreciation rights
under this plan.
The following summary presents information with regard to options
issued under the 1991 plan:
Options Exercisable Options Outstanding
--------------------------- --------------------------
Maximum Weighted Shares Weighted
Shares Average Price Under Average Price
Exercisable Per Share Option Per Share
----------- ------------- --------- -------------
Balance at July 1, 1995 1,009,830 $13.33 4,060,892 $13.21
Granted 2,208,900 14.38
Cancelled (154,494) 13.59
Exercised (125,668) 12.94
---------
Balance at June 29, 1996 2,190,690 13.28 5,989,630 13.64
Granted 2,447,800 15.88
Cancelled (236,034) 14.17
Exercised (436,136) 13.33
---------
Balance at June 28, 1997 3,446,628 13.53 7,765,260 14.35
Granted 1,901,416 17.50
Cancelled (315,422) 14.97
Exercised (841,462) 13.50
---------
Balance at June 27, 1998 4,886,528 $13.98 8,509,792 $15.11
=========
The options outstanding at June 27, 1998 under this plan have exercise prices
ranging from $12.56 to $17.50 and have a weighted average remaining contractual
life of 7.2 years.
Non-Employee Directors Stock Option Plan
The Non-Employee Directors Stock Option Plan adopted in fiscal 1996 permits the
issuance of up to 400,000 shares of common stock to directors who are not
employees of SYSCO. Under this plan options to purchase 4,000 shares of common
stock at the fair market value on the date of the grant are granted to each
non-employee director annually, provided certain earnings goals are met. As of
June 27, 1998, options for 136,000 shares had been granted to nine non-employee
directors under this plan, none of which were exercisable.
Employees' Stock Purchase Plan
SYSCO has an Employees' Stock Purchase Plan which permits employees (other than
directors) who have been employed for at least one year to invest by means of
periodic payroll deductions in SYSCO common stock at 85% of the closing price on
the last business day of each calendar quarter. During 1998, 825,129 shares of
SYSCO common stock were purchased by the participants as compared to 1,022,134
purchased in 1997 and 1,045,930 purchased in 1996. The total number of shares
which may be sold pursuant to the plan may not exceed 34,000,000 shares, of
which 9,319,913 remained available at June 27, 1998.
33
Accounting Issues Relating to all Plans
SYSCO accounts for these plans under APB Opinion No. 25 and related
interpretations under which no compensation cost has been recognized. Had
compensation cost for these plans been determined using the fair value method
of SFAS No. 123, SYSCO's pro forma net earnings and diluted net earnings per
share would have been $292,824,000 and $0.86 in fiscal 1998, $298,895,000 and
$0.85 in fiscal 1997 and $274,291,000 and $0.75 in fiscal 1996. The disclosure
requirements of SFAS No. 123 are applicable to options granted after 1995. The
pro forma effects for fiscal 1998, 1997 and 1996 are not necessarily indicative
of the pro forma effects in future years.
The weighted average fair value of options granted was $6.28 and $5.60
during fiscal 1998 and 1997, respectively. The fair value was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in fiscal 1998 and 1997,
respectively: dividend yield of 1.71% and 0.88%; expected volatility of 24% for
both years; risk-free interest rates of 6.4% and 7.0%; and expected lives of 8
years.
The weighted average fair value of employee stock purchase rights
issued was $3.14 and $2.53 during fiscal 1998 and 1997, respectively. The fair
value of the stock purchase rights was calculated as the difference between the
stock price at date of issuance and the employee purchase price.
EMPLOYEE BENEFIT PLANS
SYSCO has defined benefit and defined contribution retirement plans for its
employees. Also, the company contributes to various multi-employer plans under
collective bargaining agreements.
The defined contribution 401(k) plan provides that under certain
circumstances the company may make matching contributions of up to 50% of the
first 6% of a participant's compensation. SYSCO's contribution to this plan was
$5,660,000 in 1998, $4,975,000 in 1997 and $4,629,000 in 1996. The defined
benefit pension plans pay benefits to employees at retirement using formulas
based on a participant's years of service and compensation.
The funded status of the defined benefit plans is as follows:
June 27, 1998 June 28, 1997
--------------- ---------------
Assets available for benefits $ 287,482,000 $ 247,783,000
Projected benefit obligation
Vested (244,050,000) (182,005,000)
Nonvested (17,938,000) (12,696,000)
--------------- ---------------
Total accumulated benefit obligation (261,988,000) (194,701,000)
Effect of projected future compensation increases (45,164,000) (30,203,000)
--------------- ---------------
Total actuarial projected benefit obligation (307,152,000) (224,904,000)
--------------- ---------------
Assets (less than) in excess of projected obligation $ (19,670,000) $ 22,879,000
=============== ===============
Consisting of:
Amounts to be offset against (charged to) future pension costs
Remaining assets in excess of obligation existing at
adoption of SFAS 87 in 1986 $ 5,598,000 $ 6,777,000
Unrecognized actuarial (loss) gain due to differences in
assumptions and actual experience (15,977,000) 8,974,000
Unrecognized prior service cost 6,262,000 7,199,000
Accrued pension costs (15,553,000) (71,000)
--------------- ---------------
$ (19,670,000) $ 22,879,000
=============== ===============
34
The projected unit credit method was used to determine the actuarial
present value of the accumulated benefit obligation and the projected benefit
obligation. The discount rate used was 7.25% in 1998, 8.0% in 1997 and 7.75% in
1996 and the rate of increase in future compensation levels used was 5.5% in
each year. The expected long-term rate of return on assets used was 10.5% in
1998 and 9.0% in 1997 and 1996. The plans invest primarily in marketable
securities and time deposits.
Net pension costs were as follows:
- - ---------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Defined benefit plans
Benefits earned during the year $ 23,144,000 $ 20,599,000 $ 19,885,000
Interest accrued on benefits earned in prior years 19,372,000 16,412,000 13,812,000
Actual return on plan assets (48,932,000) (34,477,000) (31,865,000)
Net amortization and deferral 21,317,000 14,744,000 16,999,000
------------ ------------ ------------
Net pension costs from defined benefit plans 14,901,000 17,278,000 18,831,000
Defined contribution plans 5,660,000 4,975,000 4,629,000
Multi-employer pension plans 19,633,000 18,427,000 16,560,000
------------ ------------ ------------
Net pension costs $ 40,194,000 $ 40,680,000 $ 40,020,000
============ ============ ============
SYSCO also has a Management Incentive Plan that compensates key management
personnel for specific performance achievements. The awards under this plan were
$20,478,000 in 1998, $17,633,000 in 1997 and $15,208,000 in 1996 and were paid
in both cash and stock. In addition to receiving benefits upon retirement under
the company's defined benefit plan, participants in the Management Incentive
Plan will receive benefits under a Supplemental Executive Retirement Plan. This
plan is a nonqualified, unfunded supplementary retirement plan. In order to meet
its obligations under this plan, SYSCO maintains life insurance policies on the
lives of the participants with carrying values of $50,020,000 at June 27, 1998
and $46,692,000 at June 28, 1997. SYSCO is the sole owner and beneficiary of
such policies. The periodic pension costs of this plan were $5,080,000 in 1998
and $4,681,000 in 1997. The actuarially determined accumulated benefit
obligation for this plan included in accrued expenses was $34,910,000 at
June 27, 1998 and $28,923,000 at June 28, 1997. After taking into consideration
the effect of future compensation increases, the projected benefit obligation of
this plan was $47,495,000 at June 27, 1998 and $38,057,000 at June 28, 1997.
In addition to providing pension benefits, SYSCO provides certain health
care benefits to eligible retirees and their dependents in the United States.
35
Net periodic postretirement benefit costs were as follows:
- - ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- --------
Service cost - benefits earned during the period $ 154,000 $ 140,000 $312,000
Interest cost 185,000 177,000 366,000
Amortization of transition obligation 153,000 153,000 153,000
Amortization of unrecognized (gain) (189,000) (193,000) --
Amortization of prior service cost 72,000 83,000 83,000
----------- ----------- --------
Net periodic postretirement benefit cost $ 375,000 $ 360,000 $914,000
=========== =========== ========
The components of the postretirement benefit obligation, included in
accrued expenses at June 27, 1998 and June 28, 1997 were:
- - -------------------------------------------------------------------------------------------------------------
June 27, 1998 June 28, 1997
------------- -------------
Retirees $ 242,000 $ 199,000
Fully eligible active participants 569,000 773,000
Other active employees 970,000 1,227,000
----------- -----------
Accumulated postretirement benefit obligation 1,781,000 2,199,000
Unrecognized net gain and effects of changes in assumptions 3,623,000 3,250,000
Unrecognized prior service cost (661,000) (732,000)
Unrecognized transition obligation (2,301,000) (2,454,000)
----------- -----------
Accrued postretirement benefit liability $ 2,442,000 $ 2,263,000
=========== ===========
The discount rate used to determine the accumulated postretirement benefit
obligation was 7.25% in 1998, 8.0% in 1997 and 7.75% in 1996. A health care cost
trend rate is not used in the calculations because SYSCO subsidizes the cost of
postretirement medical coverage by a fixed dollar amount with the retiree
responsible for the cost of coverage in excess of the subsidy, including all
future cost increases.
CONTINGENCIES
SYSCO is engaged in various legal proceedings which have arisen but have not
been fully adjudicated. These proceedings, in the opinion of management, will
not have a material adverse effect upon the consolidated financial position or
results of operations of the company when ultimately concluded.
36
QUARTERLY RESULTS (unaudited)
Financial information for each quarter in the years ended June 27, 1998 and June
28, 1997:
- - ---------------------------------------------------------------------------------------------------------------------------------
1998 Quarter Ended
-----------------------------------------------------------------------------------
(In thousands except for share data) September 27 December 27 March 28 June 27 Fiscal Year
- - ---------------------------------------------------------------------------------------------------------------------------------
Sales $ 3,828,244 $ 3,786,096 $3,711,822 $ 4,001,374 $ 15,327,536
Cost of sales 3,130,883 3,082,913 3,035,112 3,250,728 12,499,636
Operating expenses 553,032 551,889 557,136 574,875 2,236,932
Interest expense 13,140 14,500 15,170 15,612 58,422
Other, net (122) (303) 179 299 53
------------ ----------- ---------- ----------- ------------
Earnings before income taxes 131,311 137,097 104,225 159,860 532,493
Income taxes 51,211 53,468 40,648 62,345 207,672
------------ ----------- ---------- ----------- ------------
Earnings before accounting change 80,100 83,629 63,577 97,515 324,821
Accounting change -- (28,053) -- -- (28,053)
------------ ----------- ---------- ----------- ------------
Net earnings $ 80,100 $ 55,576 $ 63,577 $ 97,515 $ 296,768
============ =========== ========== =========== ============
Per share:
Diluted earnings before accounting
change $ 0.23 $ 0.24 $ 0.19 $ 0.29 $ 0.95
Diluted earnings accounting change
effect -- (0.08) -- -- (0.08)
Diluted net earnings 0.23 0.16 0.19 0.29 0.86
Cash dividends 0.08 0.08 0.08 0.09 0.33
Market price - high/low 20-17 23-18 27-22 27-22 27-17
- - ---------------------------------------------------------------------------------------------------------------------------------
1997 Quarter Ended
-----------------------------------------------------------------------------------
(In thousands except for share data) September 28 December 28 March 29 June 28 Fiscal Year
- - ---------------------------------------------------------------------------------------------------------------------------------
Sales $ 3,679,223 $ 3,610,348 $3,470,334 $ 3,694,684 $ 14,454,589
Cost of sales 3,028,478 2,954,481 2,844,881 3,008,119 11,835,959
Operating expenses 519,729 518,694 512,563 525,349 2,076,335
Interest expense 10,917 11,888 11,580 12,117 46,502
Other, net (241) (18) 307 (210) (162)
------------ ----------- ---------- ----------- ------------
Earnings before income taxes 120,340 125,303 101,003 149,309 495,955
Income taxes 46,933 48,868 39,391 58,230 193,422
------------ ----------- ---------- ----------- ------------
Net earnings $ 73,407 $ 76,435 $ 61,612 $ 91,079 $ 302,533
============ =========== ========== =========== ============
Per share:
Diluted net earnings $ 0.20 $ 0.21 $ 0.17 $ 0.26 $ 0.85
Cash dividends 0.06 0.07 0.07 0.08 0.28
Market price - high/low 17-14 18-16 18-15 19-17 19-14
- - ---------------------------------------------------------------------------------------------------------------------------------
Percentage increases--1998 vs. 1997:
Sales 4% 5% 7% 8% 6%
Earnings before income taxes 9 9 3 7 7
Earnings before accounting change 9 9 3 7 7
Net earnings 9 (27) 3 7 (2)
Diluted earnings per share before
accounting change 15 14 12 12 12
Diluted net earnings per share 15 (24) 12 12 1
37
PART III
Except as otherwise indicated, the information required by Items 10, 11, 12 and
13 is included in the Company's definitive proxy statement which will be filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934 no later
than 120 days after the close of the 1998 fiscal year, and said proxy statement
is hereby incorporated by reference thereto.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Executive Officers is included in Part I (Item 4A) of
this Form 10-K (page 9).
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) The following documents are filed, or incorporated by reference, as
part of this Form 10-K:
1. All financial statements. See index to Consolidated Financial
Statements on page 17 of this Form 10-K.
2. Financial Statement Schedule. See page 17 of this Form 10-K.
3. Exhibits.
3(a) Restated Certificate of Incorporation incorporated by
reference to Form 10-K for the year ended June 28,
1997.
3(b) Bylaws, as amended, incorporated by reference to Form
10-K for the year ended July 2, 1994.
3(c) Amended Certificate of Designation, incorporated by
reference to Form 10-K for the year ended June 29,
1996.
4(a) Seventh Amendment and Restatement of Competitive
Advance and Revolving Credit Facility Agreement dated
as of June 27, 1997 incorporated by reference to Form
10-K for the year ended June 28, 1997.
4(b) Sysco Corporation Note Agreement dated as of June 1,
1989 incorporated by reference to Form 10-K for the
year ended June 28, 1997.
4(c) Indenture, dated as of June 15, 1995, between Sysco
Corporation and First Union National Bank of North
Carolina, Trustee, incorporated by reference to
Registration Statement on Form S-3 (File No.
33-60023).
4(d) First Supplemental Indenture, dated as of June 27,
1995, between Sysco Corporation and First Union Bank
of North Carolina, Trustee as amended, incorporated
by reference to Form 10-K for the year ended June 29,
1996.
4(e) Second Supplemental Indenture, dated as of May 1,
1996, between Sysco Corporation and First Union Bank
of North Carolina, Trustee as amended, incorporated
by reference to Form 10-K for the year ended June 29,
1996.
39
4(f) Third Supplemented Indenture, dated as of April 25,
1997, between Sysco Corporation and First Union
National Bank of North Carolina, Trustee incorporated
by reference to Form 10-K for the year ended June 28,
1997.
4(g) Fourth Supplemental Indenture, dated as of April 25,
1997, between Sysco Corporation and First Union
National Bank of North Carolina, Trustee incorporated
by reference to Form 10-K for the year ended June 28,
1997.
4(h) FIFTH SUPPLEMENTAL INDENTURE, DATED AS OF JULY 27,
1998 BETWEEN SYSCO CORPORATION AND FIRST UNION
NATIONAL BANK, TRUSTEE.
10(a) Amended and Restated Sysco Corporation Executive
Deferred Compensation Plan incorporated by reference
to Form 10-K for the year ended July 1, 1995. *
10(b) Fifth Amended and Restated Sysco Corporation
Supplemental Executive Retirement Plan incorporated
by reference to Form 10-K for the year ended June 28,
1997. *
10(c) Sysco Corporation Employee Incentive Stock Option
Plan incorporated by reference to the Form S-8 filed
under the Securities Act of 1933, as amended, dated
April 1, 1987, as amended. *
10(d) Sysco Corporation 1995 Management Incentive Plan
incorporated by reference to Form 10-K for the year
ended July 1, 1995. *
10(e) Sysco Corporation 1991 Stock Option Plan incorporated
by reference to Form 10-K for the year ended June 27,
1992. *
10(f) Amendments to Sysco Corporation 1991 Stock Option
Plan incorporated by reference to Form 10-K for the
year ended June 28, 1997. *
10(g) Sysco Corporation Amended and Restated Non-Employee
Directors Stock Option Plan incorporated by reference
to Form 10-K for the year ended June 28, 1997. *
- - --------------------
* Management contract or compensatory plan or arrangement.
40
10(h) Amended and Restated Shareholder Rights Agreement,
incorporated by reference to registration statement
on Form 8-A/A, filed May 29, 1996.
21 SUBSIDIARIES OF THE REGISTRANT
23 INDEPENDENT PUBLIC ACCOUNTANTS' CONSENT
27 FINANCIAL DATA SCHEDULE
(b) Reports on Form 8-K
None
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Sysco Corporation has duly caused this Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 4th day of
September, 1998.
SYSCO CORPORATION
By /s/ BILL M. LINDIG
-------------------------------------
Bill M. Lindig
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated and on the date indicated above.
PRINCIPAL EXECUTIVE, FINANCIAL & ACCOUNTING OFFICERS:
/s/ JOHN F. WOODHOUSE
- - --------------------------------------
John F. Woodhouse Chairman of the Board
/s/ JOHN K. STUBBLEFIELD, JR. Senior Vice President and
- - -------------------------------------- Chief Financial Officer
John K. Stubblefield, Jr.
42
DIRECTORS:
/s/ JOHN W. ANDERSON /s/ RICHARD G. MERRILL
- - -------------------------------------- ------------------------------------
John W. Anderson Richard G. Merrill
- - -------------------------------------- ------------------------------------
Gordon M. Bethune Frank H. Richardson
/s/ COLIN G. CAMPBELL /s/ RICHARD J. SCHNIEDERS
- - -------------------------------------- ------------------------------------
Colin G. Campbell Richard J. Schnieders
/s/ CHARLES H. COTROS /s/ PHYLLIS S. SEWELL
- - -------------------------------------- ------------------------------------
Charles H. Cotros Phyllis S. Sewell
/s/ JUDITH B. CRAVEN /s/ ARTHUR J. SWENKA
- - -------------------------------------- ------------------------------------
Judith B. Craven Arthur J. Swenka
/s/ FRANK A. GODCHAUX III /s/ THOMAS B. WALKER, JR.
- - -------------------------------------- ------------------------------------
Frank A. Godchaux III Thomas B. Walker, Jr.
/s/ JONATHAN GOLDEN /s/ JOHN F. WOODHOUSE
- - -------------------------------------- ------------------------------------
Jonathan Golden John F. Woodhouse
/s/ BILL M. LINDIG
- - --------------------------------------
Bill M. Lindig
43
SYSCO CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts Deductions End of
Description Of Period Expenses Describe (1) Describe (2) Period
----------- ---------- ---------- -------------- ------------ ----------
Allowance
For year ended for doubtful
June 29, 1996......... accounts $16,001,000 $16,427,000 $ -- $16,048,000 $16,380,000
Allowance
For year ended for doubtful
June 28, 1997......... accounts $16,380,000 $21,588,000 $ 455,000 $21,183,000 $17,240,000
Allowance
For year ended for doubtful
June 27, 1998......... accounts $17,240,000 $22,959,000 $1,100,000 $21,218,000 $20,081,000
(1) Allowance accounts resulting from acquisitions.
(2) Customer accounts written off, net of recoveries.
S-1
44
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- - ------- ----------------------
3(a) Restated Certificate of Incorporation incorporated by reference to
Form 10-K for the year ended June 28, 1997.
3(b) Bylaws, as amended, incorporated by reference to Form 10-K for the
year ended July 2, 1994.
3(c) Amended Certificate of Designation, incorporated by reference to Form
10-K for the year ended June 29, 1996.
4(a) Seventh Amendment and Restatement of Competitive Advance and
Revolving Credit Facility Agreement dated as of June 27, 1997
incorporated by reference to Form 10-K for the year ended June 28,
1997.
4(b) Sysco Corporation Note Agreement dated as of June 1, 1989
incorporated by reference to Form 10-K for the year ended June 28,
1997.
4(c) Indenture, dated as of June 15, 1995, between Sysco Corporation and
First Union National Bank of North Carolina, Trustee, incorporated by
reference to Registration Statement on Form S-3 (File No. 33-60023).
4(d) First Supplemental Indenture, dated as of June 27, 1995, between
Sysco Corporation and First Union Bank of North Carolina, Trustee as
amended, incorporated by reference to Form 10-K for the year ended
June 29, 1996.
4(e) Second Supplemental Indenture, dated as of May 1, 1996, between Sysco
Corporation and First Union Bank of North Carolina, Trustee as
amended, incorporated by reference to Form 10-K for the year ended
June 29, 1996.
4(f) Third Supplemented Indenture, dated as of April 25, 1997, between
Sysco Corporation and First Union National Bank of North Carolina,
Trustee incorporated by reference to Form 10-K for the year ended
June 28, 1997.
45
4(g) Fourth Supplemental Indenture, dated as of April 25, 1997, between
Sysco Corporation and First Union National Bank of North Carolina,
Trustee incorporated by reference to Form 10-K for the year ended
June 28, 1997.
4(h) FIFTH SUPPLEMENTAL INDENTURE, DATED AS OF JULY 27, 1998 BETWEEN SYSCO
CORPORATION AND FIRST UNION NATIONAL BANK, TRUSTEE.
10(a) Amended and Restated Sysco Corporation Executive Deferred
Compensation Plan incorporated by reference to Form 10-K for the year
ended July 1, 1995. *
10(b) Fifth Amended and Restated Sysco Corporation Supplemental Executive
Retirement Plan incorporated by reference to Form 10-K for the year
ended June 28, 1997.
10(c) Sysco Corporation Employee Incentive Stock Option Plan incorporated
by reference to the Form S-8 filed under the Securities Act of 1933,
as amended, dated April 1, 1987, as amended.
10(d) Sysco Corporation 1995 Management Incentive Plan incorporated by
reference to Form 10-K for the year ended July 1, 1995.
10(e) Sysco Corporation 1991 Stock Option Plan incorporated by reference to
Form 10-K for the year ended June 27, 1992.
10(f) Amendments to Sysco Corporation 1991 Stock Option Plan incorporated
by reference to Form 10-K for the year ended June 28, 1997.
10(g) Sysco Corporation Amended and Restated Non-Employee Directors Stock
Option Plan incorporated by reference to Form 10-K for the year ended
June 28, 1997.
10(h) Amended and Restated Shareholder Rights Agreement, incorporated by
reference to registration statement on Form 8-A/A, filed May 29,
1996.
21 SUBSIDIARIES OF THE REGISTRANT
46
23 INDEPENDENT PUBLIC ACCOUNTANTS' CONSENT
27 FINANCIAL DATA SCHEDULE